Smart Business Performance Podcast

KPIs should always be balanced. 

Why? 

Because, what you typically find is that if you measure one thing, that thing will improve but something else will deteriorate. 

For example, if I focus on. Production quantity, I might achieve the volumes I want but quality declines. 

Similarly, if I measure quality I might find that Quantity declines. 

The trick is to always measure both at the same time and ensure they have the right weighting or focus. 

At a business level, you could encounter the same problem. 

If you only measure Financial Performance you will find that other perspectives such as Customer or People related KPIs deteriorate and you land up with a long term issue that becomes difficult to come back from. 

The opposite is also true, if you only focus on measuring Customer or People related KPIs you could find that you underperform Financially and everyone loses. 

Tip 

Make sure you balance your KPIs but measuring the different types of KPIs at the same time. 

When choosing KPIs, always start by defining who the customer is. 

So the next logical step is to figure out what the customer is looking for.  

A common mistake I see all the time is that KPIs are set as Customer KPIs when in fact the customer doesn’t value that measurement and benefits nothing from it. For example, a sales department crafted a few customer KPIs: 

1. $ Value if Gross Profit 
2. % Gross Profit 
3. $ Value if Annuity Business 
4. $Cost of Customer returns 

From the above examples, you can see that the customer has received no benefit from these. 

Instead we should be asking how would the customer want to measure you as a supplier? 

The answer to that question would like very different: 

1. # of returned shipments due to Poor quality 
2. # Mistakes on documentation 
3. % Variance to lowest product price 
4. % Product returned for Poor Quality 
5. % Due Date met 
6. # Avg time from order to Delivery 
7. # Executive Engagements 
8. % Net Promoter Score 

Can you see the difference?  

All of these KPIs are of value to the Customer and right now your customer might be measuring you on the achievement of them. 

There are 3 Value propositions which we can discuss 

1. Value for money (or a no frills offering) 

• Customers want a product quality that is fit-for-purpose and where the delivery is predictable. 
• It must be relatively easy to do business with you and there doesn’t need to be a huge variety of products to choose from. The price needs to be competitive even 
• if it’s not the lowest. Price will, however, become a discussion point if quality and delivery are lacking. 
• In times like these customers want a great offering at a great price. They love champagne, but invariably only have money for beer. 
• There are world-class companies that do this such as Walmart, Toyota, Macdonald’s. 
• 70% of my customer are looking for the price as the #1 value driver 

KPIs 

1. % Repeat Business 
2. % On time and In full deliveries 
3. #Average order lead time 
4. % Credit Note to Sales 

The trick for you is to ensure you measure the same in your internal systems. 

2. One stop shop 

• This is the Customer Solutions model. You supply the customer with many 
• customized products and services and can be integrated into their supply chain. 
• Relationships on the ground are key as you increase the mix of services to product. 
• Companies that do this well include Microsoft and IBM,. 
• 20 to25% 

KPIs 

1. % Contract renewals 
2. Value of Referral Business 
3. % Customer Satisfaction – you can use some sort of survey to get this information 
4. % Net Promotor Score 
5. Value of ROI from Joint Customer Initiatives 

3. Product Leadership 

• Product leadership means providing cutting edge premium products. They are not to be confused with fit-for-purpose quality products as they have a much higher and superior quality and, perform at a much higher level. 
• Suppliers of leading products should earn a superior margin in order to service the additional costs these products require,  
  • such as innovation costs,  
  • research costs,  
  • handling costs and,  
  • branding costs.  
  • In addition, be wary of launching innovation projects that aren’t led by customer data as this can cause an unnecessary reallocation of resources away from productive and profitable activities. 
• Companies that do this include Mercedes Benz, BMW, Apple, Gucci Clothing. 
• 5to10% 

KPIs  

1. # Innovation Awards 
2. % Brand Awareness 
3. # Average Ranking in Product Reviews 
4. # New features per annum 

The most common question I get is, " How do I choose the right KPIs?" 
Great question! 
There are millions of things that could be measured. You can only manage what you measure. 

So if you measure the wrong things you will manage the wrong things and not get the results you're looking for. (Of course you could be lucky and get the required result, but why leave this to chance?) 
So, how do I choose the right KPIs? 
Well, you need to look at the Goal you're trying to achieve and then select a KPI which is a good proxy of that goal. 

If my goal is "Grow Revenue", then "% Revenue Growth" would be a good proxy. An increase in % Revenue Growth would mean that I reach my goal. 

That's an easy example! 

What if my goal is to  "improve Customer Satisfaction"?  Now this poses an interesting challenge as there could be a number of ways to measure this: 

% Satisfied customers - as collected from a Customer Survey 
% Net Promoter Score -  also from a survey 
% of Repeat customers – This is a proxy that assumes returning customers are satisfied 
% Proposals Accepted – This could be a good proxy for Price 
% On-Time Delivery - Another proxy, assuming the customer satisfaction is a natural result of on-time deliveries, however, there could be other reasons why the customers are not satisfied even though the deliveries are on time. 

The skill of selecting the right KPIs for the right situation is something that every leader needs to develop. This will take time but one thing you can do is get a list of KPIs that other organisations are using to help you on that journey. 

Keep reading these tips because I will provide many tips for you to solve this problem. I can’t do it in one shot. 

Tip 

Seek out a list of commonly used KPIs in your industry. 

What is a Key Performance Indicator? 

A KPI is a measure of performance used to measure progress towards a target / a goal / a desired state. 

A KPI is different from a  metric. A metric is anything that can be measured: 

• Height 
• Length 
• Weight 
• The number Sales orders 
• The Value of fixed assets 

A metric becomes a KPI when you link it to a goal and have a clearly defined target to pursue and evaluate against. It also needs to be assigned to someone. 

Tip: 

Ensure that your KPIs are aligned to goals and have clearly define targets and someone is accountable.