Truth can be found in the numbers, as they say.
For CEOs leading their companies out of the pandemic, the truth can be found in key performance indicators (KPIs) — the metrics that track the pulse of a business.
What we now refer to as KPIs have origins in the Total Quality Movement of the 1950s, and the Balanced Scorecard, a methodology developed at Harvard Business School in the ‘90s. Yet this methodology, which has been studied and prodded throughout 70 years of management science, is commonly misunderstood and poorly executed by businesses today.Free PDF Guide Journey to the Summit: The CEO’s 7 Laws of Leadership
During this time of uncertainty, there has been a movement toward speed, agility and access to predictive analytics. Business leaders have a heightened awareness of the critical nature of data and real-time reporting. Information is the ally of the informed CEO and executive leadership team.
Here are nine keys for gathering and reporting useful KPIs at your business:
1. Start by building a system of measurement.
Every week on the Vistage Networks forums, CEO members ask questions like, “We are a manufacturing company; what are good KPIs?”
Focusing on numbers without a process to evaluate them will yield unproductive metrics. Before determining applicable measures, leaders must identify success drivers in a strategic plan. Then, departments can zero in on the vital few. Good scorecards or dashboards only have 12 to 16 measures.
A management team must then consider the limitations of their systems. Many private companies do not have ERP (enterprise resource planning) systems that provide integration. Accumulating KPIs may require manual exports from multiple systems.
ACTION ITEM: Conduct an assessment of your systems so you can identify potential limitations. Then, seek out KPIs that you can gather seamlessly. You are better off with a measure that’s 80% accurate but fully automated versus one that is perfect but requires human manipulation.
2. Develop multiple scorecards.
Once a system of measurement is created, working groups can develop scorecards that are applicable within their area of control.
Given the complex nature of our business ecosystem, organizations typically require a corporate-level scorecard, divisional or departmental scorecards, and success measurements for individual employees. Measures applicable to a senior manager may be different from an entry level employee.
ACTION ITEM: Once you’ve established high level business goals, delegate the development of scorecards to working groups with specific delivery dates. Managers seeking numbers will tend to procrastinate on developing a full scorecard. Developing measures is iterative.
3. Find external indicators of demand
In February and March of 2020 when the pandemic hit, CEOs scrambled to figure out what their revenues would be. Best-in-class companies project their revenues months in advance. These companies create demand indices, often by linking to outside sources such as ITR Economics and websites like the Federal Reserve Bank of St. Louis and the Bureau of Labor Statistics.
ACTION ITEM: Look for specified economic variables that you can correlate to demand in your sector and tie your KPIs to these variables.
4. Develop predictive KPIs.
Management teams should attempt to solve problems before they begin. In many businesses, there tends be a disproportionate number of lagging KPIs. In addition to external indicators of demand, companies can create internal predictive measures.
Predictive indicators measure activities that drive future results. For example, companies should have an engine to measure pipeline. Today’s customer relationship management (CRM) systems easily capture pipeline value in a way that can be benchmarked from month to month.
ACTION ITEM: Demand that your sales and marketing team have methods for measuring pipeline. In ecommerce or other marketing-centric businesses, this may take on the form of conversion or other success metrics.
5. Make your corporate scorecard a push and not a pull.
CEOs often tell me they have “a lot of data.” Relying on managers to pull reports can be a fatal flaw. Once your management team agrees on a pertinent set of measures, scorecards should be pushed out in a regular cadence.
ACTION ITEM: Create automation so that data is automatically distributed to the people who need it most.
6. Enable frequency.
Various measures are conducive to daily, weekly, monthly or quarterly measurement. You might only measure customer satisfaction once or twice a year. Look for indicators you can measure weekly or monthly, such as the number of sales calls.
ACTION ITEM: When your department heads develop their scorecards, have them determine the appropriate frequency for KPI reporting.
7. Schedule formal debrief sessions.
Managers should meet to review scorecard numbers on a regular basis. By socializing key learnings from a scorecard, your company can build accountability and action into its culture. Inspire curiosity on root causes, so you can learn based on what the data is telling you. The value of scorecarding is driving behavior.
ACTION ITEM: Formally review scorecards as a team on a weekly or monthly basis.
8. Publish in public view.
By building a culture of transparency, you bring your employees along for the ride. This doesn’t mean you need to share sensitive financial information. While there is a trend toward more open-book management, not every business owner is comfortable with it. If you don’t share financial information, find shareable measures that will give employees a sense of the pulse of your business.
ACTION ITEM: Create a system to share information with mid-management (and/or all employees) through intranets, monitors or reports.
9. Test and train.
Before deploying measurements, test them in the real world to see if they are applicable and easy to measure. Once measurements are vetted, lower level managers can be trained on their importance so they can be leveraged in decision making.
ACTION ITEM: See KPIs Best Practices for Measurement guide for additional tips on developing a set of meaningful KPIs for your business.
Once you have established your organization’s KPIs, you have the blueprint for appropriate business activities and allocation of talent and resources. KPIs measure the short-term steps that lead to long-term performance in all aspects of your business, from finance to marketing and operations.
The truth is in the numbers — once you have clear KPIs, you will have a sharp and unobscured view of the state of your business and where it is headed.