These days we are drowning in data but dying of thirst for actionable information. That’s the problem with key performance indicators. CEOs get buried in spreadsheets and detail, and miss the important KPIs.
78 of His Closest KPIs
A CEO recently walked up to me with an iPhone and scrolled through 78 KPIs that his business tracks.
And I said, “Wow, can you tell me what actions you take around any of those KPIs?”
“Well no,” he said. “I don’t even know what half of them are. But isn’t it cool that we’ve got so many?”
“I don’t think it’s in the least bit cool,” I replied.
A CEO should watch no more than seven to ten key performance indicators. Your VP of sales, West Coast sales director, operations manager and other key people in your business should track seven to ten KPIs most relevant to their responsibilities. Each of your “lower level” people should be responsible for digging deeper into the details that are directly influenced by their specific actions. Knowledge is power, and assigned accountability encourages people to become knowledgeable.
A Report Nobody Understands
The challenge is that people start out with seven to ten KPIs and find that numbers four, eight and nine aren’t working. But they keep those and add eleven, twelve and thirteen. Then they find that one, three and seven aren’t working, but they keep those and add fourteen, fifteen and sixteen. Next thing they know they have a three-page KPI report – that nobody understands what to do with it.
If you want to measure something and can’t tell what makes it good versus what makes it bad, it’s not much use. It can be just as bad for KPIs to run too hot as too cold. Over-performing can be as bad as underperforming.
I had a meeting with a CEO in the throes of switching his company’s books from cash accounting to accrual accounting. His company’s insurance bill had risen dramatically. The month they got the bill profits seemed to nosedive because they immediately reported it on the income statement.
“And then as CEO you end up with a knee-jerk reaction,” I told him. “You get everybody way too excited about the fact that profit is down that month, when all you did was pay a big bill.” If that bill is treated as a prepaid expense and reported in monthly increments instead of all at once – suddenly things won’t seem so bad.
Many organizations have the same tendency to “overreact” when it come to KPIs as well. If you haven’t defined what you’re going to do when a KPI is running off the rails, it’s pointless measuring it because you’re just conducting a fire drill.
There’s no perfect set of KPIs. And, two or three of yours ought to be activity based, not numbers based, so you can see around the corners. get a better sense of ‘what’s coming’
For example, if you have a 120-day sales cycle, it takes about 120 days from the time your salesperson makes the first sales call to the time you realize any resulting revenue. You may expect your salesperson to make 100 calls a month, knowing just 10 will generate revenue. So if the salesperson makes only 50 a month for two months running, you know you will start to see a revenue shortfall in 120 to 180 days. This is an activity-based KPI that lets you see around the corner.
Boil it Down To One Page
“Too many KPIs, or the wrong KPIs, can detract focus and add hidden costs, as unnecessary administrative burden is imposed upon those responsible for collecting, summarizing, and analyzing KPI data,” writes finance analyst Thomas W. Smith on the Association for Financial Professionals website. “In extreme cases, it becomes the classic case of analysis to paralysis.”
CEOs and their leadership teams need to sit down and say, “Here’s the KPI. Here’s why we’re measuring it and here’s the range of performance that qualifies as good.” Dump the KPIs that aren’t working. Focus on a one-page flash report with only seven to ten that’s manageable, informative and actionable. That’s another effective Strategic Thinking Conversation for you and your team. And, it’s a lot more productive than arguing over some irrelevant budget variance!
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