Business Value Acceleration
KPIs to improve performance, productivity, profit and business value
As a business owner, you face an ongoing challenge to keep employees motivated over the long haul to achieve the desired outcomes. Strategic benchmarking to refine business processes and develop business strategy allows owners to measure performance and identify gaps. One way to do this is to use Key Performance Indicators (KPIs) to measure and reward the progress and results of their processes and staff and closely monitor employee growth.
What is a KPI?
Key Performance Indicators are quantifiable measures that reflect a business’s or project’s critical success factors. They help to align the goals and expectations of the owners, managers, and employees and to monitor and evaluate individuals, teams, and the organisation as a whole. KPIs can also be used to incentivise and recognise the achievements and contributions of the employees, as well as to encourage them to improve and grow.
Not all KPIs are created equal.
Not all KPIs are created equal. Different KPIs may be more suitable and effective than others depending on the nature and objectives of organisations, the business or the project. Moreover, some KPIs may have unintended consequences or trade-offs that must be considered and balanced. Badly designed KPIs may end up reinforcing the wrong behaviours. Therefore, choosing and designing the KPIs carefully and strategically is as important as communicating them clearly and transparently to the employees.
Using external benchmarking, for example, comparing similar businesses as part of the data collection, will aid in ensuring the firm is using the correct types of internal benchmarking. The benchmarking process should analyse business performance and look at competitive benchmarking to identify profit and performance gaps.
Qualitative or quantitative KPIs?
There are many ways to categorise and classify KPIs as measures of continual improvement, but one common distinction of the collected data is between quantitative and qualitative KPIs.
Quantitative KPIs are based on numerical data and metrics, such as sales volume, revenue, profit, market share, customer satisfaction, productivity, efficiency, quality, or safety. Qualitative KPIs are based on subjective assessments and feedback, such as customer loyalty, employee engagement, innovation, creativity, collaboration, or leadership.
Quantitative KPIs are easier for comparing and measuring performance, but they may not capture the whole picture or the underlying causes for positive and negative outcomes. Qualitative KPIs are more challenging to measure and compare, but they may provide more insights and explanations for employee performance.
Ideally, a combination of both types of benchmarking will be used to create a comprehensive and balanced view of the performance.
Input and output KPIs
Another common distinction is between input and output KPIs.
Input KPIs are based on the resources, efforts, and actions invested or taken to achieve the desired outcomes. Output KPIs track progress based on results, impacts, and benefits generated or delivered by the performance.
Input KPIs are more controllable and predictable, but they may not reflect the actual value or quality of the performance. Output KPIs are more meaningful and relevant, but external factors or lagging indicators may influence them.
Input KPIs help track and optimise the processes and activities that lead to performance. Output KPIs help evaluate and validate the effectiveness and efficiency of the work undertaken.
Again, a combination of both types of KPIs should be used to ensure that the desired behaviours are aligned with the goals, and that the goals are achieved.
KPIs and behaviour = business performance
To illustrate how KPIs can motivate employee behaviour and business productivity, let’s consider an example of a hypothetical company that sells software products.
The company has three main objectives: to increase sales, to improve customer satisfaction, and to foster innovation. The company decides to use the following KPI benchmarking to measure and reward the achievements of its sales team:
Sales volume:
the number of products sold in a given period, which reflects the ability of most businesses to generate revenue and market share. This is a quantitative and output KPI.
Customer retention:
the percentage of customers who renew their subscriptions or purchase additional products, which reflects the business’s ability to build loyalty and trust. This is a quantitative and output KPI.
Customer feedback:
the rating and comments that customers give to the products and the service, which reflects the ability to meet or exceed customer expectations and needs. This is a qualitative and output KPI.
Product knowledge:
the score that sales staff get on a test that evaluates their understanding and proficiency of the products, which reflects the ability to present and demonstrate the products effectively and convincingly. This is a quantitative and input KPI.
Innovation ideas:
the number and quality of suggestions that sales staff make to improve the products or the sales process, which reflects the ability to identify and solve problems and to generate and implement new ideas within current processes. This is a qualitative and input KPI.
How to use KPIs to calculate a bonus
The company sets specific and realistic targets for each KPI based on analysis of historical data, market conditions, and strategic priorities. The company also establishes a reward system that links the compensation and recognition of the sales staff to their KPIs.
For example, the company may use a formula like this to calculate the bonus for each sales staff:
Bonus = base salary (sales volume/target sales volume) (customer retention/target customer retention) (customer feedback/target customer feedback) (product knowledge/target product knowledge) (innovation ideas / target innovation ideas)
Motivation factors
By doing so, the company hopes to motivate the sales staff to:
- Sell more products and increase the company’s revenue and market share.
- Retain more customers and increase their lifetime value and referrals.
- Solicit and act on customer feedback and increase the company’s customer satisfaction and word-of-mouth marketing efforts.
- Learn and master the products and increase the confidence and competence of the sales staff.
- Contribute and implement innovative ideas and increase the organisation’s and sales staff’s creativity and collaboration.
Of course, this is just a simplified and hypothetical example, and there may be other factors and variables that need to be taken into account. However, it illustrates how KPIs can be used as a powerful tool to motivate employee behaviour and to align it with the business objectives.
Business owners can create a high-performance culture and continuous improvement in their organisations by choosing and designing the right KPIs and communicating and rewarding them appropriately.
Using benchmarking to develop KPIs
Benchmarking is a valuable tool for setting KPI targets. It involves comparing a company’s performance against industry standards or similar companies.
Using the right types of benchmarking can identify areas where it is underperforming and set realistic targets for improvement.
For example, suppose a company’s customer retention rate is lower than the industry average. In that case, it can set a target to improve its retention rate to match or exceed the industry average. The benchmarking process can also help a company identify best practices and learn from the successes of direct competitors.
Key Performance Indicators for Professional Services Firms
Professional services firms, such as law firms, accounting firms, and consulting firms, rely on key performance indicators (KPIs) to measure progress towards their success and identify areas for improvement.
KPIs help firms track their progress towards their strategic goals, being updated and reviewed in a continuous process.
They’re essential tools for professional services firms, as they help firms measure their success and identify areas for improvement. By tracking KPIs such as revenue growth, profit margin, utilisation rate, client satisfaction, and employee satisfaction, professional services firms can gain valuable insights into their performance and make data-driven decisions to drive their success.
Here, we’ll discuss some common KPIs used by professional services firms and how they can be used to drive success.
Revenue Growth
Revenue growth is a critical KPI for any business. It measures the increase or decrease in a firm’s revenue over a specific period. A positive revenue growth rate indicates that the firm is generating more revenue, while a negative growth rate suggests that the firm’s revenue is declining.
Professional services firms can use this KPI to track their financial performance and identify trends in their revenue growth.
Profit Margin
Profit margin is another important financial KPI for professional services firms. It measures the percentage of revenue left after all expenses have been paid. A high profit margin indicates that the firm is generating a significant profit from its revenue. In contrast, a low profit margin suggests the firm’s expenses are eating into its profits.
Professional services firms can use this KPI to track their profitability and identify areas where they can reduce costs to improve their profit margin.
Utilisation Rate
Utilisation rate is a critical KPI for firms that bill their clients by the hour. It measures the percentage of billable hours that are actually billed to clients. A high utilisation rate indicates that the firm’s employees are spending significant time on billable work. In contrast, a low utilisation rate suggests employees spend more time on non-billable tasks.
Firms can use this KPI to track the productivity of their employees and identify ways to improve their utilisation rate.
Client Satisfaction
Client satisfaction is a crucial KPI as part of a company’s NPS (net promoter score). A high level of client satisfaction indicates that the firm is meeting or exceeding its client’s expectations and knows its customers. If the firm is falling short of client expectations, it may be reflected in poor reviews online or, worse, be unseen as word-of-mouth dissuasion. Most customers won’t specifically voice their concerns, they’ll simply cease doing business with that company.
It’s business-critical to track performance from the client’s perspective and identify areas where they can improve their service delivery.
Employee Satisfaction
High employee satisfaction levels aren’t just a ‘nice to have’; lower scores are correlated with staff attrition and high costs of staff turnover. Scoring low on employee satisfaction suggests that employees are dissatisfied with their jobs, which can have a company-wide demotivating effect.
Firms can use this KPI to track their performance from the employee’s perspective and identify ways to improve employee satisfaction and engagement.
Case study: KPIs for a Professional Services Firm
This case study illustrates how an engineering firm uses key performance indicators (KPIs) and performance benchmarking to measure and improve performance.
This business uses industry statistics from IBISWorld to compare its revenue per employee, average wage, and wages as a percentage of revenue with other engineering firms. It also sets compliance factors for its staff, such as timesheet completion, invoice completion, and safety reporting, to ensure quality and accountability.
It has revenue targets for its staff and projects based on a salary multiple and a net labour multiplier. As business-wide KPIs, the business monitors profitability, staff turnover, sales conversion, and win/loss ratios. It uses a profit metric that matches its employee share ownership plan (ESOP) contribution calculation. The managers evaluate their projects and individual staff members monthly on various KPIs, such as profitability, budget, schedule, utilisation rate, revenue, work in progress (WIP) recoverability, client net promoter score, and peer review.
Strategic benchmarking process
Designing KPIs technical benchmarking without matching it to the overall strategic plan and financial model is pointless. The business benchmarking KPIs must be used to drive business performance using performance metrics.
Businesses should be using KPIs and benchmarking data to align their goals, strategies, and actions and foster a culture of excellence and staff collaboration. The key is to create benchmarks that drive superior performance, using external benchmarks to identify gaps in productivity, profit or business performance and build a competitive edge.
Benchmarks and Long-term incentives
Long-term incentive (LTI) and equity incentive plans are compensation tools used by companies to attract, retain, and motivate key employees. These plans are designed to align the interests of employees with those of the company and its shareholders by providing rewards for achieving specific performance goals over a multi-year period. Benchmarks are often used in designing these plans to ensure that the performance goals are challenging yet achievable and that the rewards are competitive with those offered by other companies in the same industry.
Benchmarks can be used in several ways when designing LTI and equity incentive plans. For example, a company might benchmark the performance goals used to determine them in its LTI plan against those of its peers to ensure that the goals are challenging and that the rewards for achieving them are competitive. Similarly, a company might benchmark the size and structure of its equity incentive awards against those of its peers to ensure that the awards are competitive and provide an appropriate level of employee motivation.
When using benchmarks to design LTI and equity incentive plans, it is important to ensure they are relevant and appropriate for the company and its industry. This means selecting a peer group of companies that are similar in size, complexity, and business model and operate in similar industries. It also means ensuring the benchmarks used are up-to-date and reflect current market conditions and trends.
Performance benchmarking and plan effectiveness
In addition to using benchmarks to design LTI and equity incentive plans, companies can also use them to evaluate the effectiveness of these plans. For example, a company might compare its performance against the performance goals used in its LTI plan to determine whether the goals were achieved and rewards were earned. Similarly, a company might compare the value of its equity incentive awards against those of its peers to determine whether the awards were competitive and provided an appropriate level of employee motivation.
Benchmarking benefits
In summary, benchmarks can be valuable for companies when designing and evaluating LTI and equity incentive plans. By using relevant and appropriate benchmarks, companies can ensure that their plans are competitive, provide an appropriate level of motivation for employees, and align the interests of employees with those of the company and its shareholders.
Ensuring all parties understand defined goals and better understand the organisation’s performance by using data to identify actionable steps to stay ahead, as well as best practices in other businesses and competitors, are all benefits of well-designed business benchmarking.
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