A unique insight from Hidden Business Profits (HBP) on how to perfect Key Performance Indicator (KPI) reporting

 We start by identifying relevant definitions.

Situational Awareness definition:

Situational awareness is being aware of what is happening around you and applying that knowledge to understand how information, events and how people’s actions will impact on goals and objectives both immediately and in the near future. (HBP Definition)

Key Performance Indicators (KPIs) definition:

Specific, empirical results of performance against target, used by management to determine probable future performance based on current fact. KPIs must only measure what can be controlled and changed which means process and the people’s behaviour who operate within the processes. (HBP Definition)

Key Performance Measures (KPMs) definition:

Performance results that are affected by re-determined outside influences that cannot be controlled or changed. Examples: how currency exchange rates affect profitability, how absenteeism or sickness affects profitability. (HBP Definition) Best Practice definition: A structured process which ensures that things happen the right way on each and every occasion. (HBP Definition)

Structured Process definition:

A clearly defined step by step process which must be taken, in order to achieve the highest possible conversion ratios. Must also include tangible and measurable results to identify where attrition tool place, because it is not only is it a matter is achieved, that is important to identify and measure what has not been achieved and why. (HBP Definition)

Sensitive Area definition:

A part of the business (or a structured process) where a small change in performance leads to a large change in the outcome, often referred to as a marginal gain. When considering all of the above, there can be no such thing as 2nd or 3rd level KPIs because all sensitive areas should produce a specific mission-critical result.

Change:

“To make or become different.”

Insanity:

Doing the same thing over and over again and expecting different results. (Albert Einstein).

The prime objective of any business:

To generate acceptable and sustained profits in order to satisfy, stakeholders, directors, and shareholders. (HBP Definition)

KPI Focus:

HBP evangelises the message: “what gets measured, gets managed, gets done”. (as long as one is measuring the right metrics).

Summary:

A business must measure their measures to make sure that their measures measure up! Every business must use correctly structured KPIs. Otherwise, it can be likened to flying a plane at low altitude, over uncharted mountainous terrain, without a radar. 


Why do decision makers measure the wrong things?

They don’t know where their true sensitivities lie because they have probably not measured them, and they can’t accomplish this if the process is wrong.

How do I identify where my businesses true sensitivities are?

With a small business (less than £1m annual turnover) a professional external resource can often become a third eye which instantly identifies the sensitive areas that should be measured, because the current directors or owners are usually too close to the day to day operations and may not have had the training, developed the skills or gathered the resources.

For larger businesses, the most effective way to identify all sensitive areas is to create a model with inbuilt simulation, then discuss the outcome options with an external expert opinion.

What should KPIs be used for?

KPIs MUST determine the probable future performance on the basis that the process being measured is structured and prioritised to deliver the best possible result. The conversion ratios through each step of a structured process should be an indicator to identify if performance can be improved, referred to as a Lead Measure.

Another benefit from engaging external expert opinion and especially those that have had the training developed the skills and gathered the resources which enable them to make suggestions for improvements in performance by re-engineering processes and helping to change the behaviour of the people who operate within these processes for the better.

If the process you are measuring it is wrong, the KPIs will be meaningless, and the results will reflect historical performance known as lag measures.

This means that KPIs MUST look forwards not backwards. Einstein did define insanity as repeating the same action and expecting a different result.

The real purpose of KPIs is to increase the efficiency with which this vital information can be imparted to and be assimilated by decision makers, so they spend much less time looking at the information and much more time acting on what they have learned. They are there to reduce information overload and prevent “analysis paralysis”.

What gets measured, gets managed, gets done – but not if one wastes a lot of time wading through piles of reports! 


Advantages of properly designed KPIs

* Making budgeting and forecasting an easier and more accurate process.

* Providing a valuable tool to improve pay plans which can, in turn, reduce staff turnover.

* Increasing sales.

* Reducing marketing costs per sale.

* Identifying when and where to increase marketing spend whilst reducing marketing costs per sale.

* Significantly improving manufacturing efficiency.

* Reducing the cost per recruit.

* Speeding up the administration process.

* Reducing debtors and improving cash flow.

* Imparting a very positive message to banks, shareholders and investors.

* Powerfully motivating the people in the business by increasing job satisfaction.


Some of the objections we have encountered and how we have overcome them:

1. It will take too long. (Solution: we deployed the latest technology, then trained and motivated the workforce).

2. We can’t automate all the data collection. (Solution: we deployed the latest technology to fully automate the KPI reports then trained managers to deliver short (10 minute) reports to the directors.

3. I don’t trust my people to collect the right information. (Solution: we deployed the latest technology to ensure error-free data capture from one digital data capture form, re-train operatives, re-align job descriptions and train managers to become more effective at managing and motivating people).

4. My people will never do this daily, let alone weekly. (Never say never. Solution: We gained a profound understanding of the neigh sayers using Psychometric Profiling, then implement re-training programmes customised to the individual. Admittedly some people were replaced with individuals that had passed a customised selection/recruitment process).

5. I only need a monthly report. (Solution: We asked the directors to explain how and why they would not want to “fine tune” their business processes as the month progresses, then justify the return on investment). 


What are the dangers of losing situational awareness?

* Not maximising profit. Poor sales performance.

* High marketing costs per sale.

* Lack of manufacturing efficiency.

* Unacceptable lead times.

* Misrepresentation.

* Low self-esteem of employees.

* High levels of staff churn.

* Inability to secure funding for expansion or turn around.

* High costs for goods or services.

* Loss of competitive advantage.

* Ultimate business failure. 


How do I get the most out of my KPIs?

Simple steps to resolving a complex issue.

1. The real purpose of measuring performance is to drive future improvements in performance.

2. A good KPI must be tightly linked to a good strategy and process. A good process requires analysis of the sensitive areas of the business, setting realistic outcomes, and specific, measurable actions (structured processes) that can be taken to reach those desired outcomes. The process must be measured against realistic targets.

3. Determine your appropriate KPIs and implement the reporting structures to deliver them – without undue cognitive effort.

4. Schedule and hold regular reviews. KPI reporting will be a complete waste of resource unless the business leaders hold a weekly management KPI meeting, where each department head delivers their KPI report in ten minutes or less. This places a demand for department managers to be inspired to achieve their monthly targets, motivated to rectify underperformance, excited about developing strategies to expand and improve performance, empowered to make improvements within documented authority limits and have a profound understanding of the importance of KPI reporting. KPI Training is crucial.

5. Reverse engineer your KPI reporting so that the reports themselves can tell you the performance levels required to get a section of a structured process back on track. Ask yourself this: how many times this year did you fail to hit your sales unit and profit targets? Our philosophy of reverse engineering KPI reporting will mitigate this risk.

6. Use your KPIs to spot potential problems or opportunities. Remember, your KPIs indicate trends in your business performance, they are windscreens not rear-view mirrors. If the trends are moving in the wrong direction, you know you have problems to solve. Alternatively, if the trends move consistently in your favour, you may have greater scope for business growth than you had previously forecast. An example might be to recruit more staff, because if your staffing is out, how will you hit increased targets? 


Conclusion:

We hope that we have changed your perception of the relevance and importance of KPI reporting. If as we suspect you are now thinking KPI reporting in a different way, and wondering what to do next.

Interrogate your current KPI reporting processes to ensure that what you are calling KPIs are really KPIs and not just Key Performance Measures.

Interrogate your strategy.

Interrogate the level of the structured processes you have implemented across the entire business.

Review the effectiveness of your review procedures – remember no manager should take more than 10 minutes to present their KPIs.


No time? Not sure how to define the sensitive areas? Unsure of how to implement the changes so they become permanent?

You are more than welcome to contact me without obligation.

Contact me: Harry Le-Moine DL: 01772 426 135 M: 07590 279 395 or send me an email click here.

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