Most businesses produce, minimally, a Balance Sheet and Income Statement…
Beyond that, not a lot gets measured. And, how do you know exactly what to measure anyway?
There are things you could measure that you would not want to measure or need to measure. As an example, in our business we don’t measure hours, even though we are a professional service firm.
What we measure are results – deliverables as per our Fixed Price Agreements.
Why? Because people don’t buy hours, they pay for results. We don’t pay for hours with our contractors, we pay for results too.
The way to know what to measure is to first define your Critical Success Factors…
What is a Critical Success Factor?
A critical success factor is exactly what it says. Let’s break it down. First, “critical”. It is critical because without this you will fail. It is something you must get right.
Using the example of our own business, we will fail if we do not deliver the results to our clients. If we measure hours and go to client and say, “we worked 100 hours on this project will you pay me $xxxxxx?”, they could care less how long or little it takes us. They want (and pay for results).
The second word is clear. You want to succeed, not fail. It is something you must get right to succeed.
So, you could think of it like this: “a critical success factor is something that influences the result of something that is critically important for your business success”.
How Do You Measure a Critical Success Factor?
You cannot measure a Critical Success Factor. You can’t because it is too broad to measure. You can only measure a Key Performance Indicator that is directly related to your Critical Success Factor.
Let’s look a simple example…
A Critical Success Factor for FedEx is overnight deliveries. Clearly, you will not pay for just a delivery. You want it fast, and on time.
The Key Performance Measurement of that Critical Success Factor (overnight deliveries) is percentage of on-time deliveries. This will tell the management how well they are performing to attain a perfect score with overnight deliveries.
How did FedEx determine overnight deliveries as a Critical Success Factor?
By going to, engaging with, and listening to their customers.
When we did the same – asked our clients what was important (back in 1997) they said they would like Fixed Price Agreements. Our clients like them for two main reasons:
- They know what they are paying upfront, no unpleasant surprises at the end of the month.
- They can hold us accountable for the results we are committed to in the Fixed Price Agreement
Which Two Entities Have KPIs?
Do you want to know which 2 groups of businesses ALL have Key Performance Measurements related to their Critical Success Factors?
The first is successful sports franchises!
The second is larger, successful businesses. There are no larger successful businesses who do not have Key Measures outside their accounting system that they use for tracking their ability to perform, as related to the defined Critical Success Factors.
Try to imagine a sports franchise with no Key Performance Measurements related to their Critical Success Factors? Impossible, isn’t it?
How to Discover Your Critical Success Factors
The easiest way to determine what are the things you must get right in your industry is twofold…
The first thing to look at is to uncover what frustrates customers in your industry. What do they hate about your industry that is common inside it?
It could be a little thing. For example, let’s take contractors doing home renovations and trades people.
One thing that most people cannot stand is sloppy repair men who often show up late, and then leave your home a bit of a mess (wood chips on the floor, mud on the floor, you get the picture…).
If you do the opposite – send in men and women dressed in snappy, clean uniform, on-time, and at the end of each day use their own dust buster to clean up, you will stand far above the crowded mediocrity in that industry.
That is one example.
The second thing to do is to go to your customers and ask really difficult, rocket-science type questions like these – “what do you not like about our service?”, “what are we getting right?” (so, you can do more of that), “if you owned our business what would you do to improve it?”).
The KPIs Flow from the Success Factors
Once you know what your customers really, truly value, then you can create some core measurements (Key Performance Measurements) that flow out of those factors.
Using the example of the tradesmen above, and imagining you own that business, you could have spot checkers go around at the end of a work day to check to see how the site was left or have them snap a picture on their phone as part of their daily completion, or just complete a checklist.
How to Measure Them?
What doesn’t get officially measured and shared will not be managed. It is important to have a dashboard with the Key Performance Indicators on it, so you can track it daily/weekly or monthly.
What Gets Measured Gets Managed
Here are a few basic business indicators that apply to nearly all businesses that you could think about to manage in your business:
- Number of new customers each month
- Number of sales contacts
- Conversion rate from sales contacts to customer
- Number of times your customers buy/shop on average in a given time period
- Average value of each purchase by your customers
Thanks for reading…