Peter Drucker is attributed with coining the phrase "You can't improve what you don't measure". The ACE performance improvement methodology turns this around somewhat to say "You need to measure it if you want to improve it".
Either way, KPIs are great for focusing the audience on a limited number of key deliverables.
I have had enormous success improving business performance by using a limited number of KPIs to change the culture of a business from "it is what it is" to best practice.
Revenue per head is a simple metric for staff of any level to understand. By presenting graphs such as the above at monthly meetings of team leaders at a software & consulting business, I was able to lift the productivity of the Consulting team by as much as 20% year on year.
The Consulting Team Leaders as well as the executive management team get together once a month and are presented with our high-level financials, including the above graph. Although initially met with some scepticism ("how are we supposed to influence that?"), clearly there has been significant impact over time.
Just discussing it each month made the Team Leaders aware that when a handful of staff resigned, the needle bumped up slightly. Go through a period when we had significant software sales? The needle jumped again. This generated a positive mood at the leadership meetings, and I could report growth in Revenue Per Head each month, even when other overheads were impacting EBITDA.
The Consulting Multiplier - the ratio of consulting revenue to salaries - has slowly risen over the period of my tenure, from a moving average of 1.1 to 1.5. That's moving from barely breaking-even, to achieving a margin of 40% each month. And in the last couple of months of my tenure, the Multiplier for the month reached an all-time high of 1.8 (the target I had originally set with the CEO).
This is also reported to the senior staff each month, and it is fair to say that the entire group takes some pride in the long-term trends within these KPIs. Removing the impact of software sales, it provided the group with more direct evidence of the fruits of their efforts. Again, without impact of overhead costs, this metric showed that the team was on the right track.
By keeping it simple and only reporting these two metrics for the Consulting teams, the group has a positive, can-do vibe and they continue to seek out opportunities to improve productivity.
I was able to gradually influence the middle-management of the business by regularly discussing the drivers of the key metrics we were using to manage the business, thus building commercial acumen and appetite to stretch to meet increasingly challenging goals. Ultimately, as overhead costs were stabilised, the longer-term impact of the operational improvements became evident.
The Result:
Without any rounds of redundancy or other morale-depleting micro-management, the senior people in the business have acted under their own initiative, to not replace every employee who left the business - asking the remaining staff to lift productivity and cover the gaps. The result was that the normalised EBITDA increased by $860k from FY 2022 to 2023 - a huge impact on the results of this SME.
Customer credit notes and written off time continue to decline, and the bottom line of the business as a whole has improved significantly year on year.
In the AR space, I have distilled what were previously workpapers filled with numbers and data, to a couple of lines on a single graph (at least for Board reporting).
Again, the improvements year on year are enormous, even to the extent that the auditors specifically asked me what I had done to improve the collections results so markedly.
I had changed the customer terms during the year after identifying that some invoices were issued with up to 7 weeks' credit, so that helped. But a large part of it has been the reductions in disputes caused by working with the Consultants to ensure that the invoices are more transparent and better show the work that was done, and who ordered it.
The key metrics in AR are very simple - and mapping monthly Days Sales Outstanding (under 30 days) and overdue AR over 90 days (less than $100k on monthly billings of over $2m) , have clearly shown the improvements I have achieved.
I would encourage any CFO or FP&A specialist who is using accounting systems that provide endless reams of data, to avoid the temptation to report everything that moves, and instead, distil the volume down to just a limited number of key metrics that you know are instrumental to the success of your business.
Share those with your stakeholders monthly, encouraging staff that can influence each item to do so.
Celebrate the wins, and soon the bottom line results will follow.
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