By Paul Latham
Most business owners recognize that they need to measure performance in their business – and identify appropriate Key Performance Indicators. They may have heard the expression “what you can measure you can manage”.
However most business owners are not sure exactly what they should measure or why measurement matters.
From the advisor perspective – the fundamental point to help your business owner client understand is that – whatever the business owner chooses to measure – will create what we call “elastic bands” (or “rubber bands”) inside their business – and in turn – those “elastic bands” will strongly influence their team behavior – with either positive or negative consequences for the business.
If we start from first principles – Key Performance Indicators (KPIs) – are the regular business measurements used to ensure that a particular process has been followed and assess how well it is working.
KPIs allows business owners to answer the question – “is the performance of business or individual improving”? The business owner can then potentially amend the process as necessary.
Most business owners start to measure activities before they are really sure what they are trying to achieve.
Business owners need to address (in this order):
- What they want to happen (definition of success)
- How they can best measure this activity (the KPI)
- Ensure team communication – team understand why important
- Measure KPI activity and assess performance
- Refine process as required (based on KPI results)
Having considered KPIs from first principles – let’s now look more carefully at the concept of “elastic bands” that are created by KPIs (using the illustration below).
Let’s use a CPA business as the example. This will help you understand the illustration and to put yourself in the shoes of a client because very similar points will apply inside their business.
In this CPA business example –the partners particularly measure activity “X” which is time (worked on a particular client) and also activity “Y” which is the % billing realization (against the time spent).
Obviously, activity “X” (Time) and activity “Y” (Realizations %) strongly influence team behavior. They create a “line of tension” (just like an “elastic band”). The measurement of “X” and “Y” shapes team behavior.
The team recognize that “X” and “Y” “must be important” to the business and the partners. The team doesn’t question them – they just “do” them automatically.
Now – as an example – let’s imagine that the partners in the (CPA) business have recently decided to concentrate on new activity “Z” (again shown on the illustration). Let’s say that activity “Z” is to “proactively introduce new business advisory services to clients by suggesting they complete a business diagnostic survey”.
Unlike “X” or “Y” activity “Z” is not properly measured – maybe because it’s something considered to be “too difficult to measure” in the short term – or maybe because nobody thought it was “important enough to measure”.
What will typically happen inside the CPA business is that – while the partner is watching – the team will dutifully try and perform activity “Z”. They will stretch the line of tension into a “new shape” to include activity “Z” (see red dotted line in illustration).
However, sooner or later the partner stops looking (because their attention is diverted elsewhere). The team will assume that because “Z” is not measured – and the partner has stopped focusing on it – then it is probably not as important as “X” and “Y”.
Unless activity “Z” is measured properly (as a KPI) what normally happens is that team behavior will revert to the norm (the “X” – “Y” line of tension) and new activity “Z” will not happen (either consistently or properly).
To overcome this, the business owners (in this example the CPA partners) must decide what activities really matter inside their business (their definitions of success). They need to be clear about what activities team members should be concentrating on – and find a way to measure them as a KPI – regardless of the difficulty. If the activity matters the business owner must find a way to measure it.
In this way business owners can create new “elastic bands” that will dictate the profitable or appropriate behavior they want from their team.
Perhaps activities “X” and “Y” are no longer relevant to the way we do business today?
Perhaps the business should be measuring something completely different, for example, “A” – “G” in the illustration below.
In the illustration “A” through “G” are the business KPIs.
The measurement of A-G points the team in the right direction – towards their definitions of success. In this case – activities “A” – “G” help the business owner to point the team towards what they want to happen:
- Follow the standard process
- Generate new revenues
- Delight the customer
Also the business owner (in the illustration) is reinforcing the importance of the measurement with a bonus reward (that links to the measurement).
The message is that business owners need to really think about the existing “elastic bands” inside their business.
They need to be clear about their definitions of success and use the right KPIs to point the team in the right direction – and reward performance appropriately.
Are your business owner clients following the guiding principles of what you can measure you can manage? It’s a key question if you want to help them to drive the right behavior and business profits.
If you are a 21st Century CPA you have a fiduciary duty to help your business owner clients to Maximize Business Potential. You should be encouraging your best clients to think about “Measuring what Matters” – and we can show you HOW.