Why do we need to measure business performance? Why do we need KPIs?

I’m not exaggerating when mentioning these two questions. Many people are still not sure about the benefit of measuring things. Well, in the most cases these questions are not asked directly and are veiled behind some innocent statements. Like for example:

“We have some KPIs, and we look at them regularly in the end of a reporting period.”

  • Great, but in this case “regularly” actually means once a year.

“Yes, we are tracking our performance! We have a dashboard with some nice charts!”

  • Excellent, but this “Dashboard” is used only when someone needs to add some nice pictures to a PowerPoint presentation.

“We have found the list of some good KPIs for customer support, and we are now tracking them.”

  • Not to mention that “KPIs” are treated by employees as another formality that has nothing to do with “real work.”

So what’s wrong with KPIs? Let’s start the discussion now, and if you have something to add, please add it in the comments.

How are small businesses doing business without KPIs?

If I had a choice to:

1) run business with bad KPIs that are not aligned with any meaningful goals

or

2) run business using intuition of my team only

I’d prefer the second choice! Bad KPIs are really harmful and demotivating! On the contrary, running business using intuition only is fine.

Ask any small business owner – how does he or she decide about buying some ads. You will learn that the decision is actually fact-based and probably there are some hidden indicators implied. Those intuitive indicators are often much better than those that one can find on the Internet.

Still we need to measure things… and the performance is not an exception

Have a look at this picture. Which line looks longer?

You think you don't need to measure things? Have a look at this picture. Which line looks longer?

That’s a simple demonstration that shows that our perception of things is not the best one (the lines actually have the same length[1]). We are not programmed to make precise measurements, and that’s why sometimes our intuition fails and takes us to the wrong conclusions. We still need to measure things!

Playing game and knowing how to calculate the score

In sports when we are learning a new game we start with learning how to play, but if we want to go ahead we need to understand how the score is calculated.

It might be as simple as time calculation for those who swim or run, or as complex as a golf scorecard. The point is that without a standard of measurement[2] we would not be able to agree on the rules of the game and compare our results to the results of others.

What about diet plan without weight control?

Let’s take another example – any diet plan is build of several measurement components:

  • Leading measures – the number of calories that a person consumes; or the number of calories burnt in the gym;
  • Lagging measure – the weight!

Not that without these numbers one wouldn’t be able to plan his or her diet plan, but having the values of these indicators helps you to understand your progress or ask for professional advice.

Some measurements save us time and money

When you visit a physician with some health problem he is not sending you directly to make an expensive MRI scan. The first metrics that he tracks are those that are easier to measure – temperature, blood pressure, family anamnesis and so on.

The same applies to a business. When someone ask for a business consultation, a consultant asks about leads, conversion ratios, average shopping cart cost, and profits.

Where do we to start with indicators? Planning and running with indicators

A company needs to plan a marketing campaign, what data do we need to look at to make the right decision? As a manager my biggest concern if the funds invested in marketing will generate some profit for the business, so we need:

  • Total cost of marketing campaign
  • Estimation of the audience covered
  • Estimated conversion ratios
  • Average shopping cart
  • Expected profits

For sure, there is a never a guarantee that leads will be converted as expected, but at least we have something to work with. Before running some expensive marketing campaign, I’d test:

  • The message that we are going to deliver to find out its conversion rate
  • The targeted audience, if they are converting, as well as the audience that we worked with before

Having these numbers the decision is made not only because of the intuitive guesses. How can you build this model for your own business? Start with understanding your business processes and business strategy in the details. We discuss these questions in web-based training “Building Balanced Scorecard Step-by-Step.”

Conclusions and recommendations

Let me sum up the thoughts from this article:

  • Good indicators help. They allow us to make business more transparent and trackable. They prevent us from making wrong decisions, and help to save time and money.
  • Wrong indicators hurt. They are demotivating team, and treated as another formality that has nothing to do with “real work.”
  • Indicators are about understanding business, you cannot come up with good indicators if you don’t understand the business model.
  • When studying the business model ask questions about conversion rates and total costs of ownership, these are basic indicators that can be used to understand the business better.

References

  1. ^ Müller-Lyer illusion. Wikipedia article.
  2. ^ The Difference Between Quantification, Measure, Metric, and KPI. Aleksey Savkin, BSC Designer, 2013.

Related Articles

Strategy and KPIs Scorecard Expert | Speaker | CEO. Aleksey Savkin (LinkedIn, @bscdesigner) is helping companies to better formulate their strategies and make the process of strategy execution more tangible with KPIs. His areas of expertise are Balanced Scorecard, Key Performance Indicators, business performance management. Aleksey is a frequent speaker at conferences; the author of a number of articles and books on Balanced Scorecard.

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