Key Performance Indicators are measurable values that businesses use to track progress to strategic or operational goals. So, if I were to ask you right now what are the three to five KPIs your business is tracking on a regular basis, you could answer me quickly and easily... right?
If you're like some of the businesses I've worked with, those KPIs may not as obvious or regularly tracked as you'd like. In fact, I've found many businesses find it pretty difficult to figure out what KPIs to track on a regular basis. If this describes you, read on... and check out my last article, KPIs: 5 Critical Questions to Help Define Your Business Metrics.
Set S.M.A.R.T. KPI goals
As 90s-MBA-course-material as it sounds, a great foundation for KPI-setting is to work through S.M.A.R.T goals—specific, measurable, attainable, realistic, and time-bound goals—with your team. Consider the stylized example below of a cost-reduction exercise done for a former client of mine, a small nutritional supplement manufacturer in the Southwest:
Specific: What, when, how?
- Increase sales and profitability for two recently launched product lines to match revenue and cost profile of first successful flagship product within two years.
Measurable: Brainstorm what within your goal can be measured
- We had benchmarks and quantifiable data on cost inputs, profit margins, and changes in revenue. Also, we had consistent and reliable access to these datasets each month.
Attainable: What are the actionable steps to get there?
- Put cost controls first, focus on revenue growth second: Inventory management, supply chain optimization, marketing, etc.
Realistic: Is this the right focus?
- Historical data showed us that there was a market for the recent launches, and a history of success with the flagship product instilled confidence.
Time-bound: What’s the deadline?
- Two years.
KPIs in action
The sales volume of our flagship product in the example above was an easy benchmark–$1.1M in annual sales. For ease of digestion (no pun intended), we set the goal of $1M in annual sales for each new product line, effectively tripling this company’s size. To measure success, we called on a few of the KPIs below:
COGS or cost of goods sold (direct labor, ingredients, packaging)
- At the time this was 60%, giving us a product profit margin (known as gross margin) of 40%. A sub-goal here was to invert that to achieve 60% profit margin by reducing costs at least 2.5% per quarter. We measured this KPI each month using interim income statements.
Ingredient cost as a % of product cost
- Specialized nutritional supplements are expensive! And very scientific-sounding. We set a goal to find one new alternate source for the top 80% of cost contributors to leverage competition in our supply base to get the best prices since we couldn’t compete on volume. We generated this KPI each month using invoice and order volume data.
Direct Labor efficiency – units per hour (UPH)
- We didn’t do the work ourselves, but we did manage the recipe and mixing steps, which we subcontracted out. Redefining certain recipe parameters allowed us to speed up a partially manual process, and we tracked this KPI on a weekly basis to gauge how effective our changes were. More units per hour means less direct labor cost in each container.
These are just a few of the dozens we tested and implemented, and we were early to achieving our goal!
Why do some businesses have trouble implementing KPIs?
Businesses often have many stakeholders, and it might be easy to agree on the big picture but not on the path to get there. This is probably the most common pitfall when identifying and implementing KPIs. Another common obstacle is access to information. Depending on company size and infrastructure, the data may be inconsistent, or not readily accessible. In this case, even the best metric won’t live past the first update.
At large companies, KPIs must also fit into the broader strategy. This additional layer of strategic alignment can be messy, especially if communication is poor. A large national bank, for example, might be tracking mortgages and auto loans generated each month with the intent to sell the debt, while a local branch manager might incentivize only higher-rate personal loans. Success at the local branch is good for the local team, but it doesn’t translate into progress toward the overall goal.
It's ok to ask for help!
We get it, KPIs can be confusing, and there’s a lot to consider! But with the right analytical approach, and a touch of creativity, you can own your path to success every step of the way. And don't forget that Paro is here to help.
Bryce is a detail-oriented analyst who enjoys solving complex problems and using data to tell the story. As a litigation consultant for nearly seven years (damages in corporate lawsuits), he routinely crafted financial models to address a variety of complicated business issues. During his tenure, helped saved billions of dollars for companies ranging in size from a local accountancy to multi-national conglomerates. He is currently a Senior Finance Specialist for Intel Corporation, where efficiency is paramount. Bryce’s primary focus is ensuring that the business unit managers he supports have a full and informed view of the landscape in front of them. He received his MBA from Arizona State University with an emphasis in Finance in 2014, and bachelor’s degrees in both business (economics) and music (percussion and audio engineering) from Indiana University in 2008.
Want to work with Bryce on your KPI strategy? Email firstname.lastname@example.org.