How NOT to screw up KPIs
Watch/Listen here or on Apple Podcast, Spotify, or wherever you listen to your podcasts
“Don't fly blind, and don't let perfect be the enemy of good.”
— Mike Goldman
Measuring Success
Many organizations are not measuring success effectively
More than just revenue and profit should be considered when measuring success
Looking at the wrong numbers can lead to ineffective measurement
Numbers need to be actionable in order to be useful
What Drives Success In A Business
There are two things that drive success in a business: improving the business and the day-to-day operations
"Rocks" – identified as 90-day priorities that measure progress in improving the business
Companies often struggle with measuring success in day-to-day operations
KPIs are important indicators of success in day-to-day operations
Success is not just about working hard, but also about working smart and focusing on the right things.
Understanding the right level of success is important, not just having the numbers.
Levels of success and failure should be established, often using a red, yellow, green system.
Types Of KPIs – Financial And Non-financial
There are financial and non-financial KPIs that can be helpful in figuring out what KPIs a business should measure.
Financial KPIs such as revenue, cost of goods, gross margin, net profit, and cash flow are important.
Non-financial KPIs such as product shipping rate, fill rate, client retention, and new product launches are also important.
In a services business, KPIs such as client retention and new service launches are essential.
Financial KPIs include PNL, balance sheet, and cash flow statement.
Leading VS Lagging Indicators & People VS Process Measures
Lagging indicators measure something that has already happened, such as revenue and profit, while leading indicators measure activities that drive results
It's important to focus on both leading and lagging indicators
People and process measures should be balanced
KPIs should be established for each function within the company
Accountability and a culture of measuring KPIs is essential
Sharing KPIs is crucial for success, despite common fears about doing so
Understanding/Education & Accountability
Education is essential in understanding financial numbers such as gross margin, net profit EBITDA, and cash flow.
KPIs should have an owner and be visible on a scorecard, which can be a spreadsheet or anything similar.
Regular meetings should be held to discuss the numbers, and a culture of accountability should be established, with each member of the leadership team holding one another accountable.
Organizations fail at this because they're waiting for perfect numbers, but it's better to start with imperfect but visible numbers.
Thanks for listening!
Apply for a free coaching call with me
Get a Free Gift ⬇️
🆓 The limitless organization short video course
Connect with me
www.instagram.com/mikegoldmancoach/
www.facebook.com/mikegoldmancoach/
www.www.linkedin.com/in/mgoldman10/
I invite you to assess your team In all these areas by taking an online 30-question assessment for both you and your team at
-
Imagine playing a sport and not knowing the score. Imagine flying an airplane and not knowing your altitude, or not knowing your speed, or not knowing where you are on the map. Most organizations are flying blind. You're trying to be successful in your business, but you're not looking at the numbers or you're not looking at the right numbers, or the people on your team don't have access to the right numbers.
Most organizations, I find, are doing a really bad job of measuring success, which means that maybe the numbers are available. By numbers, I mean more than just revenue and profit. Maybe the numbers are available, but they're not being shared. Not being shared because the owner or CEO is fearful of sharing the numbers with their people.
Maybe the numbers aren't even known or they aren't accurate. I was working with a client two weeks ago. Who knew they were having a problem or suspected they were having a problem with client retention, but didn't have an agreed upon measure for client retention. So sometimes the numbers aren't being shared.
Sometimes the numbers aren't known or they're not accurate. Sometimes you're looking at numbers, but you're looking at the wrong numbers. The numbers are just numbers. People, you get together in a weekly meeting and people are sharing numbers and everybody nods their heads, but they're not actionable numbers.
There are two things that we do in a business that drives success in a business. There's, things we're doing to improve the business. And then there's the whirlwind of the day-to-day when I work with my clients that the things they're doing quarter in and quarter out to improve the business.
Implementing a new ERP system, launching a new product. We identify those. We prioritize those. We measure those using something called rocks. A rock is a 90 day priority. So there's improving the business, but then there's the whirlwind of the day-to-day, and it's the whirlwind of the day-to-day that I wanna focus on in this episode because even companies that are pretty good at identifying a small number of rocks for a quarter, priorities for the year moving forward to improve the business, more often than not, they're flying blind on the day-to-day.
How do we know we're doing the right things every day? Another way I've heard it put is working on the business versus working in the business, and it's that working in the business or the whirlwind of the day-to-day where there's something called KPI's, key performance Indicators that are your best gauge
of success. Success is not everybody's working hard. Everybody's doing the best they can. That's not what success equals. Success needs to be quantifiable. So a key performance indicator is a measure of success. What do I mean by that? So if we're talking about the marketing function, is marketing successful because you have.
You've implemented in a new website. Is marketing successful because you've got some cool new logo because your social media campaign looks really good and maybe has a lot of engagement? I'd argue none of those things mean marketing is successful. Maybe we gauge success in marketing from the number of marketing qualified leads we're getting every week.
That might be a better gauge. How often is the phone ringing due to our marketing? And for these key performance indicators, marketing qualified leads being one. Certainly the your, your PNL is another. It's not just a matter of having the numbers, it's a matter of understanding what's the right level for success.
If I share numbers around marketing, qualified leads or client retention, and they're just numbers, our client retention this month was 92%. We had 43 new marketing qualified leads, so what? Is that success or is that failure? We need to know levels for both.
And without the numbers and without the levels of success, understanding what's the level of success. So what's that level of failure? Most often it's red, yellow, green. This number or above. If we have uh, a client retention of 96% or above, that's green. That's success.
If we have a client retention of 90 or below, that's red. That's failure. Anywhere in between 90 and 98 is yellow. That means we're in danger. We haven't failed yet, but we're in danger. Without those numbers, without the levels of success and failure, I'd argue you're flying blind as a company. So let's talk about some of the types of KPIs.
First, I'd say there are and, and these are not the only types or these are the types that are gonna be helpful to you, figuring out what your KPIs ought to be. There's financial versus non-financial KPIs. If you are measuring revenue, cost of goods, gross margin, net profit, cash flow, that's wonderful. Are those KPIs, Absolutely.
But are those the only KPIs you should be measuring? Absolutely not. If you are growing a product business, You might wanna know how much of your product is shipping out the door. You might want to know your fill rate on that product. You might wanna know your, level of client retention. You might wanna know, you might wanna set goals in terms of how many new products need to be
created and launched over the next quarter, over the next year. You know, if you're in a services business, you might want to again, look at things like client retention, look at things like, the launching of brand new services. What are you measuring that is financial, the PNL, the balance sheet, cash flow statement.
But what are some of those non-financial, again, like marketing qualified leads, like client retention, like order fill rate. So we've got financial and non-financial, then we have leading versus lagging indicators. Most organizations are doing a fairly good job of measuring lagging indicators. A lagging indicator is a measure
of success, but it's a measure of something that has happened. It's the measure of a result. Revenue, gross margin, net profit. Those are all lagging indicators important to measure. The challenge is if you're only measuring lagging indicators. It becomes very difficult to figure out how and what you could impact.
So if you're measuring revenue, and I hope you're measuring revenue and your revenue is 20% below target, there's no dial that I can turn or lever I could pull to say, okay, turn the dial up on revenue and increase revenue 20%. If I had that dial, I would sell it for crazy amounts of money that dial doesn't exist.
What does exist is an understanding of what your leading indicators are and the ability to turn up the dial on those leading indicators. So if you're lagging in indicator is revenue, it may be that you have a leading indicator, which is the number of sales meetings you're having with decision makers.
Can you turn the dial up on the number of sales meetings you're having with decision makers? Absolutely, absolutely. I could turn that dial up and say, we need to make you, we're making 50 calls a day. We need to start making a hundred calls a day and meet with more people. If my closing ratio on sales is 25% and I need to up that to 50%, can I impact that?
Sure. Let's look at our sales process. Let's look at the performance of our individual salespeople. Let's do what we can to improve our sales performance to up my closing ratio. So we can't just look at lagging measures, we've gotta look at the leading measures and a leading indicator, a leading key performance indicator
is defined as the measure of an activity that drives a result. The measure of an activity that drives that lagging indicator. So an activity is the number of sales meetings you're having. An activity is the number of current clients you're going to visit. An activity is how often you are coaching your people to try to move them from B players to A players.
So we've got financial versus non-financial measures. We've got leading versus lagging measures or key performance indicators. And then the last thing that I find is helpful is people versus process measures. We need a balance of both. What's a people measure? I'll give you two examples of people measures.
A people measure might be employee retention. It might be an employee net promoter score, I'll throw in a bonus third, it might be the talent density of your organization, which I calculate by the percent of A players, minus the percent of C players. Those are all people measures. Process measure may be how fast are we moving things through the warehouse?
What's our order fill percent? Those are process measures. So if we're looking at financial and non-financial, if we're looking at lagging and leading, if we're looking at people and process and we have indicators for all those, that's a pretty good start. We're doing pretty well. In addition to those types of KPIs, you wanna make sure you have KPIs for each function, What?What are the most important two to four sales KPIs? What are the most important two to four marketing KPIs Talent develop. Or people, KPIs, financial KPIs, technology, KPIs, all of the major functions in your company should have measures of success, ideally, both leading and lagging measures of success.
So number one, we've gotta figure out what our KPIs are. Number two, we need a process. We need a culture, an attitude. To hold people accountable for those key performance indicators. And number one most important thing is we need to share them. As I said at the beginning of the episode, I see a whole lot of leaders and owners of businesses.
Really scared to share the numbers. If my folks knew our revenue, if my folks knew our profitability, they'd all wanna race and it's a load of garbage. Most people, even, I hesitate to say, most people on a leadership team don't understand how to read a profit and loss statement or a balance sheet. People in your organization believe if you are making 10 million in revenue, the owner must be putting seven or 8 million in their pocket.
They have no idea that a healthy business is probably making 15% net profit. And of that 15% you, you may be investing a great portion of that back into the business, paying a great portion of that in taxes. So I have found when people start to understand the numbers, and sharing the numbers comes along with education.
Education is to how to look at those numbers, and it starts with a PNL. Do people really know what gross margin is and how they could impact it? Do people understand net profit EBITDA and how they can impact it? Do people understand how to measure cash flow and how they can impact it? You need your team together impacting them and in order to do that.
You need people to understand those numbers and you need to share them. Another thing to hold people accountable is every KPI should have, an owner should have someone accountable. If you are tracking inventory turns and you're off on, and, your inventory turn is 20% lower than it should be.
Who's accountable. Who's accountable for marketing qualified leads, who's accountable for client retention? And by the way, accountability is always and only one person if everybody's accountable for client retention. Nobody's accountable for client retention. So you need to share your KPIs. You need to educate people on those KPIs.
And every KPI should have an owner. Someone around the leadership team table should own each one of those KPIs. Then we need to make them visible. We need to put them on a scorecard. That scorecard could be a spreadsheet, it could be the back of a napkin for all I care. But you need some way on a, at the very least, a weekly basis to be sharing those numbers on some form of scorecard.
And that scorecard should not just have, here's our 75 numbers in a long list. That's not very actionable. But if you've got the right numbers and those numbers are color coded, red, yellow, green, depending on how you're doing against your targets, and don't track a number unless you've got a target measure of success for that number, if you've got red, yellow, green, now we can look at all those numbers and say, hey, good job on the greens.
What do we need to do to fix the numbers in red? What do we need to do to fix the numbers in yellow? So you need to make it visible through a scorecard. There needs to be some regular,uh, regular frequency of sharing those numbers. Most numbers are not gonna change on a daily basis. Some might, but at the very least in your weekly accountability meetings with your team, those numbers need to be shared.
And most importantly, and lastly, we need a culture where we're holding people accountable for those numbers. If client retention is down, we don't just say, okay, I guess that's the world we live in today. No. What are we doing about it? And who should hold the members of the team accountable? It's easy to look at the leader of that team, the owner, the CEO, and say, well, it's the CEO's job to hold us all accountable.
No, it's not. It's each member of the leadership team's job to hold each other accountable. For achieving these numbers, cause by the way, if I'm not achieving my sales numbers, my peer over on the service side may not be able to achieve their numbers. If in marketing our we're not getting great leads, it's gonna impact our sales numbers, all that's gonna impact numbers we may not be able to hit in finance around cash flow.
So as a leadership team, you need to hold each other accountable for those numbers. And lastly, the reason why I see most organizations fail at this and most do fail, they're just not, there's no visibility. There's no accountability to the right numbers. They fail at it because they're letting perfect be the enemy of good.
We're not gonna start sharing these numbers yet because they're not all a hundred percent accurate. We're not gonna start sharing these numbers yet because marketing is still trying to figure out what their second and third key performance indicators are. We're not gonna share them yet because we know our lagging indicators, but we haven't done a good job on our leading indicators.
We're not gonna share them yet because we don't have a beautiful scorecard yet. We're in the process of implementing a new, data analysis tool, and it's gonna give us some great graphs. And until then, we're not gonna do it. And that goes on for one quarter, two quarters, three quarters. There is always an excuse because the numbers probably aren't perfect.
They may never be perfect. That's okay. If right now they're 85% accurate and you're writing them in crayon on a napkin, then it's better than flying blind. And trust me, once you start sharing those numbers and holding people accountable for gathering those numbers, when you're looking at them every week and you see there's a bunch of blank spaces when you get to something that's in the red, but people go, yeah, but that number's not accurate yet.
Or you're looking at it on an ugly spreadsheet and you say, we need a better way to look at it. If you're looking at every week, that's gonna light a fire under your butt to make it more accurate, to have better KPIs to do a better job of presenting them and graphing them and color coding them.
But as long as you're not doing it at all because you're waiting for it to be perfect. You're just gonna perpetuate that, and then you are flying blind as an organization. So my challenge to you is if you are not sharing KPIs, financial, non-financial, leading, lagging people process by function. If you're not doing that at all, start whenever your next weekly meeting is.
Share what you can. Make sure you're setting targets, levels of success, levels of failure. If you are already sharing numbers, but they're not the right numbers, or they're not accurate, or they're not color-coded in the right way, or you're not having the right conversations, take that next step. So either get started or take the next step to improve, but I promise you it's like flying a plane without having any of those gauges in front of you.
And just hoping you land on the right runway. Don't run your business that way. Don't fly blind and don't let perfect be the enemy of good. Start using key performance indicators right now. Go to it.