As legendary business author Peter Drucker once said, "What's measured improves." If you've been in business any length of time, you know that creating meaningful measurements that tell you how your business is doing (a.k.a. Key Performance Indicators or KPIs) can be challenging. The good news is, you only need a few KPIs to really get a handle on the financial pulse of your business.
Rick Smith, Director of Business Analysis and Process Improvement at Yale University says the best place to start is by clarifying what should be included in the "critical few" measurements that business owners focus on. He suggests using a problem-solving perspective and asking three key questions:
- How are you doing?
- How do you know?
- Where must you improve?
While this approach is simple, it does require you to dig deep and ask probing questions in order for it to be effective.
Smith also says that it's important to differentiate between KPIs and metrics. A KPI equals a metric, but a metric does not equal a KPI. A metric is simply a data point such as 300 calls per day. That doesn't tell you if it's good or bad. A KPI includes two points to measure: 1) where you are and 2) where you should be as defined by your business objectives, service level agreements, or company specifications.
Smith also points out that businesses often create both operational and customer experience metrics, and they can get out of sync. Operational metrics show everything is working fine, but the customer experience metrics tell a different story. This is usually caused by not measuring the right things or not measuring correctly. To counteract this problem, Smith developed an indicator called the FVI (FACE Value Index). A high FVI is a good indicator that your business practices are in harmony with established KPIs.
The FACE components include:
F = Fast (i.e. Are you being efficient?)
A = Accurate (i.e. What is your error ratio?)
C = Cost Effective (i.e. Are you meeting profitability goals?)
E = Easy (i.e. Can you maintain the process without excessive effort or resources?)
By using Smith's two-part process for establishing and measuring KPIs you can more easily determine metrics for your business processes, beginning with the three key questions above to narrow down the "critical few." Then use the FACE components to establish your metrics. Two to three metrics in each major area of your business to determine how you are doing should be sufficient.
Our financial experts have a wealth of experience in helping business owners measure and improve their KPIs. Please contact us if we can be of assistance in this regard.