“You can’t manage what you don’t measure.”
Key Performance Indicators (KPIs) are a vital resource to managing your business. Each selected KPI can be your bellwether indicator for all departments and take the guesswork out of your strategy. Rather than relying on old adages and “I think” statements, KPIs help quarantine the operational data of your company and focus your go-forward actions to address specific needs.
In addition, a KPI management process shifts the organization – through an annual, quarterly, rolling forecast model process – to a forward thinking, action organization rather than backward reviewing financial company. KPIs drill into the core of each controllable area of the business and provide tangible, quantifiable data that become the foundation from which action plans are devised.
Let’s look at a controllable expense like “labor” for example. Labor is usually expressed in both dollars and % of sales. Without KPIs to further dissect what contributes to a labor overage, an organization may try to address its labor issues in the wrong areas. By tracking KPIs within the labor category to include overtime %; variance to labor ceiling hours; wage rates for the manager, assistants and associates by shift, the organization gains a better understanding where the pressure points are within labor. Add to those same KPI cuts with a comparison by region and the shortfall becomes even more precisely defined.
The discipline of monthly reviews of KPIs helps keep the company plans on target when comparing against last year or this year’s budget. With KPIs identified within each department, the collaboration between operations, marketing, human resources, accounting, facilities, merchandising, IT and real estate becomes even more necessary. Each department is held accountable on an ongoing basis for delivering results in their respective areas.
Provides Clarity: KPIs provide the single greatest factor to managing: clarity. With KPI development and management, the company specifically target areas of the business that need addressing – and as importantly, don’t mess up the areas that are humming along just fine. Rather than broad-based, anecdotal conclusions, a well-thought through KPI management system helps drill down to the core issue at hand and focus on its resolution.
Tangible Action Items: Knowing precisely the challenges and shortfalls to address, departments can then develop tangible action items to put in place in the upcoming quarter that will have a measurable impact on results. This allows the organization to re-forecast results with a targeted action plan. The precise nature of KPIs can foster nimbleness even within larger organizations.
Benchmarking: KPIs allows to measure results against like time periods with real data, not with anecdotal comments in an attempt to remember the past. Identifying key drivers in your business combined with industry fundamentals, cycles and trends foster an unbiased analysis of your daily operations. Further, with the appropriate level of detail, the organization can get to the root of issues such as labor, rather than addressing these categories in sweeping, across the board adjustments.
Makes Budgeting Manageable: Annual budgeting becomes easier with KPIs since the budgeting process becomes a rolling quarterly forecast. Again, larger organizations can be far more nimble if they are reacting to their plans in shorter time periods rather than a lock-and-load annual budget. Market dynamics that cause havoc in your plans are now met with a counter-plan.
Cross Trains Departments: Team members discuss and share KPI results in a concrete, disciplined fashion with go-forward action items identified by collaborating departments. Departments are intimately involved in the process that allows each to supplement the organization with additional action items that augment, rather than conflict goals. The senior level team that engages in a monthly KPI discussion is better positioned to communicate and cascade the results of the entire company throughout their staffs.
Board Meeting Preparation: Lastly, board meeting preparation is no longer a mutually exclusive event, but rather “decks” are built throughout the year. This allows for departmental preparation to be kept at a minimum for upcoming board meetings and maintains “top-of-mind” activities within the organization. The importance of board meetings cannot be overstated, so making the process more efficient will produce the best product for the organization.
Key Performance Indicators take the guesswork out of your business. Set up correctly, KPIs can move an organization from an anecdotal, backward reviewing to a forward planning, fact-based company. The discipline surrounding the KPI process is a critical step in ensuring that every opportunity that is afforded a company can be identified and fully taken advantage of in the upcoming quarter.