June 22, 2023

Topics:

A little announcement here…

So the last few months haven’t been smooth… switched platforms and websites and did both very poorly. But despite that, the growth engine behind this newsletter kept plugging.

Yesterday, we crossed 25,000 subscribers.

When I started this newsletter, I couldn’t have imagined I’d ever get 25k, much less in a little over a year.

I appreciate you all and can’t wait to talk more about what’s coming in the next few months.

I’d love to hear from you. Could you reply to this message and answer these two questions:

Why did you choose to join the crew (ie. what you wanted to get out of it)?
What would YOU like to see me write about?

Now… let’s talk about KPIs.

a message from The Investor’s Podcast Network

By investors, for investors

For years on the podcast We Study Billionaires, The Investor’s Podcast Network has made a habit of chatting with the world’s best investors. People like:

Ray Dalio
Howard Marks
Joel Greenblatt
and many more

With 100+ million downloads, they make podcasts by investors, for investors.

Now, they’re joining the newsletter space.

Read The Investor’s Podcast Network’s full daily commentary and expert insights in the We Study Markets newsletter. Sign up (for free) today:

Sign-up today

7 steps to picking the right KPIs

As a business owner or leader, picking KPIs seems like a simple task, but can easily become tricky.

I was recently working with a business owner and we were putting together a KPI dashboard. When we do this, we focus on a few things:

Leading vs lagging indicators
Different metrics at different time horizons

As we started to build their weekly and monthly dashboards, I began to notice that the owner had a desire to add more and more and more metrics.

Then, as we went through the dashboard, he wanted to understand how each impacted the outcome. One metric would show as a positive for Sales, another as a negative. The owner then got caught up trying to understand why they were different.

The answer is simple, but not easy: the one showing a negative wasn’t relevant to sales.

At a high level, it would have seemed to be. But when we got into the numbers, historically it had never been a great predictor of sales.

This highlights 2 problems with the approach most people have with KPIs:

We rely on assumptions and don’t test those assumptions
We pack our dashboards so that the “signals” we’re getting are meaningless.

So today, we’re going to walk through how I pick which metric (or metrics) we should be looking at.

But first… what is a KPI? It stands for:

Key
Performance
Indicator

KPIs are metrics or numbers that measure how effectively an individual, team, department, or business is performing. People often assume all KPIs should be financial KPIs, but that’s not the case. It’s often extremely important to look at customer data, operational efficiency, and many other things that don’t directly impact the bottom line.

But we do want to make sure of one thing: that the KPI you choose directly impacts the result you’re trying to achieve.

And this is where we walk through the 7 steps to picking the right KPIs.

Identify your desired outcome

Ask: what do you want to achieve?

Every business should have goals, and these goals should inform your desired outcome. Often businesses define their goals, but they’re bad goals. For me, the best framework for thinking about goals is the SMART Framework. SMART stands for:

Specific
Measurable
Achievable
Relevant
Time-bound

If you want to dig into SMART goals, here is a good article on that framework.

For now, we’re not worried about ALLLL of your goals. Pick just one. We want to focus on one desired outcome. Later we can come back to this and do the process all over again with a different outcome.

Think about each goal you have and pick a goal to start with.

List all the KPIs related to that outcome

Now that you’ve narrowed it to one outcome, start writing down the KPIs related to that goal. I like using sticky notes for this process, as it makes it really easy to move the KPIs around. But you do you! Use one sticky note per KPI you come up with. Here is a great list of KPIs for different business situations.

A key here is to pick both financial and non-financial metrics. When we’re picking our KPIs, we want to make sure we’re considering all possible options.

If you run out of ideas, search on google to find more. You can’t have too many at this stage.

When you can’t think of any more, stop for the day and comeback another time.

Once you’re done, start grouping the KPIs based on which are most similar.

Evaluate the importance and ease of collection (rate them)

Now, one-by-one ask:

How important is this metric? Rate it between 1 (not important) and 10 (extremely important)
How easy is it to collect it? Rate between 1 (hard) and 10 (easy)

How important is this metric?

To determine how important a metric is, ask the following questions:

What impact will it have on your final goal?
Can you choose a metric closer to the initial action being taken?
If this increased by 10%, what would happen?
If this decreased by 10%, what would happen?

These answers may not be concrete or scientific, which is fine. Use your gut and make sure you answer them honestly.

Inputs that you can directly tie to your goal are some of the best metrics you can have. By asking “what’s before that” over and over, you can get to the root metric in the chain. This is typically an input, or action, that one individual will take.

After thinking through these, come up with a score between 1 (low impact) and 10 (high impact) and write it on the bottom left corner of the sticky note.

How easy is it to collect?

You might write this one off, but it’s actually really important.

A KPI that is not tracked is no different than not having one at all. If it’s complicated or cumbersome to track, you’ll get frustrated with tracking it and stop.

So, to assure you can keep at it, ease of tracking is important.

You want to think:

How long does it take to gather?
How annoying is it to gather it?
How motivating (or not) is the number?

When you see sales calls go from 40 to 50, that’s exciting. But when you see minutes logged go from 500 to 550… who cares. It needs to mean something to you.

Taking all that into account, give it a score between 1 (hard) and 10 (easy) and write that score on the bottom right corner of the sticky note.

Cull the list

Add together the two scores from the last step and write the total at the top middle of the sticky note.

Now that you’ve identified your most important metrics by score, narrow it to the top 10. Don’t worry about being perfect here… if you look at it in the big picture and think 12 is more important than 10, then throw 10 out and tag 12 in.

When we cull, we’re just trying to make sure we don’t have so many we can’t give them our focus.

Identify 1 leading and 1 lagging measure per outcome

This is where the real work starts to happen.

Each metric must connect back to the desired outcome or goal. When looking at this, we want to solve a few things:

Pick a leading and lagging indicator
Determine the “blind spots”

Leading vs lagging

So what are leading and lagging measures? Leading are predictive of the lagging metrics.

Equipment maintenance to downtime.

R&D investment to new product launches.

Training budget to higher sales call conversion rate.

Sales calls should be somewhat predictive of revenue.

Determine your blindspots

Once we understand the interplay between the leading and lagging, we want to ask: what are the blind spots of each metric?

When choosing a metric, we want to understand what information will be missing from the equation. This helps us determine if we need more metrics to cover those blind spots or if we just need to be aware.

Understand your time horizon

Take your time and don’t hesitate to stop and come back later.

These are important and you want to give yourself time to process it.

Sometimes narrowing down to only 1 leading and 1 lagging indicator is hard, so it’s okay if you have to keep a few extra for now.

Document your process

Now that you’ve identified what metrics you’re going to use, it’s time to document the process of tracking the metrics.

Answer the following:

Where you’ll get it. If you don’t know where to get it, you’ll slow down and no one else can duplicate it.
How frequently you’ll report it? If you don’t choose a frequency, it’ll be “whenever” which is the same as “never.” Frequency also creates consistent numbers to look at.
Who is responsible? If you don’t have someone responsible, it won’t happen.
Who needs to know? If they collect it but don’t report it, what was the point of collecting it?

Monitor, report, and refine

You won’t be perfect at selecting the right metrics. This is vital to make sure you end up with reports that are actually useful.

Sometimes capturing the number is harder than you thought.

Other times the leading is just not as predictive of the lagging as you hoped.

The key is to recognize these things and adjust. Go back to your original list and pick one that you think will be more predictive.

This iterative process takes 3-6 months and in some sense, you’re never done adjusting.

Wrapping Up

Choosing the right KPIs can be difficult. Understand it will take time. Also, lastly, understand that different KPIs can be used at different reporting cadences.

We’ll talk about this more in-depth in the future, but I see too many businesses looking at weekly revenue when they should be looking at different metrics. Choose to view numbers on a timescale where the data predicts future outcomes (in the case of leading) and is reflective of business health (in lagging indicators).

If you can stomach it, feel free to consider metrics on these cadences during this exercise: