If you can't measure it, you can't manage it. So goes the management mantra. Key Performance Indicators, or KPIs, all have to be managed. But whether it is customer satisfaction, cost of sales or absenteeism, the stuff you measure depends on your strategy.
That will not only be shaped by the kind of business - a reseller will have a very different set of key performace indicators or KPIs from an accounting firm. Strategy is also influenced by the economy. A slower economy means companies will have to start measuring different activities, and different parts of the business. Priorities change when you are working harder to stay afloat. KPIs for every reseller should be aligned with strategy which is in turn shaped by the economic climate.
The challenge for businesses now is complex. Resellers need to find what to measure, stuff that will keep people on top of their game in order to implement the strategy, or at least ensure that lost business is kept to a minimum.
What that means is that KPIs need to be constantly reviewed.
Many companies have not yet started adjusting their KPIs.
There are many reasons for this. First, the impact of the credit crisis has only hit home this year. Second, there is uncertainty.
Up until recent months, it looked like Australia would follow the rest of the world into a recession. It didn't, but the outlook while better than overseas is still uncertain. In that context, resellers will need to fine tune their KPIs to fit in with the economy.
But what KPIs are required? When the company is working harder and not generating increased revenues, or perhaps bringing in less, specialists say the KPIs should focus on sales effectiveness.
They might include progress towards quotas, number of contacts with a prospect, daily sales and sales trends.
To increase revenues, KPIs might also look to ensuring the effectiveness of the sales pipeline. How effectively is the sales team converting leads into sales?
Is the sales force working effectively in getting the leads that they've got?
How effective is the sales team generating leads?
How many inquiries does the company get when it puts up an ad?
How many leads do we get from that ad?
What's the total yield on advertising effectiveness?
What is the dollar value of each lead compared to the dollar value spent on ads?
How often are sales leads turned into a request for quotation?
And how many of those requests are converted into real sales?
In a sales constrained environment, companies have to focus on cost.
In boom times resellers were trying to produce as much as they could to satisfy demand.
Because of that, they might have been more willing to tolerate costs in order to get the product out. In tighter times, however, cost control is more critical.
This could generate real improvements in the business. Finely targeted sales KPIs might create efficiencies. Tasks such as market research and responding to billing questions, for example, could be handed over to other employees, or outsourced and that would free up sales representatives to spend more time on the phones and out in the field.
When companies start delegating tasks, the KPIs give them more control and allow them to monitor how things start tracking once the changes are made.
But the state of the economy and market suggests a third scenario might be emerging - cash constraint. With accountants reporting more insolvency work involving smaller companies, KPIs must move to cash flow, outgoings and money coming in. Resellers would also be looking at the spread of creditors, and their financial health.
Picking and choosing which KPIs to monitor is not easy and resellers should tread carefully to ensure short term cost savings do not cost more in the long-term.
A reseller could cut staff costs by X per cent to a level set by the KPIs. As a result, they could lose five or 10 people. However, if this results in a loss of skills, the company could also lose customers.
Changing and redesigning KPIs cannot be done overnight. While companies can easily come up with rough and ready numbers, the trick is setting up a management system, with review and control processes that ensure people are actually delivering the KPIs.
It might take a week to define and design them and several weeks to get up and running. As a rule, it takes longer in bigger companies, sometimes months.
Anyone running a 50-person business would have the bandwidth to be across all the numbers and they tend to have a strong gut feel for what's going on.
If the company is bigger than that, there is more delegation.
And in those sorts of companies, people are held to account for outcomes as measured by KPIs, not just the tasks.
KPIs are crucial for business but they need to be based on what is actually going on out there.
They need to have a touch of reality about them.
If they amount to a manipulation of accounting data, the company will suffer because in the end, they are not measuring the real world.
Go to page 2 for a detailed case study on the topic.
Case study
Smart KPIs helped Cirrus thrive in the downturn, writes Leon Gettler
Key performance indicators are more than just the score card at Cirrus Australia. Cirrus chief executive officer Darren Phillips says they are part of the company's success and culture.
Cirrus is one of the few Australian companies specialising in the delivery, support and implementation of all IBM software and applications. Demand for its services is high.
In the worst business environment since the recession, Cirrus doubled its revenue and had significant growth over the 2008-09 year.
Cirrus chief executive officer Darren Phillips says KPIs are an important part of the company's successful strategy.
"If you look at my last year in the worst financial times, we actually did the best we have ever done," Phillips says. "I wonder what that would have been like if this had been a boom time?"
Much of the success, he says, comes from the KPIs. While many other companies have revised their KPIs in response to economic conditions, Cirrus has not changed them at all. It has not needed to. "I think we nailed it some time before. That's why, and we have gone from strength to strength," Phillips says.
He says finely tuned KPIs are part of the firm's advantage. "One of the reasons we have been very successful is that probably almost five years back we looked at our employment contracts and said the key was the KPIs. We were quite careful about them. One of our key differentiators in the market is how well we have done that."
The company has all the standard sales KPIs but they are structured to ensure sales people have a broad perspective, an eye on the big picture.
"You have to be very focused,'' Phillips says.
"With some of the KPIs, you have to make sure they have the broad view of everything happening in the business."
"That means when they are making value judgements in every transaction they are doing, it keeps the broad picture as part of what they do. Otherwise they become too focused on just the next outcome. So for a sales team they have the team figure, they would carry the number of the region and the whole company in their KPIs.
"We also have things like overall profitability. They are conscious of the overall margin of delivery. Now, in sales that's unusual. How can they control the overall margins? But we are open enough to share that so that they do have that as part of their thinking. It enhances the attachment of the employee to the overall outcome."
Phillips says sales KPIs are only part of the picture. Cirrus has KPIs around quality of life and quality of relationships. Phillips concedes that's unusual for an IT company but he says it is absolutely crucial. It might also explain why Cirrus hasn't lost any staff members in the past four years.
"Sales KPIs are much easier for companies to identify with,'' Phillips says. "Sales KPIs are easy to measure but it's the rest of the organisation that is the engine room.
"There has to be diligence. If you don't get those KPIs correct, you don't get the engine room right; and sales is only one aspect of the business," says Phillips.
So how does the organisation develop KPIs around quality of life and relationships?
"One of the KPIs is this - have they actually enhanced a relationship with customers, with other staff members or with their peers? Is there tangible evidence of them having done that?
"We find examples of that in their employment review and we would use that as one of those measures. It is a very measurable thing. We have actually put in measures to say, ‘What are they doing to enhance the quality?'
"Even with my most technical person, you would think they are not involved with customers and they are engine room but having these measures is a key part of being successful. It's about where they can contribute to the overall business and it makes sure they measure themselves against that so they feel their value.
"A lot of our success is attributed to the fact that we have done that really well."
While the KPIs are solid, there is room for improvement. Phillips says they always need to be reviewed. "It would be absolutely nonsense to think you have got it absolutely perfect,'' he says. "Things change all the time.
It's like setting out a score card
to some degree. That's OK but if you are never counting the score, what does it matter? It's about how often you look at it and look at those indicators.
"One of the things we have looked at is trying to make these KPIs measure back to personal goals. What we are going to do now is keep going a little bit further and say how can we encourage you to make not only positive changes in your own life, but how do we make sure we recognise you are putting that effort in?"
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