Facebook Twitter LinkedIn Google+

Danger Ahead?

Originally published: 03.01.11 by Tony Petrucciani

How to use KPIs as a warning system instead of just a reporting system.

The pace of modern business calls for new ways to use key-performance indicators (KPIs) beyond traditional spreadsheet reports issued on a regular schedule. In fact, such end-of-month or end-of-quarter reporting is becoming an increasingly ineffective way to spot red flags that can precede a problem.

Protecting profits and market share requires an immediate response to problems as they arise or — better yet — predictive insight into a potential problem and an action plan to prevent it. Fortunately, new strategies and reporting tools can enable contractors to use KPIs to quickly identify the underlying issues of problems and find solutions faster.

These new capabilities are enabled by technology — specifically, business-information software solutions designed for service businesses that provide ad hoc reporting tools, real-time data tracking, continuous updating of critical metrics and numbers, a way to see the interaction of performance drivers, the ability to “drill-down” through multiple layers of data, and ways to visually display data such as in-platform pivot tables.

Is Now the Time to Change?

At what stage in a company’s growth should it develop and implement a predictive KPI program? Is a family-owned business with

one service truck too small to take advantage of available technology? Of course not! Productivity and accuracy are essential to profitability — no matter the size of the company. Here are three ways to tell when it’s time to make a change to how you are using KPIs:

  • Once the level of business (or number of transactions) becomes too time-consuming and cumbersome to manage with spreadsheets, it’s time to automate (invest in businessinformation management technology).
  • Errors are occurring, and customer satisfaction is slipping because service is not responsive enough. This indicate’s it is time to implement a system based on real-time data.
  • If high-value technicians are spending more time on tedious manual paperwork rather than billable activities, the Return on Investment in automating with software will be relatively quick.

Even if a business is small, it will benefit from initiating a KPI program early so that a sound infrastructure is in place and ready to help manage the growth process. Using KPIs early gives a young company a baseline for its maturity and allows it to measure and document success over time.

Using KPIs effectively for ongoing problem solving also requires a new way of thinking for management teams. Here is some key information on how to address each of these:

New Thinking for Management

A management team using KPIs for effective problem identification and problem solving will:

Ask strategic questions. Making strategically aligned inquiries is essential to problem solving but is often overlooked. Meaningful KPIs answer questions — most importantly, questions that lead directly to revenue streams. “Why is revenue down?” is the obvious question contractors ask when there is an unexpected dip in the bottom line.

But this question is too general and is likely to lead to a costly and ineffective response instead of leading to the most simple, appropriate answer. “Why is parts revenue down 2% from the previous month and down 4% from the same month in the previous year, although the number of service calls over the past 12 months is up 1%?” is a multipart question that more accurately reflects the complexity and intertwined cause-effect of the many drivers of profitability.

Oversimplification is dangerous. But asking performance-oriented questions with specific details can help to pinpoint what KPIs the team should be watching.

Focus on what is driving performance. How does KPI analysis become preemptive, rather than reactive? The answer lies in finding the drivers and trigger points of performance.

Tracking and monitoring one KPI is far from sufficient, and adding a few more KPIs to the process is only a moderate improvement. Maximum effectiveness comes from ongoing review and study of existing KPIs and what’s driving them. This review and study will reveal new KPIs and even which KPIs are no longer important or not a truly effective measure of performance.

The results of one analysis should lead to another, leading to another critical number to track, leading to another ad hoc report, leading to another KPI to monitor, etc. Stop thinking about KPIs as something to be identified once every couple of years.

An example: Let’s say your company wants to reduce parts inventory to improve your daily cash flow. Several factors influence on-hand inventory levels, as well as a potential cash-flow shortage. But, which factors are measurable, predictable, and able to be influenced?

One driver might be purchasing. Perhaps parts and equipment are being purchased in quantities too large for your demand, and a new purchasing KPI needs to be created. Identifying the appropriate drivers may involve a degree of trial and error. The further removed the driver is from the result, the harder it may be to find or control. Ad hoc reporting may uncover a chain of drivers.

Intervene as early as possible. Correcting the non-compliance early has the most benefits. Like a toppling line of dominoes, one issue leads to another, escalating damage.

The disastrous chain reaction can be prevented if the first wobbling domino is spotted and steadied. So, too, if the first KPI alert is established early enough in the operational process, there is time to analyze options, make a careful correction, and minimize risk.

Evaluate risks associated with early intervention. Although early intervention is good, any actions taken need to be evaluated for both immediate and longterm ramification. Yes, all purchasing could be curtailed for a period in order to bring inventory levels down, but is the marketing team wrapping up a directmail campaign to increase service calls? If so, make sure the company is prepared for a potential upswing in appointments from the campaign.

Using The Right Technology

Use (or invest in) flexible reporting tools. In using KPIs for problem solving, detailed, multi-dimensional questions can be answered only with a flexible — yet detailed — ad hoc reporting software tool. Flexibility solves the inherent customization challenges that arise from each company’s unique perspectives, terminology, and applications of data.

How do you know if your company has flexible reporting capabilities? When you, as a leader, can prepare a KPI report without help from your IT team or without special training, this is maximum flexibility.

Make predictive analysis your ultimate goal. “If our inventory continues to remain at this over-stock level, we will reach a cash-flow roadblock by the end of next quarter.” This is a much more meaningful statement than, “We have to reduce inventory or we’ll run out of cash!” There is a key word that changes the entire perspective: “If.” Yes, opportunity exists! And, timing! Predictive analysis allows changes to be made while there is still time to affect the outcome, or at least, prepare for it. Preemptive actions are certainly more cost effective. Besides the financial savings, customer satisfaction may also be preserved, something that is far harder to recover than lost revenue. Obtaining a new customer costs up to seven times as much as retaining one, some analysts estimate.

Use real-time data. Unlike snapshot- captured data, which becomes obsolete the moment it hits a spreadsheet, real-time data is dynamic, living and — typically — still retains the ability to be influenced. Easy-to-use, flexible ad hoc reporting, therefore, becomes the primary tool that allows managers to delve into the depths of research and analysis. Advanced software can provide pivottables, filters, and sort capabilities for KPI data. Paper spreadsheets should be reserved for historical data rather than problem solving.

It’s a lot like spilled milk. “We lost revenue last month” is a statement that comes too late, is unactionable, and breeds energy-wasting grief.

Conclusion: Keep KPIs on Track With Growth

A company’s KPIs strategy must evolve if it is to match the changing needs of a growing company. What worked in the company’s early growth stage is far from sufficient for a multi-branch organization. The modern service marketplace requires a new generation of KPI reporting and tracking tools.

Tony Petrucciani is CEO of Single Source Systems, Inc., a software developer located in Indianapolis that specializes in software solutions for service-intensive companies such as HVAC contractors.

About Tony Petrucciani

Tony Petrucciani

Tony Petrucciani is CEO of Single Source Systems, Inc., a software developer located in Indianapolis that specializes in software solutions for service-intensive companies such as HVAC contractors.

For more information about Single Source, visit www.singlesrc.com

Articles by Tony Petrucciani

- Premium Content -

Danger Ahead?

A company’s KPIs strategy must evolve if it is to match the changing needs of a growing company. What worked in the company’s early growth stage is far from sufficient for a multi-branch organization. The modern service marketplace requires a new generation of KPI reporting and tracking tools.
View article.