Paul Golden looks at how SMEs can get it right when it comes to selecting the most appropriate metrics or KPIs to ensure continued growth.
The sheer volume of information available to managers of start-up or early-stage enterprises can be a distraction. This is why they are encouraged to focus on indicators that reflect the performance and progress, are measurable, can be compared to a standard (such as a budget) and are actionable.
According to business adviser Tina Marie Parker, these key performance indicators (KPIs) are vital to monitoring the growth and development of an emerging enterprise: “If you are not measuring and monitoring your performance you cannot know what is working and what is not in the process of growing your business.
Among these indicators will be those which are key markers of the business performance, and hence the emphasis on the identification of those markers which are so vital to the business that they become “key”. One of the key success factors for a start-up is recruiting the right people, and it is critical that the management team is in full control of the process, says KPI expert David Parmenter.
“Measures to be taken include contacting candidates who have been offered a position and have not accepted it within 24 hours,” he says. “Entrepreneurs are busy people, but in a growing economy candidates will shop around and you don’t want to give them that opportunity.
Time is of the essence when it comes to performance indicators, according to Parmenter. “There is no such thing as a key performance indicator that is monitored monthly. Weekly management meetings are an opportunity to measure progress and ensure that delayed projects don’t slip further behind. Similarly, cash flow needs to be monitored on a weekly basis – the end of the month might be too late.
It is also important to understand that activity alone does not equal progress, observes Russell Streeter, founder of Excelsior Business Development: “KPIs provide confirmation that the actions you have taken in a given time period have had the desired results. When you are taking risks, such information is invaluable.
Entrepreneurs are busy people, but in a growing economy candidates will shop around and you don’t want to give them that opportunity
An instinct for KPIs
However, profit improvement specialist Dr Philip Smith warns that KPIs are only relevant if they relate to key success factors: “Managers need to understand the strategy of the business, the threats and opportunities and the key success factors that will drive performance to meet goals. In many cases, successful entrepreneurs will develop their own KPI-type approach without even realising it.”
Rob Hill, non-executive director and former finance director of metal spray technologies manufacturer Metallisation, reckons KPIs are at their most useful when presented as part of a balanced scorecard and accompanied with informed narrative and explanation.
“Users also need to keep in mind that KPIs typically deal with historical data and even if ‘gaming’ is not overtly happening, there is a risk that management may act in a way to achieve a good KPI outcome now, at the risk of putting longer term prospects in jeopardy,” he says. “For instance, strong sales or productivity could be achieved in the short term through a reduction in quality standards or maintenance programmes. I would also be concerned if an individual or board started to use a KPI result to automatically trigger business decisions.”
Targets and drivers
A proper planning process will guide managers towards the KPIs that are most suitable, says Streeter: “Think of setting KPIs as the final step in the planning cycle that begins with a statement of what you want your business to become, to achieve or to help others to achieve and explains the purpose of your business.”
Stephen Pugh, finance director at brewer, hotelier and wine merchant Adnams, refers to the difficulty of balancing high-level KPIs that don’t point sufficiently closely to problem areas, and performance indicators that can confuse by their sheer number. “Nothing substitutes having the right corporate targets and analysing the drivers behind achieving them,” he adds.
According to Pugh, there is always a risk that a business can become over-reliant on KPIs: “There is a well-known principle that setting a measure can make it meaningless as people start to manage the measure rather than the real drivers of the business. No usable set of KPIs can capture the full complexity of a business. KPIs assist in measuring performance and flagging problems early, but they cannot substitute for a wider appreciation of what is happening within the business.”
PwC suggests that between four and 10 measures are likely to be key for most types of company. Hill accepts that the bigger the organisation and the more managers employed, the more KPIs there are likely to be across the whole organisation. “However, at the level of an individual manager or board, too many KPIs can lead to confusion and overcomplexity,” he says. He would use no more than six on individual dashboards.
While diversified businesses have more to monitor, which creates a need for more KPIs, Pugh also doubts that more than half a dozen core KPIs would be useful and adds that while they need to be industry specific, it is more important that they are specific to the business.
Given that the larger the organisation, the more KPIs proliferate, danger arises when the CEO is distracted by indicators that subordinates may think are more relevant, adds Len Jones, group finance director of Practical Car and Van Rental.
Jones says companies need to carefully consider why they are setting KPIs: “Are they being used to gauge business performance or as another lever of internal control on the basis that they replace direct supervision? The danger at SME level is the disproportionate use of resources for recording when they should be directed to product service delivery.”
PwC observes that management should reflect on whether KPIs continue to be relevant as strategies and objectives evolve. Access to new information may facilitate reporting of new KPIs that provide a deeper understanding of the business.
“As KPIs get produced they may lead to other measures of performance being introduced, so they will change over time depending on what the firm is actually monitoring and – more importantly – what it is doing as a result of the measurement being reported,” says Jones.
Additionally, KPIs may be imposed on the business (for example, in bank covenants) so stakeholder management is another key factor. He concludes: “In my experience, most stakeholder-focused KPIs are reported on an ad hoc basis when things go wrong rather than actually assisting the day to day operations of the business.”
So it all comes back to what Parker said at the beginning: if you don’t measure and monitor performance, then you can’t know what is working to grow the business.<
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Business Management Magazine, Issue 240, February 2016
Since Paul Golden wrote this article in 2016, others have published further research into KPIs.
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