Key Performance Indicators (KPI)
Any of you who follow motor racing will be familiar with telemetry, where the teams in the garages are able to monitor every move of car, engine and driver, thousands of times per second via wireless signals.
Whilst motor racing is the most extreme example of this data monitoring and evaluation process, nowadays most other professional sports teams and stars will use the capture and analysis of data about their own, and their competitors’, performance. In golf; video and computers analyse a player’s swing, in football; managers use video to identify possible improvements and of course baseball is the classic statistics based sport.
So what can small businesses learn from this? Well do you think Roger Federer would be the greatest tennis player ever, if once a year his coach had watched a highlights video of his matches and then rung him up with a few bits of advice? Of course not! His team and he will watch every match, every practice, every competitors match, and react accordingly. Developing better moves, improving poor strokes, finding other players weaknesses. So why not use this approach of identifying and improving your key performance indicators or KPIs to make your business more professional and more competitive.
Your annual accounts are produced from limited information for specific purposes such as tax and statutory reporting. Relying on them to tell you how to improve your business performance is like Red Bull Racing getting a print out of their cars’ engine performance in the post the following week; pretty much useless. You need to gather your own KPI information, process it and act accordingly if you’re going to be able to make the changes you need to, in the time frame you need to.
This may sound a bit daunting, after all you’re not an accountant, but much of this information is easily available and you may already use some of it in a non formalised way. A lot of it has nothing to do with traditional accounting, and often doesn’t even involve money directly.
The first step is to think about what drives your business. What are the key things which your business needs to do to keep it’s customers happy? So if you run a shop you need to sell products at a price which everyone is happy with, in a timely fashion. Lets say then that the important numbers there are number of products sold, selling price, buying price and customer waiting time. If you’re running a training company your important numbers may be the percentage of employee time spent on chargeable work, the lead time from order to training day and the average price charged per hour. In a manufacturing business you should be monitoring production capacities and machine up time. Every business type will have different measures which are important, and you may be able to find some useful pointers within your industry by searching the internet. You don’t have to have hundreds of indicators. Just a handful will do to start with, and more than 15 is probably overkill.
Having identified what you think is important, your Key Performance Indicators (KPI) , you need to start measuring them. Depending upon the information involved you may use differing measurement methods. If something is critical you need to be accurate and may need to make an effort to collect it with time sheets or monitoring equipment, you can also be accurate if something is easy to establish. However some information may be difficult to collect or not quite so important and here you can use estimates or averages. Don’t bog the business down collecting data if it’s not necessary. The important thing is to have something even if it’s only rough. Try also to collect some historical data although this often won’t be possible.
Now comes the important bit. Once you’ve started to collect the data you can map it out on a monthly, weekly or daily basis and start to use the information to make changes in your business. Look at the trends, compare your KPIs to competitors or industry standards. Think about how you can improve on your performance and make those changes. If something doesn’t have the desired effect try something else. Learn the effect that pulling a certain lever in your business has so that you can pull it further or push it back quickly as appropriate.
So if you want your business to be a high performer start to think like a professional sportsman and analyse and improve your key performance indicators on an ongoing basis.