“Not everything that you can count, actually counts’
Einstein is credited with this quote. He as usual was completely correct.
In the 1750′s Jedediah Buxton was taken to see Shakespeares Richard III performed by David Garrick at the Drury Lane Theatre. At the conclusion upon being asked his opinions he answer that there were 12445 words. He missed the point though his word count was accurate.
This is very applicable to business. I was just reading of person who said in the organisation she worked for she had the responsibility for 137 Key performance indicators. She went onto to say that she only concentrated on 7 but those 7 may not necessarily be what her management focused on. 137 KPI’s show an organisation that is counting everything they can count.
It seems that business can lose sight of what the role of metrics in an organisation is.
These metrics are are known as KEY performance indicators. Something is key when it is of fundamental importance to the business. It is key if it is a make or break, the difference between success or failure. There is no way that the 137 KPI’s are all key to the businesses success.
The success that needs to be considered is that which is important in the eye’s of the customer. We need to define success the way the customer does. This means that we need to completely understand the customer. What is it that they like and hate about your organisation? Often the core product or service is not what the customers sees as the value from dealing with your organisation. It is usually a number of little items that surround the delivery of the core product or service.
The next aspect is PERFORMANCE. It is the items that the organisation is performing and whether they are delivering on this promise. Performance is around those things / processes that the organisation can control. For instance an agricultural company is significantly affected by the weather but it can not influence or control this.
The last word in the trio is INDICATOR. Indicator means it is providing information on future performance. Because it is easy to measure history ie balance sheet we spend too much time and effort on these. We need to spend the time on developing indicators that give us information that we can make decisions about the future on.
Lastly another significant problem of counting everything eg the 137 KPI’s is that nobody focuses on them. The person I relate was only concentrating on 7 but her manager may be focusing on a different set. A lot of time and effort was being spent to collect this information but it was wasted. A key purpose of implementing KPI’s is to provide focus for the organisation to achieve its KPI’s. With some people focusing on some KPI’s and others concentrating on a different set you automatically set up a situation for tension.
Focus on what the customer defines success and implement KEY PERFORMANCE INDICATORS around this.
Rules of Thumb – Are they good or bad?
Often in business there are industry rules of thumbs for profits, costs and valuation. There are many examples of these however to illustrate professional service firms often use the one third rule which is 33% wages, 33% operating expenses and 33% profit. Commercial cleaning business try to only have wages as 55% of income. There are plenty of examples but are these useful.
My belief is that these rules of thumbs can be useful if they are used as a guide only. If we rely on them to make significant decisions they we can be led astray. The rules of thumbs can trap you into certain assumptions about the industry. These assumptions may become self limiting. To take the business to the next level it is important to think about business lessons from outside the industry that could significantly accelerate the business.
Before Fedex came into the delivery business it was considered normal to have a delivery rate of 95%. Fedex changed this. They were not happy with the industry norm. Now the delivery rate of Fedex and also the other companies is 99.95%. This does not sound a lot until you realise the number of parcels that are freighted each year. This difference has meant that millions more parcels are getting to where it is meant to.
In Australia financial planning firms have an industry rule of valuation of about 3 times recurring revenue. Financial planning firms are still being sold for these figures. This is despite the fact that there is significant regulatory changes coming to the industry which may significantly affect the recurring revenue. Also this is despite that this method of valuation gives no regard to what the business is actually earning. So the rule of thumb could be a starting guide but then we need to consider the hard facts.
The next area of rules of thumbs is those that a business creates over time for internally use. I have seen businesses where they have determined rules of thumbs for when they are pricing a quote. Again these rules are useful but we need to be constantly reviewing these rules against the hard facts. So for example when the quote is accepted we need then to examine the resulting job profitability and determine whether that pricing rules are still relevant.
So I see rules of thumbs like fire. In its place fire can be extremely useful but if it gets out of control it can destroy all. Use rules of thumbs as a guide but always check the hard facts on a regular basis.
A key ingredient for performance reviews
An area that always creates discussion is that of performance reviews for the team. Now if you want detailed templates and systems I would strongly recommend that you visit Heart Harmony where Ingrid Cliff has a very good Performance Review manual. This post is about an important element of performance reviews that I believe is handled poorly.
For there to be a true review of performance at some future point then both parties need to know exactly what is expected. How can there be a true review of performance if both parties have different ideas of what was expected.
It is a must that there are Key Performance Indicators in place from the outset that both sides clearly understand. There does not need to be a lot of KPI’s but just a few KPI’s that match the employee or team effort to the desired customer outcome. Without correct measures then it is purely a subjective performance review which usually means that the staff member will feel upset.
Importantly these KPI’s need to be directly related to what is important in the customers eyes. Don’t just use KPI’s that the employee cant influence or are just taken from the accounting data.
The team needs to understand what the management defines as success and what will be rewarded.
A Report a business must do each week (or even more regularly)
We all know Cash is King so why is so many business are not keeping a very close eye on it?
Where is the cash.
It is important to understand the exact cash position of the business every week if not every day. Additionally we need to understand what is affecting the cash position of the business.
So to understand the cash position I recommend that the financial accountant / controller/ bookkeeper of the business prepare a Cash Flow report.
This report would detail the following :-
- Opening Cash Balance last week
- Cash inflows received this week
- Bills / expenses paid this week
- Current Cash balance
- Expected cash inflows in the coming week
- Required expenses to be paid in the coming week
- Expected cash balance next week.
This simple report explains what happened last week and what is expected to happen next week. Also you can add to this report by comparing last week report to this weeks to see how close the prediction was and if there was any lessons to be learnt from this. The report can then be used to make decisions and take actions. You can’t do anything about improving cashflow if you don’t know what it is it now.
My question to you is how are you measuring your cashflow and would this report help you?
Image credit: mindluge
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