One consistent theme that we see – and thoroughly believe in – is that top performing businesses have a keen understanding of their performance metrics. Good managers and owners are typically able to quickly rattle key stats off from the top of their head. That brings us to our point: like Mr. Deming Said:
“You cannot manage what you cannot measure.”
Key Performance Indicators – or “KPI’s” in consultant speak – are exactly what they sound like. KPI’s are metrics that are directly relevant to a specific business and are used as either a measurement of historical performance or a predictor of future performance. KPI’s are not one side fits all. Ideally management should identify critical components of their business and designate those items as KPI’s. The key here is their business. Not just generic metrics.
So for instance, in an web-driven application, the Customer Acquisition Cost (CAC) is critical to understanding the effectiveness of your marketing spend. Management might seek to understand if allocating additional capital to advertising (PPC advertising, sales staff, trade shows) would have a positive ROI for the company. Contrast that with a gas station. Customer Acquisition Cost? Probably going to be REALLY hard to influence customer acquisitions on such a location based business. But if our gas station happens to be a bit old school and wrenches on cars, measuring the efficiency of their mechanics vs. standard hours would be smart.
So What KPI’s Should We Measure?
Great question. Glad you asked. Here are a few to get you moving:
- Gross Margin
- Net Margin
- Operating Margin
- Return on Equity
- Days Sales (Receivables) Outstanding (DSO)
- Days Payables Outstanding (DPO)
Sales and Customers
- Customer Acquisition Cost
- Customer Complaints Per X
- Customer Profitability
- Cost Per Lead
- Lead Conversion Rate
- Capacity Utilization
- Cycle Time
- Inventory Turns
- First Pass Yield
Yes, there are about a million more things out there you could measure. The key is to pick the critical ones. Try to measure everything and it’s a recipe for disaster. You’ll get overwhelmed, you’ll have a hard time collecting the stats, you’ll abandon the effort. And then you’ll be right back where you started.
- Here’s a big list of KPI’s to consider
- Four Critical KPI’s
- Mashable is always good for breaking down concepts. Try this.
- KPI Library app
- On performance management