Key performance indicators Featured

8:00pm EDT March 26, 2008

If you don’t know how your business is doing at all times, you’re heading for trouble. An early warning system?

Clearly defined key performance indicators (KPIs).

“A key performance indicator is a metric that allows you to evaluate whether you are meeting a certain goal,” says James P. Martin, CMA, CIA, CFE, CFD, CFFA, senior manager with Cendrowski Corporate Advisors LLC. “Identifying what the KPIs should be for a particular organization is part of the overall risk assessment process, which identifies any number of factors that can stand in the way of success.”

Smart Business asked Martin how companies can most effectively use KPIs to monitor whether business is on track.

How can a company best define its key performance indicators?

Performance indicators differ from business to business. Having clearly defined goals to start with will help the company determine what it needs to monitor. To assist in the process, use the SMART acronym; ask whether the KPI is Specific, Measurable, Achievable, Relevant and Time-bound. A KPI should be all of these.

How can KPIs be used to improve efficiency?

KPIs are used in many industries to monitor and improve efficiency, and thus improve the bottom line. The fast-food industry has the use of KPIs down to a science. It monitors everything — how long it takes you to receive your food, how long it takes to cook 100 burgers… the list goes on. Fast-food companies know what needs to be accomplished to achieve their goals, and they identify a measure to make sure it happens. Another example is a call center. Management will monitor how many people it takes to answer how many calls per day to determine ways it can improve efficiency.

How often should a company monitor its KPIs?

It depends on many factors unique to each organization. If you’re a company in turnaround mode with low cash levels in the bank, you might be monitoring certain KPIs daily, such as A/R and average sales per day. If you’re a manufacturing company tracking production on a piece of equipment you’ve financed, maybe you’re analyzing the metrics on a monthly or quarterly basis.

How important are metrics?

Very important. If a KPI is not measurable, it will not be a useful metric. For example, ‘word-of-mouth’ is not a useful metric. In addition, make sure you are measuring things that are relevant. Here’s an example: By using metrics, an organization named pets.com — which sold bulk pet food and the like on the Internet — determined that many shoppers were abandoning their carts at the time of checkout. Why? Most of the products were too expensive to ship. Pet.com went out of business because its solution was to provide free shipping. It used a metric that revealed a problem with its business model but incorrectly interpreted it.

What is a ‘balanced scorecard’?

That means that you have to look at overall objectives holistically. If you only measure factors related to profit — e.g., how many widgets can we produce by how many workers in one hour — you might overlook quality, marketing… all the other elements that must work in harmony in order to achieve success. Your KPIs should be set up so that you are monitoring all areas of the business that tie into achieving your overall goals.

What about smaller companies that don’t have KPIs in place; how can they get started?

Small companies do have KPIs in place; they just may not realize it. For example, they intuitively monitor payroll — they know how many hours they pay versus periodic revenue. The first step to formalizing the process is to determine what you need to monitor and measure. Look at the current performance, benchmarks and target levels. Think about all the processes you undertake; analyze objectives and risk conditions/pitfalls to avoid.

How often should KPIs be revisited?

At least once a year, as part of the annual meeting to set objectives for the upcoming year. Throughout the year, however, new KPIs may need to be added and old ones removed. To be useful, the KPIs that are already in place must continue to make sense.

JAMES P. MARTIN, CMA, CIA, CFE, CFD, CFFA, is a senior manager with Cendrowski Corporate Advisors LLC, Bloomfield Hills. Reach him at (248) 540-5760 or cs@cendsel.com or go to the company’s Web site at www.frauddeterrence.com.