KEY PROFIT INDICATORS
I was with Tom and Vera Griffin over the weekend and during our conversation Tom mentioned ‘widgets’. Vera, who is a very accomplished business founder and innovator, asked what a widget was. We both laughed and snap; we said ‘it could be anything’. Wikipedia tells me it is a placeholder name for an object and it’s used by economists and accountants. Is widget, jargon?
Maybe it’s only me but when I listen to a typical business leader being interviewed these days my skin crawls as they wax through jargon filled descriptions of the external market forces, the downward price pressures, the capitalisation strategy, in the medium term, going forward; the list is endless.
This is one from Greencore last week; “The proposed placing will enable the company to proactively manage debt levels to ensure appropriate liquidity and leverage headroom”
Of course I know what they mean; it sounds very impressive. Well I think I know what they mean. How about you?
The current phrase on trend is ‘Pivot’. Have you had to pivot during that pandemic? In fairness if you are speaking to another business person directly about your business then using jargon makes sense. If you are a retailer talking to another retailer about having to turn to on-line sales due to Covid 19, then I guess saying you have had to pivot is a quick way of saying it. The person you are in direct conversation with will get it. However, using jargon in a general setting is unhelpful at best and most likely makes you sound like a tosser. Hmmm, is slang OK?
The finance world is particularly bad when it comes to abusing jargon. We don’t even know we are using it most of the time. Future proofing, growth strategy, below the line, bottom line, hit to the balance sheet, EBITDA, funds flow and this week’s topic KPI, to name a few.
Leaving Cert Accounting
Hey you at the back of the class, ‘what does KPI stand for’ shouted Mr. Harman. The class went silent, wondering how Davy was going to answer this one. Harman didn’t like Davy, too smart for his own good he told us regularly. He was going to get his comeuppance when he was out in the real world Harman would tell him. What the hell was a KPI, we all thought. No way Davy was wiggling out of this one. For dramatic effect Davy leans back on his chair, gazing at the ceiling and musing, with a smirk on his face, he wonders generally, out loud; does it mean ‘Key Profit Indicator’? Harman is silent and we’re all in awe. Bloody hell we think; he got it right. Davy’s dad is an accountant, all they talk about at home is stuff like that.
Of course that’s fiction, there was no such thing as KPI’s in the 80’s and certainly not in Leaving Cert Accounting, Davy didn’t exist and Mr Harman was a quiet reserved man. I’d say KPI’s was a 1990’s invention and anyway accountants don’t talk about work at home. Too worn out from the excitement of it all.
Some of the Good ones
One evening Twenty years ago I was meeting with Ralph Parkes a good friend of mine who founded Fine Wines retail chain. As we chatted his phone started to beep with messages which he ignored. After about the fifth one I suggested he check the message and he waved me off and said it was the takings being messaged through to him from each shop as they closed. He said, he’d check them later. Nice control and a simple but very effective KPI.
Professional services firms typically measure two key items: Utilisation and recovery, both expressed as percentages. In simple terms there are 37.5hrs available in the week and 100% utilisation represents 37.5hrs assigned to client work. How much the firm is utilised on a monthly basis is monitored and I know one of the big 5 legal firms were experiencing 150% utilisation in the busy time after the last recession! In the 1993 Movie The Firm, Tom Cruise’s character Mitch McDeere was starting his legal career in Bendini Lambert & Locke. He was told by his new boss that if he even thought about a client in the shower then make sure to charge it! Recovery is the amount of income recovered against that charged time and is also expressed as a percentage. These are useful professional service KPI’s.
I know a pension advisor in the city who targets 10 business development meetings a week. If he achieves that he knows his business grows, if he goes through a spell of less he can see a slowing in growth. Simple and easy to measure KPI.
A Kerry business I have worked closely with invests heavily in SEO and ‘pay per click’. They monitor click throughs, enquiries and sales completed from click throughs and they watch it daily, as a percentage figure. The percentage which could be 0.252% is the KPI.
Every morning when Michael O’Leary sits at his desk he gets a report on the previous days operations and you can be sure he focuses in on a number of KEY figures. The comparison he makes against his expectation will drive decisions that day. This is an essential focus in the low fares airline business.
Not all businesses benefit from daily monitoring and every business will require its own tailored focus which will change depending on market circumstances. The options and variations around KPI’s are as extensive as your imagination will allow.
Types of KPI
The obvious KPI’s are financial in nature and every business should monitor sales, margins, profit and balance sheet items monthly. Of course a KPI is of no value unless it is compared against plan or a previous period or measured in a trend. Some worth considering include; Sales growth and sales as an absolute figure, margin against a target, certain costs as a percentage of sales and net profit as an absolute figure.
The balance sheet KPI’s will vary from business to business. A capital intensive business will focus on assets while a service business is unlikely to consider assets but will be very focused on debtors and if they measure work in progress, on that too.
Operational KPI’s must be sector specific to and focus on the individual needs of the business. These should be developed with consideration for the business plan. Less is more and the entire team should buy into the use of the KPI and what it is trying to achieve.
Some obvious operational KPI’s around the sales function monitor unit sales, sales by location, average order value, leads, sales cycle length but there are many more that can be included.
Marketing KPI’s which are closely linked to sales KPI’s will focus on activity to generate sales: Website traffic, inbound calls, monthly advertising spend, sales team response time, qualified leads, social media reach, email marketing measures; the list goes on.
Deeper internal KPI’s will focus on how you run your business. If you make product they will be focused on measures around the product and this area is well developed from a KPI point of view. Services will focus on employee measures and if technology is crucial, how to measure the effectiveness of your technology. If R&D is key to your business then you need to measure R&D as that should be an indicator of future value in the business.
It can take teams some time to get comfortable with KPI’s and what they mean. The first time you calculate a KPI and report it, the reader will have nothing to compare it against. Over time, they will get experience of the movements they have seen and what is achievable. This experience of the KPI in the past will feed into the teams ability to use movements in KPI’s as indicators of changes in the business.
I looked at a business this week with four divisions and it is hard to spot any consistency in information coming from each division. There are some KPI’s but they don’t make sense when compared against the past or against the other divisions. There is no meaningful trend that I can see and from my discussions with management they don’t seem to have any particular insight from the figures. The quality of the primary data is questionable which if you think about it, is the most likely reason for the inconsistencies. They need time to get their systems in order, which we can help them with and then they need time to build confidence in their reports and the KPI’s that are being generated. Then the KPI’s will start to make sense.
The technology that is now available for producing information, including KPI’s and reporting on them is powerful. Management can choose any aspect of their business and monitor it successfully. This leads to better faster decision making. At Numeric we focus on producing timely, accurate and relevant monthly management information. We help analyse that information to assist management with decisions and we keep the Jargon to a minimum.
(Photo Michael Dziedzic)