KPIs for the downturn
Monday, October 13, 2008/
As the economy turns, companies will quickly need to adjust the key performance indicators they use to keep their staff motivated and performing. LEON GETTLER reveals the KPIs you can use to boost sales and improve cashflow.
By Leon Gettler
As the economy turns, companies will quickly need to adjust the key performance indicators they use to keep their staff motivated and performing. We reveal the KPIs you can use to boost sales and improve cashflow.
One well-known management maxim is “if you can’t measure it, you can’t manage it”. Key performance indicators – whether it’s customer satisfaction, cost of sales or absenteeism rates – are crucial to keeping any business on track.
But as the economy slows, companies are being forced to look hard at their KPIs and realising they will have to start measuring different activities and different parts of the business. Priorities change when you are working harder to stay afloat.
The challenge for businesses now is finding stuff to measure that will keep people on top of their game in order to implement the strategy, or at least ensure that lost business is kept to a minimum.
Don Abell, a partner at KPMG’s middle market advisory service, says companies are only starting to adjust their KPIs, partly because the impact of the credit crisis has only hit home in the last few weeks, and partly because up until recently, Australians were being told we would ride out the economic storm. It is a different story now.
“Certainly companies are assessing the impact right now,” Abell says. “They haven’t come to grips with it, but it is on their agenda. It’s only a question of how quickly they come to assess it.
“Certainly they are very focused on where the dollars are going right now. There is certainly a change in attitude and we are seeing businesses pulling back from things they otherwise would do,” Abell says.
“People will adjust their expectations, adjust their KPIs. The question will be when they take that decision to make that adjustment, and I haven’t seen it yet and I don’t see any indication that we are going to see great changes in KPIs before Christmas. But people might think they need to adjust for the second half of the financial year in which case, they may come out prior to Christmas.”
So how do you know what to measure when the economy is changing? And how much of it depends on the size of the business?
KPIs in good times
In a boom market, business is likely to be production constrained, with demand running high and the company struggling to turn out enough products and services to meet it.
Typically, the KPIs for a production-constrained strategy might include:
- Turnaround time for jobs.
- Output rates.
- Quality measures.
- Meeting production schedules.
- Customer feedback.
- Lost time from injuries.
- Delivery in full, on time.
All these focus around the strategy of meeting demand that’s booming. When you can’t get the stuff out fast enough, KPIs need to speed things up and keep the business humming.
KPIs to spark sales and keep the cash flowing
But in a downturn, when business is dropping away and you have to fight for every account, the strategy shifts to sales-constraint.
When the company is working harder and not generating increased revenues, or even watching sales fall, specialists say the KPI spotlight typically turns to examining sales effectiveness. They might include progress towards quotas, number of contacts with a prospect, daily sales, and sales trends.
The following questions could prompt KPIs for a sales-constrained company:
- How effectively are we converting leads into sales?
- Is our sales force working effectively in getting the leads that they’ve got?
- How effective are we being in terms of lead generation?
- How many inquiries do we get when we put up an ad?
- How many leads do we get from that ad?
- What’s the yield on our advertising effectiveness?
- What is the dollar value of each lead compared to the dollar value spent on ads?
- How effectively do we convert those leads into a request for quotation?
- And how many of those requests were converted into real sales?
Using finely-targeted sales KPIs can help create real improvements in a business and focus is more clearly on the actual job of getting money in the door. Tasks such as market research and responding to billing questions, for example, could be handed over to other employees, or outsourced to free up sales representatives to spend more time on the phones and out in the field.
Once these changes are made, the KPIs will give companies more control and allow them to monitor how things start tracking once the changes are made.
In a sales-constrained environment, there is also more focus on cost. In boom times when you are trying to produce as much as you can to satisfy demand, you might be more willing to allow the expense in order to get the product out. In tighter times, cost control is king.
But the state of the economy and market suggests a third scenario might be emerging; cash constraint. Put simply, more companies will go bust.
Dun & Bradstreet’s June quarter survey has found that business failure rose 11% in the first half of this year. A total of 4800 companies collapsed. Accountants are also reporting more insolvency work involving smaller companies.
In that sort of environment, the KPIs need to focus on cashflow as well as their spread of creditors, and their financial health.
In SmartCompany’s recent story on cashflow tips to get you through the downturn , CPA Australia policy adviser Jan Barned said it can even be worthwhile to direct at least a portion of your sales team’s commission structure towards ensuring the customers they sell to actually pay.
“Small businesses with sales reps often pay commission on the amount of sales, so by swinging it around and paying a commission on sales banked you may find that all of a sudden your sales team is in there helping you collect that money,” Barned says.
Choosing the right KPIs
Picking and choosing which KPIs to monitor is not easy. Les Pickett, chief executive of the Pacific Rim Consulting Group, says companies need to tread carefully. “Short-term cost savings could cost in the long term,” Pickett says.
“If, for example, you cut all travel expenses and do business on the phone, maybe you will lose a customer. If you cut staff costs by X% to a level set by your new KPIs, you will cut five or 10 people. But unless you look at what skills you need, you will end up losing customers.
“The KPIs need a touch of reality about them; they should not be a manipulation of accounting data.”
Neil Sylvester, a director of consulting at Partners in Performance, says changing and redesigning KPIs cannot be done overnight.
He says while companies can easily come up with rough and ready numbers, the trick is setting up a management system, with review and control processes that ensure people are actually delivering the KPIs.
“You do want to be ahead of the game,” Sylvester says. “To put a KPI system in a company in place takes time.
“If you are in a desperate situation and you look at people in the business where you have a weak set of KPIs and start strengthening those, it might take you a week or so to get it defined and designed.
“Then, it might take you several weeks to get it up and running. If you are in a big company, it might take you several months to get up and running.”
Naturally, it is a lot easier with an even smaller business.
“The guy at the top of an 80-person business has pretty much enough mental bandwidth to be across all the numbers and have a strong gut feel for what’s going on,” Sylvester says. “Once you start getting bigger than 200 people, you have to have more delegation going on. You have to be able to hold people to account for outcomes as measured by the KPIs, not simply for tasks.
“And when I am only a 10 person business, I am going to have the KPIs in my mind. I say: ‘You do this, you do this and you do that’, and I know that if all that happens it’s going to work.”
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