KPIs: Why Your Business Should Ditch ‘Performance’ Indicators and Start ‘Predicting’ the Future
Posted on 13th October 2016 in Advisory
Written by Amy Harris
Before the cloud, businesses could only dream of having daily visibility of their figures. Paul Shrimpling, one of our Cloud Advisors, recently held a session on Key Predictive Indicators versus Key Performance Indicators and this blog shares some of the key insights discussed.
At FUTRLI we’re obsessed with helping business owners and accountants to look up and ahead. We believe we have great software to make that happen but if we focus just on software, we are not looking at the big picture. Our cloud advisors are on-board to share their knowledge and experience with you. This blog shares the highlights that were discussed on this webinar. You can watch the full webinar here.
Managing Director of Remarkable Practice
If you’ve not owned a business it’s hard to truly grasp the importance of cash flow and KPIs. Paul rescued his family’s furniture manufacturing business when it was on the brink of collapse. KPIs were what helped him transform the results. To say Paul is passionate about KPIs in an understatement. Paul has spent the last 8 years advising accountants on how to apply KPIs to their firm and help their business owner clients too.
Key Performance Indicators v Key Predictive Indicators
The term ‘KPI’ is mostly taken for granted. Everybody is familiar with it to some degree. Paul Shrimpling has a very refreshing approach to its meaning and usage…
Key Performance Indicators = “Performance” equals “past”.
Performance means output or result and tells you about what’s already happened, past tense, history
Key Predictive Indicators = “Predictive” equals “future” (Click to tweet)
Predictive indicators measure activity – the activity (input) that drives the outcomes (sales, leads generated, business growth). Predictive indicators are input measures, not output measures. They are leading indicators, not lagging indicators. Get inputs right and your business future is a bright one.
“The idea of a car dashboard is a perfect example of Key Predictive Indicators working well. You know these are great KPIs because they drive action (pun intended).
When the red oil light comes on then action gets taken, oil is added. If the KPI is ignored and no action is taken, then the car is going to breakdown – potentially catastrophically.
A great KPI drives action in your business too.
When Paul checked on his bathroom scales after his recent trip to Italy the scales showed he’d put weight on. Challenging as this is Paul focused not on the performance indicator (the scales) but instead obsessed about the action KPI – how many times he runs and swims each week. Paul’s obsession with this input exercise KPI quickly changed the scales (output).
Canaries and the mines
“Both of my grandfathers worked down the pit. When they started they used canaries to predict danger. If the bird fell off the perch, they got out and got out quick. Their lives depended on it. The canary was their Key Predictive Indicator.
Not surprisingly they obsessed about the health of the canary. Which KPIs are you obsessing about in your business?
“I know it’s not that cut and dry in business but there has to be real effort and energy in working out KPIs that people are deadly serious about. KPIs that individuals are connected to so that they do drive action. For example, customer satisfaction can be tracked using the Net Promoter Score and should be obsessed with, as it is a canary-like measure that predicts the future health of your business.”
This is one of the core reasons why FUTRLI looks to the future with forecasts and budgets, not just data analytics. We need to see how we are trending so we can react and proactively respond to these indicators, for the better of the business.
From Worst to First
In the history of KPIs one landmark theory in a book by Kaplan and Norman is worthy of mention. Their text is called ‘‘The Balance Score Card’.
Kaplan and Norton argue that you must have KPIs and you must have many in order to have a balanced view of your business. The danger of this approach is losing focus. One criticism of KPIs is that there are often too many of them being measured. Too many KPIs means spreading yourself too thin.
The book ‘From Worst to First’ documents how Continental Airlines turned it’s business around. The new CEO (Gordon Bethune) famously dismissed the existing business manuals including their balance scorecard by burning it in the car park. The business was focusing on so many metrics and not getting anything right.
Bethune suggested they focus on three core KPIs. Three KPIs that truly mattered to their customers…
- Lost luggage
- Arrival on time
- Customer complaints
Obsessing about these three KPIs turned Continental from the worst to the first ranked airline against these customer critical measures.
The question to ask yourself is what action is really driving your business? If you’re helping a client, use this to generate a very valuable conversation.
Which KPIs are you going to obsess about in your business? Click to tweet
How many things can you really get obsessed with? 1 or 2 or 3? Certainly no more.
In fact, the science of the brain suggests we can cope with two or three reasonably comfortably, and, if it gets to four, it is stretched. If it gets beyond four it is maxed out and fails to work.
“You can only really obsess about 3 KPIs in the next month or the next quarter or the brain switches off,” Paul advised. If a business genuinely wants to adopt KPIs and make a genuine change in results, then start obsessing about just a few core numbers.
Paul shares how he used KPIs in his upholstery business
Since the age of 13, Paul was part of the upholstery business his dad ran.
Later in life, Paul and his dad started their own upholstery business and grew it into a well-respected £1m business.
A major firestorm hit the business when, on Christmas Day 2000, Paul fell seriously ill and had to step out of the business for 16 weeks. The economy, in recession, hit the upholstery trade hard. And a recent commitment to a London showroom sucked large chunks of cash out the business. Paul’s dad had long since retired but stepped back in whilst Paul recovered.
When Paul returned 16 weeks later, the business performance was spiralling downwards and he was faced with one very big decision…
Wrap it up or continue?
Paul rolled the dice, re-mortgaged and re-financed the business and gave himself his greatest challenge. He now had everything on the line to prove he could take the business from the brink of collapse to one where it was ready for sale.
KPIs: The selection process
“There is no point in measuring profit because profit-watching is not going to drive any action. It is the numbers that drive profit that we had to obsess about. It was these KPIs that actually determined the success of the turn around of the business.” said Paul.
- Paul crafted 8-9 KPIs
- Weekly, the entire team, including sewing machinists, reviewed how they’d contributed to those KPIs
Key Performance Indicators have to be shared
Paul had always worked with numbers in the business and he was passionate about what these indicators could tell him. However, up until this point, he kept them to himself and did not share them with the team.
Paul was convinced Key Predictive Indicators were the right way forward. The stakes meant he knew he needed to bring his team on board so they could join in the obsession too. “After a few necessary redundancies, I sat down with the team and said: I know this is tough but we actually all have to work together in order to secure our jobs.”
Although Paul decided upon these numbers alone he then worked with the team to make it collaborative. It was important to achieve their buy-in and educate them as to why they were important. “I was working with skilled people but numbers weren’t their life, they were there to upholster or put fabric through a sewing machine,” said Paul.
Business is a game and KPIs are the goalposts
Working with accountants and their business owner clients has convinced Paul that the game of business requires goals just like a game of football or cricket.
Within 3-4 weeks the team started to warm up to the game they were all playing. “The best story I have is about our cutter, Craig, a mad passionate Derby County football fan. As excited as Craig would get about Derby his passion never showed up at work in the 10½ years I worked with him…that’s until we introduced KPIs.
He was the type of employee that used to clock in and out on the dot and would only work on a Saturday if he was paid time and a half. Four or five weeks into the KPI journey, I found him in the workshop catching up on our KPIs before the Saturday game. No pay, he was just excited to score a goal and hit the business KPIs he could influence. Emotional engagement is one of the real powers of the game that is Key Predictive Indicators,” says Paul.
You can read a case study here where FUTRLI has tripled a 20-year-old businesses profits by getting their team involved in the business game. Case study: Mojo Bar.