The Eyes (and I’s) in KPIs
There once was a old King who was gifted an elephant for his birthday. Unfamiliar with this strange creature from a far away land, he brought in his most trusted advisors, three blind wise men, to tell him about its value. The three men came into the palace hall, where the elephant was standing, and immediately started touching and feeling different parts of it to understand this treasure.
The City Wiseman seized the tail. “Why, it is nothing but a common broom”, he said, “this is of little value to your highness”. The Forest Wiseman feeling the trunk claimed: “I know this creature, it is a snake, surely it is an exotic one as I have never held one like this before”. The Palace Wiseman, holding onto the elephant’s hind leg, proclaimed with certainty: “It is a massive pillar, certainly strong enough to hold up the castle walls!”
Growing Perspective
Organizational growth is neither linear, no guaranteed. There are many reasons that start-up companies grow, stagnate or die. Regardless of its trajectory, relying on the visionary drive, energy and charisma may help a business reach a certain point but it has its limits. The difference between an entrepreneurial team and a monolithic organization is not about profitability or industry, but rather its organizational depth.
As organizations grow, so too do their teams and members, as different levels of expertise or vision are required. The ability to develop appropriate and diverse skillsets, is what often separates growth from stagnation at each inflection point. As different perspective become more important, due to rising complexity and stakeholder interest, leadership begins to delegate authority and responsibility. Its internal focus and lens shifts. Because of this, the ability to measure each Subject Matter Expert (SME)’s expertise and execution becomes key.
Common practice suggests organizational goals, which are used to measure success and growth, should follow the basic goal-setting criteria of being SMART (Specific, Measurable, Achievable, Realistic and Timely). The ability to systematically analyze, track and drive measurements of success are the Key Performance Indicators (KPIs) which will allow act as a GPS on the roadmap to the company’s goals. But even the best and most accurately measured KPIs will drive you off a cliff if they are not the wrong ones.
Key Performance Indicators of Key Performance Indicators
As organizational focus shifts, so too must the understanding of what drives growth at the next level. Monitoring revenue alone is great but without measuring profitable revenue what is the organizational value? Short term profitable accounts are important, but accurate lifetime profitability analysis is better to build a systematic engine of growth. As noted, SMART goals are great but unless they have a verifiable correlation with the desired outcome, it would be like measuring the number of trees to evaluate your distance to your end destination.
An example of lost perspective
In a hypothetical example, a company has historically looked at cash receipts as a KPI of success. As most businesses start, cash inflow is what drives survivability and is an easy metric for people to understand. But while it may be easy to understand and observe trends in cash receipts, without monitoring other leading metrics or KPIs, there is a risk of reacting too late or losing perspective, especially if that cash is used to cover a growing amount of employees or vendors to keep the coming in. After all, cash-in is a lagging indicator, and not representative of the future obligations associated with their driver.
On the other hand, a well trusted team to measure the KPIs responsible for driving cash-in are important to gain a better understanding of the roadmap ahead. Some earlier indicators include: billings, account profitability, cost of acquisition, collection rate… Management that refuses to evolve its outlook and focus on what is important loses perspective. Relying on over-simplistic and routine measurements of success will only yield the same result or worse may dangerously lead the company down the wrong path.
Furthermore, once the right tools are in hand, it not only highlights the importance of what is being looked at, but how they are being looked. KPIs need to be understood in the context over time and in relationship to each other. Having the right set of KPIs allows for clearer interpretation of their inter-connectivity and relationship, the SMEs impact on each and to each other and the overall trends and correlation.
Same story, different perspective
There once was a President of a company who, feeling uneasy, called the Senior Leadership Team to the boardroom to give their analysis on the company’s performance and growth prospects. The VP of Sales said: “Our pipeline is great. Our sales are higher than last year! We’re the ones driving success here.” The VP of Operations next chimed in, “Production is great! we’re pumping out more than the target volumes can handle. But staffing is at full capacity. We can’t do much more on our end.” Finally, the VP of HR proclaimed, “Turnover is lower than last quarter and we’re saving a ton on recruitment costs.” The President looked around. Seemingly everything was doing great! He went back to his office.
The next day, the President came to the office, feeling uneasy about the direction of the company, and called another meeting.
Articles
Steve Tsao
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