As a consultant, I ask every client: “What are your key performance indicators and metrics and how are you tracking and following them?” This question usually elicits substantially more fear and apprehension than it should. After reading this post, you will: 1) Learn the definition of key performance indicators (KPI) and business process management (BPM) 2) Learn why KPI and BPM are essential for small businesses and 3) Learn a basic KPI development strategy
Definitions
Key performance indicator (KPI) – “[KPI] measure the business health of the enterprise and ensure that all individuals at all levels are “marching in step” to the same goals and strategies” (Bauer, 2004, para. 1). A key performance metric (KPM) will tell you about the status of a specific process. All KPI and KPM but not all KPM are KPI. Do not get bogged down in the definitions! If you currently do not have any metrics or indicators, it is more important that you HAVE metrics and indicators. The differences will become evident to you later.
Business process management (BPM) – “Managing entire chains of events, activities and decisions that ultimately add value to the organization and its customers” (Van Looy and Shafagatova, 2016). Colleges offer programs in business because there is a science of doing business that extends to different types of business. How you manage your processes will directly affect your company’s success. There are plenty of businesses that make great products or services that fail because they have inadequate processes, tracking, and accountability.
The Importance of KPI and BPM
The average micro and small business owner might be tempted to ignore KPI and BPM and say, “I just manage everything in my head” or “I just follow my instinct.” As a business owner and analyst with over 15 years of experience, I can say that this answer is what I hear from business owners that end up with failing businesses. The phrase “failure to plan is planning to fail” is very true in business. According to the small business administration, 1 in 5 businesses fail in the first year and only 1 in 2 survive past five years. The failure rates are intimidating, given how much capital is put into the launch and operation of a business.
Developing KPM and KPI Businesses will have different metrics and different KPI and metrics; however, you can use these questions to build a few basic KPI for your business.
- Who – Will see the KPI?
- What – Does it tell me (and potentially others) about my business?
- Where – Will I see and use the KPI?
- When – How often is it (and should it) be calculated?
- Why – Is this important to my business overall?
- How – How will I use the KPI to manage processes in my business?
Real-life example:
When I owned a successful hypnosis business, I used several metrics associated with social media, web presence, customer interactions, marketing ROI, and follow-ups. Of these metrics, follow-ups (KPM) were an important metric and it directly impacted my 3rd party hosted customer-review scores (KPI). Although this example happens to be customer visible, it is not a requirement. Third-party reviews were a critical indicator for me as a service provider. These reviews were a front-facing number that prospective customers would see and use when deciding to use my services over my competitors and it showed me how customers viewed my business. If this number was anonymous, it would still be a KPI for my business because it provides the same information on customer perception. Many large corporations have surveys on the back of receipts that they use to track this information without customers knowing the broader results.
After the first few years, a new business process to follow-up with clients was implemented and a 100% follow-up rate (KPM) was tracked. In the follow-up, I received the client’s perception of their progress and satisfaction and reminded clients of a 100% satisfaction guarantee if they expressed dissatisfaction. If clients were not satisfied, I wanted to find out BEFORE they wrote a review, so it was essential to follow up appropriately and timely. If a customer was unsatisfied, I would offer a free 2nd visit or offer to refund their money. The goal of the follow-up process was to receive higher reviews by ensuring clients received value for their time and money.
Real Life Result:
The follow-up program customers left moderate reviews (3) instead of low reviews (1) when they were unhappy because they felt that my business was ethical. Managing the follow-up process (BPM) and tracking the follow-up rate (KPM), I was able to raise my follow-up rate to 100% and my review scores (KPI) increased from a 4.3 on average to a 4.8 out of 5. Eventually, I was able to calculate a monetary value for review score based on assessed traffic flow that occurred when review scores rose and people responded “because you had the best reviews” when asked why they chose my business.
Conclusions:
Key performance metrics and indicators are essential for small business owners to hold themselves and employees accountable. KPM and KPI need to be visible and calculated often enough to be timely and useful. KPI improve overall business process and financial health.
References
Kent Bauer. (2004). KPIs – The Metrics That Drive Performance Management. DM Review, 14(9), 63–. Small Business Administration. (2012, June). Do economic or industry factors affect business survival? https://www.sba.gov/sites/default/files/Business-Survival.pdf
Van Looy, A., Shafagatova, A. Business process performance measurement: a structured literature review of indicators, measures and metrics. SpringerPlus 5, 1797 (2016). https://doi.org/10.1186/s40064-016-3498-1