Many years ago, before I came on board to work for a large contracting company, one of the questions I asked the owner (and who would become my boss) was "What KPI's are you tracking and how are you trending overall?" I got a sideways look before getting a "What's that?" response. I went on to explain the what’s and why’s and made creating and tracking several KPI's one of my first orders of business for the company after I was hired.
So what are KPI's? Key Performance Indicators (KPIs) are a company's measurable goals, typically tied to an organization’s strategy, as revealed through performance management tools. Simply put, they are measurable objectives showing progress or failure and useful insights on how your business is doing. These metrics may center on some or all areas of your business, and may include company financials, field operations, sales, marketing (SEO) and customer service.
Some companies may use different terminology to track metrics such as dashboards, benchmarking or Balanced Scorecards. Performance appraisals are one of the most common forms of KPI's that most companies use. For the sake of this article, however we will be focusing on the operational and financial KPI's and dashboards in the areas of your business mentioned previously.
Why do I need KPI's for my company? For almost all businesses, a company's employees and equipment represent both the biggest expenses and its most valuable assets. The company's productivity and ultimately its profitability depend on making sure all of its employees and equipment perform up to, if not exceed their full potential.
To survive and indeed prosper, companies can no longer manage their business just looking at their balance sheet and income statement. Businesses need to utilize KPI's and delve deeper into what it does well and what it doesn't. Where it doesn't, KPI's reveal the company's symptoms of what ails it and to what degree, which allows the company to:
- Identify specific problems within the company (Is it the people, process or equipment?)
- Identify where improvement is needed and how much can be improved (establishing benchmarking)
- Take corrective action to improve or replace the problem (change the process, people or equipment)
- Continually monitor against benchmarks and take corrective action accordingly
Think of KPI's as a rudder that will allow you to steer the boat across unchartered territory to a pre-defined destination (goal) for your company. With this rudder you can give the boat direction and to see what's ahead (see trends and to ensure you're on track to goals). With this ability, you can avoid the boat from hitting an obstacle, avoid menacing storms that might be in your area, or (worst case) running your boat into the rocky shore.
Ultimately, KPI's allows managers and owners to make informed decisions based on the data and information that they provide and to take corrective action to improve performance.
Do most companies my size track KPI's? You'd be surprised by how many of your peers DON'T have any form of KPI's that they are tracking. I've seen different surveys and studies show that 50-65% of all companies across any industry regularly track some form of KPI's. I believe this number is overblown for small to mid-sized companies by at least 40-50% because:
- Performance appraisals are included in the number and that doesn't directly impact the operational or financial efficiency of the company
- Smaller to mid-sized businesses simply aren't aware of the benefits thus don't utilize true KPI tracking.
So the actual percentage of small to mid-sized business using true KPI tracking or dashboards is most likely in the 25-33% range. The bigger the company, the more likely they will be using KPI's and the smaller the company the less likely they will be using KPI's.
In the case of the large contractor that I worked for, they were a $100+ million revenue organization and didn't have any formal KPI structure in place before I got there. Don't get me wrong, they operated pretty well before their KPI's were implemented. However, they were a good company made even better with them in place.
So perhaps you've identified symptoms that your business is experiencing that something is wrong. You want to go about implementing a KPI tracking system but not sure how to go about it. So what KPI's should you be tracking? I'll be covering that topic along with other topics like should I purchase an automated dashboard KPI solution or can I just track it manually using excel spreadsheets? Stay tuned and find out in part 2 of my series on "Why and what KPI's should we be tracking?"
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