How to configure key performance indicators around a business strategy

You can’t aimlessly operate your business. You need a strategy — a conscious, deliberate intent of how to move into the future. But strategy is something every company struggles with.

“It’s hard. The phone rings, the customers come in and the day to day whirlwind can eat you up,” says Chad Hoffman, president and CEO of Richwood Bank. “We’ve all had days where you get nothing done that you planned. But if every day is like that, especially at the top of the organization, you don’t have a strategy. You must spend time on what your future will look like and how you’ll get there, or you’ll be moving backwards.”

Smart Business spoke with Hoffman about setting up a strategic plan with the right key performance indicators (KPIs).

What’s the difference between leading and lagging indicators?

Lagging indicators measure past performance and compare it to targets you’ve set. They don’t predict the future. A return on assets, net interest margin or profit are all lagging indicators. A leading indicator is an assumption of the future, based on predicting what’s going to happen. It helps you stay ahead of problems.

You’ve got to take things like profit and ask, what is holding it down? What leading indicators can be measured and improved to make the lagging indicators better? Can you raise your customer services scores, for example, to improve your bottom line? The balanced scorecard approach believes KPIs in three areas — customers/stakeholders, internal processes and organizational capacity — help drive financial performance.

It’s also important to realize you need to be good at key performance questions, before you can actually measure the KPIs.

How should KPIs be included in a strategy?

Leading indicators are the most important because that’s the future, but you need both. The leading indicators are the ones you work on a day-to-day basis, but lagging indicators tell you if your day-to-day work is paying off. You can think you have great questions and your assumptions are fantastic, but if your profit doesn’t improve, it’s time to re-examine those questions and assumptions. Strategy is only great if it shows positive results. You can make assumptions, but they’re assumptions for a reason. If they’re wrong, the lagging indicators will tell you that you haven’t met the customers in a place that they really want to be met.

It’s a good idea to review your KPIs quarterly. Are you seeing a benefit? Is there a reason to wait another quarter? Also, strategy must be practiced, and it cannot be a tightly kept secret. Leadership has to drive this, but let everyone know what those measurements are and why they’re there. A frontline employee might have a different perspective.

Where do companies go wrong when developing KPIs?

They set up too many measurements. You can waste a lot of time measuring everything that moves. The rule of thumb is no more than three, or it will start to get overwhelming. If you have a bigger staff, maybe each department gets three KPIs. Remember, if everything is important, nothing is important. Once you accomplish a KPI, whether completing it or improving a number, you can shift to something else. Don’t add more; replace one with another.

If you’re comparing measurements, keep this benchmarking in context. Every organization is different, and you have to decide what’s important to you. Yes, if everybody in the state is trending up on their income and you’re trending down, that’s worth paying attention to. Trends are important, but don’t focus so much on the numbers themselves.

Again, if you choose the wrong KPI, be willing to say, ‘We screwed up. Let’s ask some more questions.’

Is there anything else you’d like to share?

As your organization grows, strategy only becomes more important. You’ll hit some on the head and miss others completely, but as you track KPIs, it’s not so bad to be wrong. The best thing you can do is choose the right KPI. The second-best thing you can do is choose the wrong one because you’ll learn what’s not important to your customers. The worst thing is not doing anything at all. You’ve got to start somewhere — and if it’s the wrong somewhere, at least you’ve eliminated that piece.

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