KPI’s, Key Performance Indicators, can change based on what management is looking for our in their performance. The consequence of focusing on certain performance indicators can easily cause a business owner to get more granular in their focus or the positive result in a management change in another. Here’s two stories of how this might play out.
A particular business owner providing professional services could easily measure their gross profit margin and make decisions on how to increase it. If you’re marking up labor, you might try for a labor multiplier of 2x and if possible drive it up north of 3x. That’s a huge success if you accomplish it. However, depending on the markets you’re serving, you may find that you’re losing proposals if you’re applying that same multiplier to all the markets you serve. While it may work in a large corporate market, it may not work in a mid market or small business market. You may need to adopt a tiered pricing approach to each market based on the complexity of the assignment and what the budget is for the client. In this case, you would begin to track the won/lost ratio of proposals in each separate market you serve and adjust pricing accordingly to hit the revenue and gross profit targets you’re shooting for.
Another business owner has been tracking his close rate on opportunities and is seeing an improvement over the past 3 years going from 13% to about 19% overall. They are seeing a 30% increase in revenue year over year. While management still sees room for improvement, there is a predictive element of the business where they can accurately predict his revenue by looking at the opportunity. What’s troublesome is that with this revenue increase, there has been a temporary decrease in gross margin, likely due to management not looking at the labor and materials cost in the manufacturing process. So the KPI has changed, and they will now start tracking the labor and materials component of their manufacturing process.
KPI’s can often change because a business is dynamic, not static. These stories hopefully add color as to why business owners and managers could and should look at changing KPI’s based on the priorities of the organization.