I’m going to start this article with a quick story.
A while back there was a contract I took that had me going onsite to a medium-sized Toronto business and helping them to understand the value of a data-driven culture. Typically a business will welcome me with a nice introduction, lead me to a conference room that becomes my home for the day, and give me enough caffeine to drown a team of data nerds.
Now those introductions are all well and good, especially the caffeine, but they don’t let me do the job they hired me to do as effectively as I would like.
In this particular example, like many others, I arranged to show up 30-minutes early and had our Project Sponsor walk me through their office, spending a few minutes with each employee I could see actively working on something.
“Hey! I see that you’re working on [insert thing], can you tell me why? Oh that’s great, can you tell me what value that just added to the business? Oh, interesting.”
All I ask in these circumstances are:
Here’s why this is such an interesting set of questions.
If you were to ask an employee the above two questions, then subsequently ask their manager the same questions about that employee’s activities, the answers will almost never match!
Why is that?
An employee will have a different business value proposition. The manager will have a different perspective on what the immediate reasoning for an action is. And, they will never be on the same page.
It’s like the old ‘Newlywed Game’, except it’s only the couples that most of us think should never have gotten married in the first place - the ones where the husband thinks his lactose intolerant wife’s favorite drink is a milkshake.
Here is that particular example:
EMPLOYEE CONVERSATION
*start conversation*
Me: “Hey there, good morning! I see you’re doing something there, forgive me… but what are you doing?”
Employee: “Just putting in orders.”
Me: “Oh that’s awesome, why are you doing that?”
Employee: “Because that’s my job… [staring intensifies]”
Me: “Ahh, yes - let me ask this another way. What value does your doing that right now add to the business?”
Employee: “Orders need to go into the system in order to get work started..”
Me: “Do you know what key business metric you’re contributing to by doing this work?”
Employee: “I would imagine there’s a ‘daily orders entered’ metric I’m evaluated on.”
*end conversation*
MANAGER CONVERSATION
*start conversation*
Me: “Hey there, good morning! I just saw so-and-so doing [insert thing]… any idea what they’re doing?”
Manager: “They should be putting in orders.”
Me: “Oh they definitely are. Say, why are they doing that - what business value are they adding?”
Manager: “Those orders keep the work moving.The work on those units don’t start until they have a valid work order. The business needs those orders in asap to keep units going through the pipe and not creating a backlog. We see delays all the time and they significantly impact our revenue.”
Me: “That makes sense, do you have a key business metric they’re contributing to?”
Manager: “There’s an ‘orders per hour’ metric that we review and an ‘avoidable delayed orders’.”
Me: “Interesting, thank you.”
*end conversation*
Alright, the discrepancy should be clear here, and if it isn't, take another read. These subtle disconnects can become significantly negative contributions to business revenue outcomes, employee/manager satisfaction, and more.
In the above scenario we see an employee who is right on the money - literally.
They are performing their revenue-producing activities, they are understanding the value, and they know that their contributions are key in their evaluations. That said, they are missing the whole story.
While the employee is probably thinking that they are contributing revenue with every single invoice they place in the system, they are unaware that their positive contribution has a sneaky negative counterpart: avoidable delayed orders.
Let’s recap:
With that laid out, it’s obvious to most that the employees will be measured daily on:
Revenue Gained by Orders Entered - Revenue Lost by Delays
So the employee’s contributions are less than they expected, so what? They still make revenue.
Well, an employee is operating under the pretense that by entering orders they are doing their job. If they enter enough orders, then they have done their job and made the company revenue.
But did they make any profit?
This is a question we can’t answer without knowing what contributing factors go into the Revenue Lost by Delays metric. It’s completely possible that in this circumstance the business loses money due to the employee only focusing on orders entered.
And this is exactly why KPIs are so important. Like so many management concepts, KPIs are often focused on at the expense of the big picture, when the entire point of KPIs is that they’re meant to help employees and managers alike develop a deeper, more practical understanding of how their business operates. More specifically, KPIs are there to help understand how a business generates profit, and how each part of the business contributes to that profit generation.
This article is all about making KPIs more than just another buzzword and learning how to effectively use them to get eye-to-eye with your business. When using KPIs correctly, you’ll not only be able to see the past and current state of your business more clearly, you’ll be able to confidently show the path forward for team members at all levels.
Not only do Key Performance Indicators tell us about the main business impact (revenue) of an action, but they allow us to review the outcomes of our actions (throughput) and identify areas of improvement (reduce delays). You could go so far as to say that KPIs are what give you the initial ‘place to look’ when trying to optimize your business.
If we paraphrase, in this example we have two KPIs: potential revenue gained vs potential revenue lost. By focusing on these two areas, a business leader could optimize a businesses’ revenue. Let’s get to the good part: how to do it.
It’s simple. In order to optimize your business based on KPIs, you first need to break your KPIs down into their component properties.
Every KPI is made of something that we can trace back to a data source. From tasks that are entered into a Project Management tool, to sales that are entered into your CRM, you are reaching into these systems to grab some kind of data that makes up these KPIs.
Where you’re reaching into to get the data isn’t important for this example.
What is important is to understand the pieces of data that are being pulled and their following properties:
Being able to deconstruct your KPIs this way is important for understanding which actions are creating impacts that could be optimized against. By identifying all of these elements, leaders and employees can more easily identify, and justify, what is being asked of the employee.
Let’s look at the DNA makeup of the KPIs we just discussed.
(Potential) Revenue Gained by Orders Entered:
(Potential) Revenue Lost by Delays:
Now that we have the two KPIs deconstructed into their component parts, we are able to fully articulate to the employee exactly what it is they are trying to achieve and optimize for. They are also fully able to understand who is impacted downstream of their processes.
We understand our KPIs’ DNA makeup and are now ready for step 2.
Quick note, there will always be a point where Managers, or other business leaders, have a good ol’ gut feeling that an employee could reduce that bad metric if they just did… x.
I wrote an article to help business leaders understand more about how they can give their gut feelings a good ol’ gut check.
If you’re following along, you’ll know that this is where we started:
Manager → “I want a reduction in Revenue Lost by Delays!”
Employee → “Uhhhh… What are delays?”
In order for any employee to understand their manager’s request to improve a metric, they will first need to understand this metric - which should go without saying since these should be the metrics that an employee is being evaluated on.
This is why, during onsite visits, I will often suggest that managers encourage employees to start being more vocal. Managers should feel encouraged when their employee cares enough to ask one simple question: “What does this metric actually mean and why is it important?”
Once the employee understands the answer to this simple question, something beautiful tends to happen. Employees start to align with their manager on a cohesive set of goals. Even better, often we see employees and managers working together to optimize employee efforts in reaching these goals.
By having the DNA of our KPIs, we are able to use that structure (system, user, screen, data elements) to communicate KPIs to the employees who are at the heart of the process.
So, now we are here:
Manager → “I want a reduction in Revenue Lost by Delays!”
Employee → “Okay, can you sit with me and help me optimize my workflow?”
Manager → “Yes, let me set up a meeting with the downstream folks and get this sorted!”
Alright so, that last quote is probably a bit unexpected.
Remember, we are trying our best to articulate our KPIs to the users who are impacted by the introduction of these KPIs. If we look at our second KPI, the user is different from the initial employee that started these discussions. Take a look:
(Potential) Revenue Lost by Delays:
In this case, the user is the Floor Manager and that user will be a contributor (think input) to the KPI. Because of this we need to not only articulate the KPI to the first employee, but we need to explain and articulate this KPI to the Floor Manager in order for them to do their part.
Often, this is the biggest failure in an organization.
Most organizations miss the opportunity to evangelize their KPIs to the contributing parties. By missing out on this opportunity, they are simply unable to optimize their business around these KPIs.
Let’s dive into optimizations in Step 3.
When we perform optimizations with a business we need to ensure that we have taken a holistic approach to creating and implementing the optimization we are targeting.
This is because if we are not looking at the whole story, then it is likely that our optimization will only be an optimization for some and a disruption for others. There are many examples of optimizations leading to unforeseen consequences and, unfortunately, there is often so much sunken cost in the previous optimization that we move to the next domino and treat fixing the newly created issue as: another great and noble optimization task!
My Famous Example:
There is a transportation company that needs to increase the pace on one of their docks. In order to do so they need to see a dramatic increase in [Pallets Moved Per Person / Per Hour]. So, they create optimizations on the dock that allow forklift drivers to increase their speed, more tightly and efficiently stage loads, and to generally get more done faster.
They optimize the dock for speed, efficiency, and they have reached their goal of having unprecedented increases in Pallets Moved Per Person / Per Hour!
However, with their narrow focus, they have also seen a dramatic increase in the number of OSD claims coming from the dock where they just performed optimizations!
They are seeing more breakages and damages than ever before.
In this circumstance, let’s not focus on what we should do and instead focus on what we have seen organizations do. And believe me, it is wild.
But organizations often don’t do what they should do.
Instead of returning to the optimization and doing it correctly (that’s what they should do), we see organizations open up an entire investigative effort on how an increase of our OSD metric could possibly occur and how we can optimize it - without touching the root of the current problem. The organization will review data on how the trucks are operating in transit, how the drivers are performing, how drivers are trained, how forklift operators are trained… and the list goes on and on.
Had the organizations stopped to…
… most of the time they wouldn’t be in the mess they find themselves in the first place.
This is why optimizations need to be reviewed holistically, and it starts with the two previous steps.
1) Find the DNA of your KPI and 2) articulate the KPI and its breakdown to all members upstream and downstream.
Once that is done, then and only then are they ready to optimize.
Let’s bring this home by returning to our original example.
In the case we discussed at the start of this article there was a disconnect between what the employee thought they were being evaluated on (and why), and what the manager’s expectations of the employee were.
We broke down the two KPIs we discussed as part of the example.
We discussed the importance of articulating the KPI to all members upstream and downstream.
Now, let’s discuss the optimizations that could occur from a KPI of this sort.
KPI Breakdown:
(Potential) Revenue Gained by Orders Entered:
(Potential) Revenue Lost by Delays:
If we look at the Revenue Lost by Delays KPI, we can see that one of the component parts is the “Maximum Order Throughput”. Inside of this component part, there are some data elements that will impact our order throughput that are not present on the “Orders Entered” part from the Revenue Gained by Orders Entered KPI.
Here are the critical missing pieces:
By including the Floor Manager (downstream party) in the conversation about KPIs and optimization, we learn that there is a limitation of the work scheduling software that lines up work orders sequentially based on when they were entered. The work scheduling software DOES NOT optimize the orders by any metric and does not allow for the reordering of orders in the lineup.
When we asked the Floor Manager about the delays, they told us that they know that delays are added by the system and are calculated as: ‘the time between a work order ending and the next work order starting’. When asked about optimizing for delays the Floor Manager has a simple suggestion that changes literally everything:
“If the orders are entered in groups that are focused on ‘Work Type’ then we can eliminate the setup and cleanup times that are creating delays. For example, if we do two back-to-back brake jobs, then we will have almost all of the same tools and space requirements and we can skip the setup and cleanup of tools.”
That right there is an optimization that directly impacts the Floor Manager, requires almost no extra effort by the Employee, but which can absolutely change the revenue landscape of the company. But it isn’t possible if an organization is unwilling to create KPIs, understand their KPIs’ DNA, articulate and evangelize the KPIs across the organization, and then use all impacted parties to create optimizations.
When we talk to business leaders about coming KPI-to-eye with their business, the discussions are simple. We believe that better visibility into your business will create more effective KPIs, fuel better decisions, and create optimization potential that wouldn’t otherwise exist.
But this process takes work.
It requires your team to be able to…
And while this may take work, leveraging services like those of Bear Cloud Studios can make running your business easier, smarter, faster, and overall more productive.
