By: Dave Baney, Founder 55 Questions
The success of your company depends on laser focus on the companyâ€™s goals and business strategy. One of the most important elements of your plan is to set up a way to measure your progress against your goals. Companies often develop key performance indicators (KPIs) to serve as a tool to track how well the company is performing.
Pretend for a moment that you are out for a Sunday afternoon drive on a scenic mountain road. You are eager to reach the top but you have one slight obstacle — the windshield is blacked out. You can only use your mirrors to navigate the bends and turns of the road. What are the chances of reaching your destination?
Many businesses are driving this way, without a clear view of where theyâ€™re going. This is what itâ€™s like trying to reach a goal without leading indicators. Leading indicators are KPIs that give a hint as to what to expect in the future. Without them, you are not able to see where you are going or if you are even heading in the right direction.
What happens if you can see out of your windshield but your mirrors are removed? While it is probably safer than driving without the windshield, you are not able to see what is going on behind you. Without lagging indicators established in your business strategy you will not be able to see the full picture.
When both leading and lagging indicators are established you are able to see where you have been and where you are headed. This is something that can be easily done for every part of business. Here are a few examples:
If you are in a business that acquires work through a bid process, a leading indicator could simply be how many bids you have out to potential clients. You can estimate how many of these bids will close based on past averages. For example, if you have historically closed 25 percent of your bids and you have 20 bids active you can expect to close 5 of them.
You can establish a lagging indicator by looking into your past sales. What were your sales and closing rates last month, last quarter, and last year?
Human Resources KPIs
If you have created a way to track the satisfaction of your employees, whether through a survey or as a response to one of the expectations you have set, you can establish a leading indicator. High employee satisfaction, for example, should be an indicator for future low employee turnover. The reverse could also be true, low employee satisfaction could be a leading indicator for high turnover.
High, unplanned employee turnover is a lagging indicator that something is not going right and should be investigated further. Keep in mind that you should only include unplanned employee turnover (those that leave voluntarily) otherwise there may be hesitation to terminate employees when necessary.
Tying KPIs to the P&L Statement
By using your companyâ€™s previous P&Ls you can easily outline your goals for the next year. To do this take the last five years of statements and look for the single best year you had for each line item. Then use those numbers to create a theoretical best practices P&L to serve as rule of measure and assign the appropriate member of your staff with the accountability for achieving each goal. The benefit of using your previous success is that you know the numbers are attainable because you have already achieved them.
As you begin planning and updating your goals, remember to include both a windshield and mirrors. You will find it will be a lot easier to navigate the mountainous terrain we all face in business.
Dave Baney brings over 30 years of Fortune 500 management and leadership experience to growing businesses nationwide through 55 Questions’ tools and processes. Known for crisp execution, marketing insight and thoughtful direction, he is now a trusted advisor for CEOs.
Check out his website at: http://55questions.us2.list-manage2.com/track/click?u=03cf0430103408589a…