Time and again we come across companies that destroy profitability and long-term value by choosing the wrong key performance indicators, also known as KPIs.
Let’s look at some examples of the wrong Key Performance Indicators.
Restaurant: The first example is a fast food chicken restaurant which was trying to reduce waste so it chose what it thought was a clever metric.
“Number of pieces of chicken sold vs. wasted”.
While this achieved 100% efficiency, it also created long wait times because product had to be cooked from scratch and as a result there was a dramatic drop in return visits from customers.
Hotel: In another example, a hotel was bleeding cash. To rectify the matter, the hotel took aggressive cost reduction actions instead of focusing on increasing hotel occupancy. While they initially had a short-term reduction in burn rate, there was significant long-term deterioration in the business resulting in a bankruptcy.
Manufacturer: It is not much different from the manufacturer that was 100% focused on increasing production but had no focus on delivery. As a result, they had a great product but unhappy customers and very low repeat business.
Retailer: In another example, a retailer had product variety as its key performance indicator. But when we looked under the hood, it was quickly obvious that only a handful of products were driving the sales, and the bulk of their products were simply sucking up cash and creating cash flow problems for the retailer.
Call Center: Finally, a call center’s primary key performance indicator focused on driving down the call time, i.e. how quickly they can hang up the phone on a customer, instead of cross-selling the customer.
Now, let’s look at some examples of the right Key Performance Indicators.
Industrial: An Industrial company that had chronic cash shortages improved its cash position. Instead of looking only at its receivable balance, it started to track its Days Sales Outstanding known as dsos. We won’t bore you with the DSO formula but it should suffice to know that it can help companies start improving receivable collection on a measurable basis.
Manufacturer: Another example would be a manufacturer that consistently had excess inventory issues. The company moved to additionally tracking its sell-through velocity within its distribution channels. This allowed it to dramatically reduce its inventory levels.
Technology: A B2B technology services firm improved its revenues significantly by moving from just tracking sales to also tracking how many conversations were taking place company-wide with qualified prospects. This allowed them to consistently meet or exceed sales targets.
Professional Services: A professional services company that we helped, doubled their value by measuring and then reducing their customer acquisition costs with an emphasis on increasing the lifetime value of the customer. In this case, their lifetime value to customer acquisition cost ratio was 4 to 1.
Let’s take a personal example. If you’re trying to lose weight, you will have better results if you track calories consumed and burned vs. just your weight.
So, are you tracking the right things? Because if you’re not, you have a real opportunity to start improving the performance of your business as well as your valuation.