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• 🎛️ KPI Dashboard best practice

• ⚽️ Leadership lessons from a soccer great

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THE DEEP DIVE

From People to Profit: Using KPIs to Drive Performance

This is Week 4 of 6 in a series on FP&A.

Early in my career I worked in a business with thousands of operating units.

For a while my job was to run the team that produced the balanced scorecard each month for each of those units.

It was a tough job.

We went to press each month on working day 7 with individual dashboards. One for each operating location.

The financials only closed on working day 5.

Giving us 2 days each month to produce:

• over 3,000 dashboards

• across 4 levels (location, region, business unit, corporate)

• 21 KPIs (yes too many) needing more than 50 data inputs

• actual, target, and prior year

• month and year to date

Anyone who’s managed this in a corporate knows how hard this can be.

And in those days, I was managing all this in an MS Access database.

I can feel some of you young-uns cringing upon reading that.

It was as bad as it sounds.

But forget risk and technology for a moment.

This was a long time ago. The ability to produce accurate scorecards for that many outlets was a competitive advantage. Regardless of how it got done.

Our competitors were not able to to do it. They could manage in total, or by region, but not as fast.

Our strategy was no better (nor any different) to our competitors. But we won because we executed harder in a hyper competitive market.

The sponsor for this was the COO. A peculiar man who didn’t like his silences interrupted (sometimes these ran well over 60 seconds).

Not a master strategist. But in those days he ran an operation of over 200,000 people, across 3,000 locations. He could get them to move mountains.

Extraordinary for a man of so few words.

He has since gone on to be a CEO of a $30bn revenue business, and still is today. A big dog.

He rarely said a word to me. But he did once say this:

From that point, I looked at the balance scorecard work with fresh eyes.

He was describing profit as a lagging indicator to a bunch of non-financial leading indicators. And people measures being the lead of lead KPIs.

I no longer saw it as a scattering of KPIs from different functions. I now saw it as a chain. Starting at people, and ending at profit. And one KPI must hand off to the next.

The KPIs measured the chain, and the operators hit the ‘reds’ with white hot fury.

It turned the 3D chess of business down into a much simpler game of execution across a chain of KPIs.

And if one link of the chain wasn’t working, it was obvious where. The problems were isolated to an operating unit, region, or a particular KPI.

And a well isolated problem was no match for the relentless focus of this COO. And the intensity of the execution juggernaut he had created.

A performance machine.

Anyway, let’s go back a bit.

The History of KPIs?

Whilst the language of KPIs and Scorecards emerged 30 years or so ago, the principle is age old.

In the stone age cavemen would make notches on a rock for each animal they killed.

Sidenote: Imagine being a fly on the cave wall for the board meetings. Just a bunch of grunting and pointing. And then the guy with the fewest kills gets beat to death with his unblemished rock. Performance management.

Modern accounting systems (developed over the course of the second millenia, including our beloved double entry bookkeeping. But the first idea of dashboards emerged in the early 1900s.

French scholars built the first 'Tableau de Board' to measure efficiency.

But it was another 70 years or so before before becoming common business parlance as ‘KPIs’ in the 1990s.

What exactly is a KPI?

There are plenty of definitions. But the best I found is this:

A KPI is a quantifiable measure of performance for a specific goal over a given period of time.

Let’s highlight some key words:

• Quantifiable: Numbers

• Measure: Clearly Defined

• Performance: Desirable Outcome

• Specific Goal: Link to Strategy

• Period of Time: Relationship between performance and time

But how do you define the right KPI suite for your business.

Here are 7 steps to using KPIs to unlock performance in your business.

Step 1: Start with strategy

A good strategy should set 3-5 SMART goals.

The 3-5 hero measures that together make an evergreen Northstar for business performance. What is it, in the long term that you are trying to achieve with your business.

Some examples: $100m revenue by 2028. EBIT of 10%+. Market Share. Customer Satisfaction.

Step 2: Define your people profit chain

Think of this as a simplified value chain. Starting with People, ending with Profit.

For example in a retail business it might look like this:

People, Stores, Products, Customers, Profit

Or in a professional service business:

People, Service Delivery, Customers, Profit

Each of these becomes an area of the business which needs measuring via KPIs.

Step 3: Define Tier 1 KPIs

We ideally want 10-12 KPIs. I've seen 20, but it's too many.

So 2-3 per area you defined in Step 2.

And you already have a few of them (your hero measures from Step 1)

They should work together and go to the heart of what makes success in the business.

We’ll call these the Tier 1 KPIs.

Individually important.

But together they should tell the story of the performance of the entire business

Here are some examples:

• People; Engagement Score. Employee Net Promoter Score. Labor Turnover. Absence Rate.

• Operations; On Time Delivery / Service. Operating Cost Per Unit. Order Cycle Time. Productivity per Labor Hour. Waste Levels per Throughput. Throughput per Hour. Capacity Utilization.

• Customer; Net Promoter Score. Sales Volumes. Gross Margins. Customer Retention Rate.

• Finance; EBIT %. Free Cash Flow. Return on Capital Employed / Equity.

A good way to test if there are any KPIs missing: Ask yourself the following 2 questions:

• If all of these KPIs were green, would that be enough? Are there any circumstances that you would be unsatisfied with performance?

• Can you neatly follow the People to Profit chain without a link broken?

Step 4: Create KPI Bible

We have decided which KPIs are important. Now we need to agree how to measure them.

Any KPI output is a product of inputs and calculations.

We need to document this clearly for each KPI:

• Input data

  • What data is needed?

  • For what period?

  • From what source?

  • Who is responsible?

• Calculations

  • How is the KPI calculated?

  • How does that change / total at different levels of the hierarchy?

  • Who performs the calculation?

  • In what system is the calculation performed and where is it stored?

  • How frequently is it measured?

• Output

  • Who is the business owner of the KPI?

  • Who reviews the output before its published?

  • How are targets set?

  • Are any financial measures departures from GAAP, how and when are they reconciled?

  • How, where and when is it published?

The detail is important here. I have seen a criminal amount of time wasted down the years through a lack of clarity and ownership of KPIs and data sources. And the real crime is that the discussions are perpetually about the data, rather than driving performance.

Let’s break one down. Take ‘labor churn’:

• What period do you measure the churn; 1, 3, or 12 months?

• Do you count contractors and off payroll staff?

• Do you use data from the payroll system or the employee management platform (why don’t they reconcile?)

• How do you calculate the denominator? Start of period actual? Average of last 12 months? Average of calculated churn period?

• Do all operating units get the same target?

• Do you want to measure churn of last 12 month joiners and total employees separately? To isolate fast churn.

• Do HR calculate this themselves? Or do they provide the data into the reporting team to calculate it?

I could produce another 20 questions for this KPI alone.

It doesn’t matter what the answer is.

But it does matter that these questions get asked and answered. And get documented precisely.

You are creating the GAAP accounting manual for KPIs.

Step 5: Set Targets

For each of your Tier 1 KPIs you should have a long term target. Lofty and aspiring, but achievable.

You must define the time frame. 3-5 years is typical.

One KPI will stand out amongst the others to form the BHAG (Big Hairy Ass Goal), that acts as a north star for the business.

For example: By 2028 we will be a $50m EBIT business. Or… By 2030 we will be #1 with over 50% market share.

It then becomes easier to set a long term target for the rest of the Tier 1 KPIs

I.e. to get to $50m EBIT, we would need $500m revenue, 10% EBIT, which is 50% market share. This will mean a net promoter score of 75%, and an employee engagement score of 80%

Once you have those long term goals for each KPI, you can break it down into a ‘year 1’ target for each.

Then finally you can break that back by reporting period (monthly). And into operating units.

Best practice is to fold the KPI target setting into the budget process. Make it one and the same.

KPIs and financials are not separable, so how do you plan for one without the other?

Step 6: Set up reporting

You have a clearly defined set of tier 1 KPIs that connect your people all the way down to profit. And a monthly target by operating unit. And those targets ladder up to connect to 5 year strategic goals.

How exciting.

Now we need to set up the reporting so we can track performance. And the granularity of our target setting mans pinpointing problem should be easy.

I like to anchor all KPI management around a Monthly Corporate Dashboard. Think of it to KPIs what Management Accounts are to Financials.

I use something that looks like this:

In this example you can see a clear story of a division in the business that is driving to meet a sales growth and EBIT target:

• They have pushed their loyal and well engaged staff too hard, which in May has resulted in high absence.

• This led to an increase defect rate and weaker deliver service.

• Customers hated it (Net Promoter Score)

• And the financials are a bloodbath as a result.

The remedial action becomes much clearer. Exposed by the People-Profit Chain.

I tend to RAG measures as follows:

• Green: Better than target.

• Amber: Worse than target but better than last year or a threshold

• Red: Worse than target and last year

I’ve also seen Blue used for exceptional / stretch performance.

Step 7: Performance Management.

To complete the loop it’s important you don’t stop at reporting.

There must be a formalized channel for discussing KPI performance, and driving improvement.

You want Step 1 to 6 as slick and automated as possible. This maximizes the time spent in Step 7, where customers are satisfied and money is made.

My experience is that most business spend too much time debating the KPI definition, where the data comes from, etc. Wasted energy. Do it well once. Then focus on driving improvement.

Monthly Performance Reviews are a great anchor for performance management of KPIs. We will cover these meetings in more detail in two weeks time.

Tier 2 & Tier 3 KPIs

So, with the 7 steps done, this completes the cycle for your anchor Scorecard.

Your monthly tier 1 KPIs by operating unit.

But for larger businesses this will not be enough. If you want to bind the complex organization around a People to Profit chain. And get true alignment. You must go further.

In a complex business only a small number of the most senior people will feel they can truly influence those tier 1 KPIs.

You need to drop to the next layer down. Expand the KPI set to cover tier 2 (functions) and tier 3 (individual teams). This means easier alignment to management.

For example, lets say you had Revenue Per Labor Hour as a tier 1 KPI. This is a fantastic measure of the trading efficiency of the business. The problem is that it’s hard for any one department to own it 100%.

It’s a product of Revenue (Sales Function) & Operational Efficiency (Operations).

But if you introduce two Tier 2 KPIs to sit underneath it, you can make it much more attributable:

• Revenue Per Unit (owned by Sales)

• Units Per Labor Hour (owned by Operations)

You could then breakdown Revenue Per Unit into Tier 3 KPIs by Sales Channel or Product Category. These could then be attached directly to individual sales managers.

Measure Units Per Labor Hour could by individual operational departments. Creating another set of Tier 3 KPIs.

Done well you end up with a pyramid of KPIs covering 3 management tiers. Document this into your KPI bible.

But you must only start on tier 2 and tier 3 KPIs once you have all 7 steps working seamlessly for tier 1 KPIs.

I have seen many KPI project fail under the weight of an over-ambitious scope.

Next week we will explore how to use incentive schemes to ensure KPI delivery culture takes grip in the business.

BOOK CLUB

Pep Guardiola.

Last weekend he won a third successive English Premier League title. And is still on track for a historic treble this season.

But a decade ago he reached even greater heights with FC Barcelona. Not only did they beat everyone in front of them, they did it playing a style of soccer no-one had seen before.

Underneath it was an incredible culture of performance, humility, and teamwork. He captured ‘lightning in a bottle’.

In the marvelous The Barcelona Way, Professor Damian Hughes combines unique stories from this period with management theory.

The result is a fantastic set of management tools that are demonstrated to work in a high performance environment.

If you find most leadership books too abstract or theoretical (as I do), you might like this.

FEEDBACK CORNER

A review of last week’s edition:

CFO Secrets: Teaching you about nerdy finance stuff, all whilst keeping families together.

POACHED GREG

Our boys finished on top. Never in doubt.

Anyway …

That’s all for this week. As always you can find me here on CFO Secrets, Twitter, & LinkedIn.

So that’s KPIs. Next week we’ll activate those KPIs in the business through the right incentive structure.

Until next time…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend. But I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need to make the right decisions.