A Key Performance Indicator or KPI is a metric that business owners and decision makers (collectively referred to as owners) can use in order to help evaluate the current performance of their operations, allowing them to set strategies and identify areas where they can set goals to fuel growth. Often, a KPI can be thought of as a question that an owner will have, with the resulting output being an answer to that question.
With the abundance of data available, it is important that your business develops and monitors the right indicators in order to succeed. KPI’s generally should have a set target for which to benchmark against, whether it be from industry data, executive experience, or other expectations an owner may have. Once there is a set target, owners, their management team, and their advisors should help develop and implement strategies that drive the KPI toward the target.
For owners, it is also important to pick the right KPI. Certain industries will have specific KPIs that are extremely important to their organizational growth, such as gross margin for a wholesaler or retailer or cost per lead for an online centric user platform. Owners should look to develop metrics they feel will have the most impact on their final measurement (which itself is a KPI). While this may sound like an overly complicated and challenging task, many owners already are looking at certain common numbers as KPIs and not even realizing it.
Many KPI’s often will often look towards drivers of the businesses operational bottom line, however, this does not have to be the case. KPI’s can be used in non-financial matters to measure success, such as Carbon Footprint, Waste rates, Quality Index, or Social Networking Footprint. The key to developing a KPI is as follows.
1. Determine the final output for which you are trying to measure. This may not always be financial or profit oriented and often can be an operational measure such as output per period. For example, an organization may be concerned with its operating profit, and feels that its customer service costs are a key driver in the profit.
2. Together with key personnel, develop an understanding of the inputs needed to reach the output. In our example, a business owner may meet with his head of customer service, customer service managers, and his finance department and together find that its customer service costs are driven mostly by salaries and that their input into the organization would be the number of customer services calls per month.
3. Develop a measureable metric to benchmark. To continue with our example, we find that Cost per Customer Serviced can help tell us how much we are paying per customer and allows apples to apples comparisons if a business is growing. We would take our service costs/customers serviced per month to come up with how much each customer costs.
4. Benchmark the metric against prior results and industry standards and set targets. For our customer service example, a good analysis would be to compare with a rolling 12 months as well as to what others in the industry are paying per customer.
5. Set & execute strategies. For example, in conjunction with our customer service team we may set a strategy that streamlines the customer service process so that the staff can take more calls per month if we find the costs are too high, or consider adding more staff to improve customer service if the costs are too low and other KPIs (customer satisfaction surveys) dictate as much.
6. Continue to monitor – even after target has been reached.
KPI’s are an integral part of the next step in growing a business enterprise. A KPI provides a concrete objective measure to assist in setting targets and goals for your operation as a whole. A good KPI will be one that is measurable and is found to have a direct impact on your final output, whatever that may be. Many astute owners are often intrinsically aware of these KPIs, but have never formally documented or measured their results and can often be surprised when they do. The use of KPIs will only increase as more data is readily available and can be used to continue to grow your business.
Edward McWilliams, CPA