Key performance indicators

Copyright ©Nick Bettes Consulting

Key Performance Ratios

For SMEs

Copyright ©Nick Bettes Consulting www.nickbettes.co.uk

Objectives

• At the end of this seminar you will

– Know how to identify the key performance

ratios (KPRs) for your business

– Know how to use KPRs to focus the day-to-

day activities of your staff and managers on

achieving your business strategy


Agenda

• What are KPRs?

• Why businesses need KPRs

• Financial, leading and lagging KPRs

• Generating KPRs

• Choosing KPRs

• Implementing KPRs


My Background

http://www.google.co.uk/imgres?imgurl=http://www.freefoto.com/images/2039/02/2039_02_10---Narrow-Boat--Foulridge-Wharf--Leeds-and-Liverpool-Canal_web.jpg&imgrefurl=http://www.freefoto.com/preview/2039-02-10?ffid=2039-02-10&h=400&w=600&sz=181&tbnid=bEsWkYJiNIbNPM:&tbnh=90&tbnw=135&prev=/images?q=narrow+boat&usg=__ECcUEAChyUFngsJ9mgDUC497c60=&ei=oNb_S8yTI9W84gbmrenLDg&sa=X&oi=image_result&resnum=5&ct=image&ved=0CEIQ9QEwBA

http://www.google.co.uk/imgres?imgurl=http://www.freefoto.com/images/2039/02/2039_02_10---Narrow-Boat--Foulridge-Wharf--Leeds-and-Liverpool-Canal_web.jpg&imgrefurl=http://www.freefoto.com/preview/2039-02-10?ffid=2039-02-10&h=400&w=600&sz=181&tbnid=bEsWkYJiNIbNPM:&tbnh=90&tbnw=135&prev=/images?q=narrow+boat&usg=__ECcUEAChyUFngsJ9mgDUC497c60=&ei=oNb_S8yTI9W84gbmrenLDg&sa=X&oi=image_result&resnum=5&ct=image&ved=0CEIQ9QEwBA

http://www.shell.co.uk/

http://www.shell.co.uk/

http://www.baesystems.com/index.htm

http://www.baesystems.com/index.htm

http://en.wikipedia.org/wiki/File:Exprologo.PNG

http://en.wikipedia.org/wiki/File:Exprologo.PNG

http://en.wikipedia.org/wiki/File:Securicor.png

http://en.wikipedia.org/wiki/File:Securicor.png

http://en.wikipedia.org/wiki/File:G4S.svg

http://en.wikipedia.org/wiki/File:G4S.svg


The Engine of Growth


What are KPRs?

• Also called Key Performance Indicators (KPIs)

• They are the small number of measurements that tell you how a business is performing

• They are the dials on your business dashboard

• They look backwards (traditionally) and forwards

• They translate strategy into action and align the efforts of your staff with your strategy


Example KPIs

• An airline

• A supermarket

• A railway

• An hotel

• A solicitor

• A golf club

• Portsmouth FC

• Load factor

• Income/square foot

• On-time arrivals

• Occupation rate

• Billable hours ratio

• Average round time

• Wages/receipts


Why Do Businesses Need KPIs?

Is this how you think about your business?

Or this…?


Why Do Businesses Need KPIs?• Your business is a system for making money

• This system has inputs and outputs, velocities and volumes, leaks and breakdowns

• This system is being perpetually revised and adjusted to achieve different outcomes in changing circumstances

• Some parts of it work better than others

• Well-run, scalable businesses are better tuned, more easily monitored and more quickly changed

• They achieve this by being able to measure and adjust system performance – using KPIs


Your Strategy Needs KPIs• Strategy is the alignment of your organisational

outcomes with your customers’ outcomes

• Strategy defines how you are going to achieve this -what you will excel at, things you will change

• KPIs set targets and measure progress towards these outcomes

• KPIs without a strategy are like a speedometer without a map

• Strategy without KPIs is like a map without a compass

• Defining KPIs is about defining strategy


Your People Need KPIs

• Most people will excel if they have

– Purpose

– Mastery

– Autonomy

• Agreeing clear targets

– Relates their efforts to the Purpose of the organisation

– Defines success and the route towards this

– Allows you to delegate and let them get on with it


Financial, Leading and Lagging KPIs

• Most of us will have some financial measurements

– Turnover, gross profit, cash flow….

• Two reasons why they are not usually enough on their own

– They are outcome measures

• They cannot be changed directly, only by changing something lower down

– They are lagging indicators (they look backwards)


Problems With Lagging KPIs

• They tell you something is wrong when it is too late to do something about it

• They don’t provide any information about the future and how to prepare for it

• All performance indicators are of course lagging

– It’s the way that you interpret them that turns some of them into leading indicators


Potential Leading KPIs

• Customer satisfaction

• Employee satisfaction

• Invoice queries

• Returns

• Sales leadtime

• Sales activity

• Complaints

• Near misses

• Defects

• Absence

• Sales pipeline

• Website traffic


Generating KPIs

Goal

DriverDriver Driver Etc

Start with your strategic goal

Think of all the factors that contribute to the

goal (drivers)

Select the most relevant

Decide how you measure it

Driver

Measurement

Driver

Measurement

Goal

Measurement

Decide how you measure them

Driver

Measurement

Driver

MeasurementRepeat until you run

out of drivers

Driver/Goal

Measurement


An Example Goal HierarchyNet Profit

£

Gross Profit

£

Overheads

£

Turnover

£

Direct Costs

£

Sales

#

Unit Price

£

Leads

#

ConversionRate

%

MarketingSpend

£

MarketingProductivity

#/£

Sales Skills

?

Lead Quality

?

EmployeeEngagement

%

HR InitiativesTraining or

recruitmentNiche or

product focus


Overlapping HierarchiesNet Profit

£

Gross Profit

£

Overheads

£

MarketingSpend

£

EmployeeEngagement

%

EmployeeAttrition

%

RecruitmentCost

£


Alternative HierarchiesNet Profit

£

Gross Profit

£

Overheads

£

Turnover

£

Direct Costs

£

Sales

#

Unit Price

£

Leads

#

ConversionRate

%

MarketingSpend

£


#/£

Sales Skills

?

Lead Quality

?

EmployeeEngagement

%

HR InitiativesTraining or

recruitmentNiche or

product focus


Alternative HierarchiesNet Profit

£

Gross Profit

£

Overheads

£

Turnover

£

Direct Costs

£

Salesproductivity

£/#

Salespeople

#

Orders/head

#

Averageorder value

£

SalesAppointments

#

ConversionRate

%

Product price

£

Products perorder

#

Pricing modelSales

management system


Your TurnNet Profit

£

RecurringGross Profit

£

RecurringRevenue

£

ProjectPullthrough

%

ContractAttrition

%

CustomerSatisfaction

%

ResponseTime

#

Availability

%

Product price

£

StaffAttitude

?

RevenueResilience

?

EngineerUtilisation

%

EngineerProductivity

£/#

RecurringCosts

£

Spares Cost

£/#

First TimeFix%

Average FixTime

#


Choosing KPIs• Must be an outcome (eg number of leads) not just a driver (eg marketing

spend)

• Must be close to, affected by, and measure the effectiveness of, a strategic intervention

• Must be easy to measure

• Must send a clear message about what is important

• Should avoid encouraging obvious unwanted behaviour

• Must cover all your strategic goals

• In totality, must define the basis on which you compete – your strategic advantage

• Max 6-8 KPIs for the business

• Should aim for a mix of leading and lagging


Choosing KPIsNet Profit

£

RecurringGross Profit

£

RecurringRevenue

£

ProjectPullthrough

%

ContractAttrition

%

CustomerSatisfaction

%

ResponseTime

#

Availability

%

Product price

£

StaffAttitude

?

RevenueResilience

?

EngineerUtilisation

%

EngineerProductivity

£/#

RecurringCosts

£

Spares Cost

£/#

First TimeFix%

Average FixTime

#


Choosing KPIs

Rev

Re

s

Re

c R

ev

Pro

Pu

l

Co

n A

tt

Cu

sSa

t

Ava

il

Sta

Att

Pri

ce

Re

s Ti

m

Ne

t P

ro

Re

c G

P

Re

c C

os

Eng

Uti

Spa

Co

s

FTF

AFT

Outcome? Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y

Close to & measure action?

Y Y Y Y Y

Easy to measure? Y Y Y ? ? ? Y Y Y Y Y Y Y Y Y

Clear message? Y Y Y Y Y Y Y Y Y Y Y Y Y

Unwanted behaviour? Y Y Y Y



£

Gross Profit

£

Overheads

£

Turnover

£

Direct Costs

£

Salesproductivity

£/#

Salespeople

#

Orders/head

#

Averageorder value

£

SalesAppointments

#

ConversionRate

%

Product price

£

Products perorder

#



£

Gross Profit

£

Overheads

£

Turnover

£

Direct Costs

£

Sales

#

Unit Price

£

Leads

#

ConversionRate

%

MarketingSpend

£


#/£

Sales Skills

?

Lead Quality

?

EmployeeEngagement

%


Implementing KPIs• Incorporate them in your business plan

– Set KPI targets

– Plan strategic initiatives

• Performance is delivered by people

– Internal communication

• Start early

• Two way

• Never stop

– Job descriptions – accountabilities that match KPIs

– Individual and team objectives that match KPI targets


Implementing KPIs

• People operate systems

– Change and document the processes that will deliver your KPI targets

• Monitor progress

– Incorporate KPI performance in your monthly management review

– Incorporate objectives in your appraisals and performance reviews


KPIs in Practice – M&E ContractorIncrease turnover

Implement account management

Improve service quality

Differentiate service

Demonstrate service value

Increase account penetration

Improve sales productivity

Implement CRM system

Average build project order value

Project/maintenance pullthrough

Sales/headVolume under maintenance/TV

Availability

Average fix time/priority

Increase professional

services incomeWin larger projects

Increase build income

Increase maintenance

income

Increase overseas income

Differentiate as quality/specialist

Differentiate UK sector propositions

Acquire international sales

capability

Develop tax and logistics capability

Develop in-country channel partners

Downstream of M&E consultancy

Commoditisation,M&E entrants

Company size limits project size

Prof services/ project pullthrough

Recurring gross profit/overheads

Income/unit Attrition


KPIs in Practice – Website AgencyProfitable growth

Order book £

Marketing plan & budget

Get certified

Enquiries #

Project profitability %

NPT % Income/hour £ Bugs #

Structure & JDs

Planning & PM system

Communication

Recruitment


Implementing KPIs


Implementing KPIs

Desired state and timescale

Projects,stages,reviews

Current state


Key Performance Ratios

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Key performance indicators

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