Guest Post: Live or Die by your KPIs
Trust is critical within organizations and should be table stakes amongst leadership teams. Everyone is motivated and incentivized to drive the company towards the same common goal. Despite the trust and confidence we have in one another, we have a fiduciary responsibility to the companies we serve.
“Trust, but verify.”
The “trust, but verify” philosophy can be polarizing when it comes to leadership styles. In general, business is all about relationships and the verification element can damage relationships. However, we all agree, “in life-or-death industries or situations… trust, but verify.” Verify your KPIs because they are a key factor in the life or death of your business.
What is a KPI?
Key Performance Indicators, or KPIs, are critical measurements of historical business performance that provide insights and enable better business decision making at both strategic and tactical levels. KPIs vary from company to company and industry to industry.
Common SaaS KPIs include:
- ARR (Annual Recurring Revenue)
- Lifetime Value (LTV)
- Customer Acquisition Cost (CAC)
- Net Dollar Retention and more.
For those of you in the B2B SaaS world, OpenView publishes an Annual Benchmark Report with great insights.
What’s wrong with KPIs?
KPIs are rarely used properly. Although there are some standard metrics across industries, private companies operate in the wild, wild west. Despite having the best intentions, everyone seems to calculate their CAC differently. You may be thinking, “Who cares, they are private companies, they can do whatever they want!” and that’s true to some extent. However, when there is no clarity and consistency to how metrics are calculated the measurements lose meaning and lead to poor management decision making. This lack of consistency around private company reporting is often magnified when leadership experiences any sort of transition.
It’s time to discuss your metrics and ensure everyone is on the same page. Stop blindly following those around you and start helping your team think more strategically.
Defining Your Key Performance Indicators (Your KPIs)
That goal might be measuring X daily active users, recording sales bookings of Y, driving gross margin improvements of Z, or a number of other objectives. Without context, these goals may seem arbitrary or random. Take a step back and it's easier to see the big picture. Although these goals may not be particularly relevant in a vacuum, they typically help the company progress one of three ways:
- Securing the next round of funding to continue operations and drive expansion.
(ie: revenue milestones & capital efficiency)
- Reaching profitability to avoid the need to secure funding.
(ie: reaching cash flow positive, throwing off X%+ EBITDA, etc.)
- Maximizing enterprise value when preparing to exit.
(ie: Improvement to EBITDA are often critical can be critical when at a multiple of EBITDA)
Have Your KPIs and Eat Them Too
Establishing key performance indicators is not enough. You must start leveraging KPIs to drive success across your organization. It all starts with good data. If you have bad data sources, the values you report could lead to less than ideal business decisions.
Garbage in garbage out
If a company reports they are on pace to exceed their sales projections by 20%, they may double down on sales to grow faster and/or hire more customer support reps in preparation for growth. If that report was built with inaccurate data from a CRM with duplicate records, things probably won’t end well. Expanding the sales team may fuel the inconsistency of data and continue to snowball. More customer service reps will likely lead to very underutilized team members and an unnecessary cost. Either way, the business could be utilizing resources better if they had a better grip on their KPIs. Ensuring reliable data is half the battle.
Focus on the right metrics
If a company is focused on net income from their accrual based P&L and decides to offer a new benefit for employees, they may be in for a rude awakening if customers are not paying them as they scramble to stay afloat due to the unexpected pandemic. Instead of net income, the company should probably be focused on free cash flow.
Without clarity on real metrics with meaning, it's easy to see how a company might raise too much or too little capital. Both can be expensive. It’s also easy to see how a company might not hire to meet demand whether its customer support agents, field service technicians, or any other role within the organization.
All failure is not bad and in many ways failure ultimately leads to real progress. For some founders like Elon Musk, “If things are not failing you are not innovating.” This is true when it comes to major advancements with technology and disruption.
However, when failing boils down to bad management or misinterpreting what your KPIs are telling you, it’s hard to imagine investors being eager to fund your next venture. CBInsights covered many startup failures from financial fraud to burning through cash. If these companies better managed and verified their KPIs, some would certainly still be in business today and have a chance of achieving their mission.
What’s the point?
If you’re still with me, there is a decent chance your organization's KPIs could use a refresh. That’s okay. You are not alone. Every organization should take time to evaluate their KPIs regularly as their business evolves. Failing to understand KPIs reduces your chance of success.
Here are a few steps you can take to establish or refine the KPIs of your business:
- Schedule a meeting with your executive team to review the company mission and ensure alignment. Try to find a solid 4 hour window or consider splitting into two 2 hour sessions if needed. The CEO should begin with clearly articulating the mission and confirming buy-in from everyone else in the meeting. [Note: If everyone is not on the same page, you should probably reframe your meeting to focus on the bigger picture and reschedule the KPI strategy session for a later date.]
- Start with a clean white board and get back to basics. If you had any metrics previously, put them aside and we’ll get to them later. Talk through your business model and identify metrics that matter to your success. Similar to “SMART” goals, it’s critical that your KPIs are specific, measurable, achievable, realistic, and timely. Do not rely on metrics that your competitors are using or that your friend recommended. Encourage the least senior and least vocal team members to speak up first to ensure their perspective is heard without being nudged in another direction.
- At this time, take a look at prior metrics, and consider adding them to the mix. Some may already have been discussed and you’ll likely find others are actually irrelevant now.
- Then, go around the room and ensure that everyone at the table (or in the Zoom meeting) understands how each of their colleague’s KPIs are computed and how they roll up into the bigger picture. Additionally, everyone should understand where the data comes from and who is responsible for maintaining the integrity of that data source.
- Create a shared Google sheet (or similar shared document) to track this information and update it regularly (for most metrics monthly will make sense, but for other data points weekly or quarterly may be a better cadence).
- Sit down and refresh your KPIs quarterly (or at least annually) to ensure that they are still relevant to your business as it continues to evolve.
- Most importantly, continue monitoring your KPIs to better understand business performance and enable better decision making across the organization.
Email MightyCFO for a free KPI monitoring sheet template and feedback on your KPIs.
President, Mighty CFO, Inc.