Core Concepts: Key Performance Indicators (KPIs)

The Big Idea:

Key Performance Indicators (KPIs) are the signposts on the road to success. They are essential data points to know what is going well, what could be improved, and what needs immediate attention in your home improvement business. In this article, I step through what KPIs are, how to choose them, and how to balance the costs and benefits of tracking KPIs over time.

What is a KPI?

Key Performance Indicators, or KPIs, are metrics of significant importance to the overall health and goals of a business. They can be general business metrics such as total sales, net profit, etc. Or, they can apply to a specific area of the business, such as marketing measuring how many leads were developed, or fulfillment measuring how many projects were completed on time.

How do you choose a KPI?

KPIs are chosen by managers based on their value to managing the business. It’s tough especially for smaller businesses to track many different metrics, so often a few of the most important metrics are tracked continuously, even if the process is quite manual.

Essentially the goal is to keep an eye on the numbers that tell you if things are going well and if the business is on track to meet your goals, or not. Which KPIs are important for each business depends an awful lot on the business and its’ particular goals. If keeping marketing cost under control is important to you, marketing cost as a percentage of net sales may be an important KPI to track. If people being late is causing a drag on completing jobs on time, maybe you track the percentage of your team who were on time in a given week as a KPI.

How specific or granular should a KPI be?

The answer to this one is simple: KPIs are just for managers to keep an eye on critical areas of the business. KPIs should be as specific as is useful to your particular situation, and no more. Make no mistake, measuring KPIs reliably over time almost always has both a hard cost in dollars, as well as a soft cost in time. If your measurement systems don’t produce reliable data, your KPIs are probably worthless and the effort is a waste.

Also, score each KPI on a 1-10 scale for business impact. The question here is: “If we get this right, how much does it contribute to us reaching our goals?” If you’re tracking miles driven on work trucks to see if you can save money on tire replacements, it’s probably a pretty modest impact on the business. But, if you’re tracking marketing cost to keep that under control, it probably will have a real impact on your bottom line.

The KPIs that are an 8, 9 or 10 in business impact and are a 1, 2, or 3 in cost to implement and track are your “low-hanging fruit.” Start with those, and get better at it over time!

The Action Test

There are lots of things living in your business right now that might be interesting to know, but you may not be any better off for knowing them. A good way to think about KPIs is to ask yourself the question “If I know that X KPI is going up/down, how would knowing that change my behavior?”

Let’s look at an example for a company that decides that it wants to track the productivity of roofing crews by day of the week.

You define what productivity means (say squares per day), you put your measurement systems in place, and you run a test for a couple of months. In the end, you find that your crews are the most productive on Tuesday and the least productive on Fridays. Ok… so now what?

Are you going to stop producing work on Fridays because it’s not very efficient? Of course not. It probably also doesn’t make sense to just yell at everyone to work harder.

If you’re going to take this information and shrug or file it away for another day, you’re probably wasting effort and money tracking productivity by day of the week.

On the other hand, maybe you could decide to move your most difficult production projects to days earlier in the week when crews are the most productive. You might also decide to create a contest to see which crews are the most productive within your standards and call it the “Friday Challenge” to goose productivity when you know you are weakest. That might cause a meaningful bump in how efficiently your crews produce projects.

Finally, you might decide that tracking overall efficiency by day of the week isn’t specific enough, and you decide that you really need to look at efficiency, by day of the week, for each crew. That might give you more actionable data so that you can coach a specific crew or crews toward better performance, without involving your high-performers. But again, this more granular look at your production comes with a cost, so a decision will need to be made about whether the juice is worth the squeeze.

If you can’t come up with a good idea about how to use the information you’ll be getting, it is probably not very valuable, and the KPI is probably not worth tracking.

Getting Started

So how do you get started? You probably already track some data today. Gross and net sales are pretty common KPIs that accounting handles. If one of your goals is to drive profit (and it probably should be), start by taking a look at your business and making an educated guess about what is dragging on your profit right now.

Maybe you need to take a look at tracking warranty calls, selling costs, close rates by rep, or something else entirely. Most KPIs start with educated guesses about which metrics will have the biggest impact on your goals, prioritizing those guesses, and then doing a small, time-limited sample when possible to see if it is worth implementing fully, and/or permanently.

Lastly, it is important that your team knows what KPIs are being tracked, and what they are responsible for. Pick a KPI of the month, or quarter if that’s a better timeframe, and ask them to focus on driving improvements in a KPI of interest. Not only will it keep them focused on an important, measurable goal, but it will also give them great feedback over time about how well you are accomplishing your organizational goals.

Leave a comment about your favorite KPIs to track below!