Chances are, you’ve heard about KPIs while having conversations with your peers or in business-related podcasts, blogs, and television shows. But do you really know what they are? Even if you have a basic understanding of KPIs and their place within your business, do you truly know how to define them? As I’ve begun looking for key performance indicators in my own business, I’ve come to understand that there’s a lot to unpack. That’s why I’m asking today’s question, KPIs, what are they, and why do they matter to business owners?
Follow Along With The Financially Simple podcast!
In January, my entire team gathered, outside of the office, for a 3-4 day strategic planning session. Each member of the team came away with a little bit of homework, myself included. My task was to solidify, strengthen, and condense the KPIs within my business. Not realizing exactly what I was getting into, I told my team that I would have it done in 45 days. Yeah, I know. I can hear some of you laughing at my naivety right now. I didn’t realize how much went into defining a business’ KPIs.
During that 45-day period, I did a lot of research. I read many different books and listened to many podcasts on the subject and found that a lot of the information on KPIs is either redundant or overly simplified. However, I read a book by David Parmenter that was aptly named, Key Performance Indicators. In it, Parmenter does an excellent job of streamlining some complicated concepts. However, the more I researched, the more apparent it became that my 45-day goal was overly ambitious.
For today’s entry, I want to look at four different terms and how they work. Each of these terms helps to further define and shape KPIs and why they matter to business owners. So, what are they?
At their core, key performance indicators (KPIs) measure what you specifically need to do to reach your goals when your business has grown too large to manage on your own. KPIs can be past, present, or future indicators. Sometimes these are also known as lagging, present, or leading indicators. For example, if you’re using net operating expense as a KPI, that would be a lagging indicator. The number of meetings that you have this week would fall in with the present indicators. Finally, the number of prospective clients you expect to visit your website or place of business could be used as an example of a futuristic or leading indicator.
As I stated earlier, many of the resources on KPIs repeated a lot of the same information. However, David Parmenter offered a concept that really stood out to me. Basically, he posed the question, is everything a KPI? When you think about the phrase “key performance indicator,” you have to focus on the fact that it’s “key.” Therefore, unless something is absolutely crucial to measuring your business’s performance, it isn’t key. For everything else, there are performance indicators.
These are items that tell you what you need to do in a broader sense. One example of a performance indicator is an increase in your shareholder’s equity. Although you can get an idea of whether your business is trending in the right direction, an increase in shareholder’s equity simply provides a holistic picture of your business’ health.
Just as not all performance indicators are KPIs, not all indicators are performance-based. Once again, I have to credit David Parmenter’s Key Performance Indicators for coining the phrase, “Key Result Indicators.” I had never heard this term before reading his book, and it really is a brilliant concept. Think about it. How have you done?
Key result indicators show you exactly how you’ve done. They give you an easy view of how your team’s efforts have impacted your business.
In every business, there are a handful of things that must occur for you to have continued success in your company. These are critical and, therefore, non-negotiable for your business to succeed. Not long ago, I was speaking with a dentist client of mine. I found it interesting that he viewed scheduling as a critical success factor within his practice. That means that the scheduling must be accurate for his business to have continued success.
Some might argue that scheduling is a performance indicator—I know it would be in my business. Having the schedule full certainly helps, but it isn’t a critical factor in my business’s success. Perhaps that’s the case in your own business, as well. Even if scheduling isn’t a critical success factor for you and your business, something is. Identifying the CSFs in your business is a big piece when determining the KPIs in your business. Let’s move on to the framework of KPIs and why they matter to business owners.
I like to put things into a visual context whenever possible when learning new concepts. So, when I encountered these four terms, I envisioned a pyramid. At the pyramid’s pinnacle is the critical success factors of your business. On the tier just below that are the KPIs. Next up are the key result indicators. Finally, at the base of the pyramid, the performance indicators are laying the foundation.
According to the research included in David’s book, there should be no more than 80 performance indicators in a company. I know that seems like a lot of performance indicators. However, if you think of the company as it is broken down into the 8 key areas, it really is quite simple to develop 80 performance indicators. With that number in mind, you should automatically be thinking of the rule of 80/20. This means that 20 percent should be divided amongst key results and key performance.
If you split that down the middle, giving 10 KPIs and 10 KRIs gives you 100 points of measurement within your company. This means that you can quickly and easily get an accurate assessment of how your company is performing; using the KPIs to measure past, present, and future specifics of what you need to do to reach your goals, KRIs to measure the results of your work, and performance indicators to show you the granular details of what you’re doing.
But what about the critical success factor? Candidly, I’ve struggled with this in my own company. I even told my team that I can pretty easily identify the financial KPIs and that I’m beginning to understand the KRIs. But when it comes to selecting just three things that must happen to create continued success within my business, I’m struggling. I mean, not only do I have to narrow this list to just three items, but they must also be cohesive with my performance indicators, KRIs, and KPIs AND align with my vision, mission, and values.
RELATED READING: The Strategic Planning Process: Steps to Clarity and Direction
I talk about vision, mission, and values regularly and often try to tie every part of my business to them. Simply put, vision is where you would like your business to be within the next five years. Your mission is why your business exists and why you’re moving in the direction of your vision for the company. Values, on the other hand, detail the principles that you hold most dear. As you can see, coming up with three critical items to your success, work with your performance indicators, KRIs, and KPIs while also matching your vision, mission, and values, is a daunting task. This is why so many people hire consultants and business coaches to help them build a performance pyramid.
So, there it is, folks. This is a small peek into my own journey as a business owner. I hope that by showing you my own processes—warts and all—that you may also benefit from it within your own business. Friends, this has been a challenge for me. I’m not afraid to admit that. But can you look at your business and identify just three items that are critical to your continued success? If so, then I applaud you, and I hope to reach your level one day.
However, if you can’t or are struggling to narrow it down, don’t fret. We use consultants in my company because, as a business owner, it can become challenging to see the forest for the trees. Oftentimes, it’s easier to see things when you’re not as close to the issue. If this is you, that’s okay. Reach out to us. We have a team of business experts that are happy to help.
Friends, life is hard, but life is good. Understanding KPIs and why they matter to business owners can be frustrating. Identifying your performance pyramid doesn’t have to be. With a little research and perhaps, an outside perspective, defining your critical success factors can be, at least, financially simple.
Outlining the KPIs in your business is often a time-consuming and complex process. Many business owners benefit from having an outside expert help them establish a KPIs system for their company. Please don’t get stuck in the weeds, handling it all on your own. Reach out to us. The team at Financially Simple is here to help!