KPIs myths exposed

by Barry on October 11, 2010

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Most organizations have no idea of how to implement Key Performance Indicators (KPIs). They either measure everything that moves, or they operate in the blind and measure nothing except perhaps revenues or profitability.

KPIs allows you to quickly and directly evaluate the health of an organization. It is important to select the right KPIs to measure. This is the hardest part in determining your KPI strategy. You want to select those KPIs that truly tell you how your business is doing, and what are the true root-cause measurements you should be evaluating. They should be closely tied to your overall business strategy. For example, Southwest Airlines determined that their operations is based on a quick turnaround time of their planes once their planes reach the gate. They concluded that this allows them to fly fewer planes and have more on-time departures, which allows them to lower prices and gain more customers, ultimately making them more profitable. So whenever a Southwest plane touches down, every person who works for Southwest is doing their part to turn around their planes in thirty minutes or less.

Myth 1: Measure everything that moves

When selecting your KPIs, you will be tempted to measure everything. This is the wrong approach as you will be overloaded with way too much information and what is really important will be impossible to see. You want to limit the number of KPIs to seven to ten indicators, preferably closer to seven.

Myth 2: You need to spend two million dollars and have six months to implement KPIs

Hold off on high-end dashboard for at least three months. Although there are plenty of consultants willing to take your money to develop customized dashboards just for your business, hold off until you have time to measure KPIs for at least three months. I can guarantee that you will want to adjust and tweak the KPIs after you start measuring them, and you will probably make some mistakes. Plus you don’t want to spend six months in the planning stages while nothing is being measured. This is why I recommend keeping things as simple as possible when rolling out KPIs. Initially a spreadsheet will suffice.

Myth 3: Revenue is the most important thing to measure

While revenue is important, far more important is profitability. This determines how successful you are, and all other KPIs impact profitability either directly or indirectly. Keeping in mind that profitability is a factor of your overall revenue and what it costs you to deliver your product or service, everything feeds into profitability.

Myth 4: Keep KPIs private

While there may be some KPIs that you would not share with your entire staff, I recommend sharing as many as possible. Let them know how the organization is doing and use this as motivator to improve performance. Engage your staff and make it fun.

The steps to take to implement KPIs are:

  1. Determine which KPIs to measure
  2. Determine your goals. The goals need to be measurable and have a timeframe associated with it. For example, don’t just say “Improve employee retention” but “Employee turnover should be less than 5% per month”
  3. Determine how you will measure each metric. Put in-writing the detailed formula so that others know how to interpret it. For example, if you are measuring employee billable utilization, you need to make organizational assumptions for how many working hours there are in a week, and how vacations and holidays are factored in.
  4. Develop the workflows for obtaining data and reporting KPIs. Keep it simple at first and evolve it over time. Use a spreadsheet initially
  5. Measure and report on KPIs

As a starter, below are the typical things that you will want to measure in an agency. Use this to get the discussion started within your organization. Evaluate what means the most to your organization. For example, I worked in one organization where winning awards was their key driver. They determined that this was the top factor in attracting new clients, partners and employees. In this organization, I would measure how many awards they win every month.

  • Revenue: gross revenue for the office, segmented by business line and client
  • Factored pipeline: the projected revenue from the pitch pipeline, in factored form
  • Profitability: the single, most-important measurement and may be expressed in terms of PBT, EBIT or EBITDA. Measured across organization, client and department
  • Project versus retainer: measures the amount of project revenue versus retainer revenue
  • Gross margin per employee: how much each employee brings in comparison to their costs
  • Billable utilization: how billable each employee is, separated by department and employee
  • Headcount: number of employees broken out by full time, part time and freelance staff
  • New business win rate: how effective the organization is at winning new business
  • Employee turnover: the amount of people who leave the organization either on their own or because of performance issues, measured in comparison to the total number of employees. Does not include reductions in force

As much as possible, show numbers in graph format showing trends over the previous 12 months. This allows for easy comparison and to see if your are trending upward or downward. For further reading on KPIs, pick up a copy of The Balanced Scorecard: Translating Strategy into Action.

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