In Part One of our two-part series on Retooling Your Company Scorecard Post-COVID, we tackled the concept of Trailing KPIs. Retooling your Trailing KPIs allowed your business to assess the strategic decisions made over the last few months. More than likely, there was an increased focus on profitability metrics and a strategic shift to managing resources. The next logical step in the process is retooling your Leading KPIs. Those decisions made during the pandemic undoubtedly created operational or personnel changes which means it’s time to retool how you predict those outcomes.
While trailing KPIs are generally more straightforward as they measure an end result, Leading KPIs are more nuanced. They may not be the same for every business and can take months to measure the correlation between activity and outcomes. The better you can get at predicting those outcomes, however, the better you will be at allocating spend, making hiring decisions, and forecasting revenue and income.
Developing a Leading KPI
Trailing KPIs measure if you’ve hit a stated goal. Leading KPIs, however, focus on the process, variables, and activity drivers that will determine your ability to achieve a goal. Think of Leading KPIs as your “speedometer” to indicate if you are speeding up or slowing down towards your ultimate destination. Leading KPIs are also less obvious, more varied, and specific to your business.
So how do you develop a Leading KPI? You will want to follow a five-step process:
- Set a strategic goal or objective
- Determine what success looks like
- Decide how to measure your KPI
- Track effectiveness and measure for a period of time
- Review for relevance
More specifically, let’s walk through an example of what this process would look like:
- Set a strategic goal or objective: At a high level what do you hope to achieve?
- Example: “Reduce Customer Churn” is a good strategic goal to eliminate revenue loss. Especially in a post-COVID world where new business development might be difficult. Keeping your current customers is usually easier than acquiring new ones. The Churn Rate is actually the Trailing KPI in this example as it measures the outcome.
- Determine what success looks like: If reducing customer churn is the strategic goal, how do you define success, and what is the process to reduce churn?
- Example: Reduce churn by 15%. This defines what “success” looks like from a metrics standpoint. Next, determine why customers are leaving. Is it product related? Are they unhappy with your customer service? You have to dig into the core issues to determine what is leading to customer churn in order to develop a KPI around it.
- Decide how you will measure a Leading KPI: After an internal review, you determined that customers weren’t happy with the customer service or support that they were receiving. This is clearly something you need to work on, but how do you measure improvement? What is the actual Leading KPI you will measure to influence the churn?
- Example: One way could be to develop a Net Promoter Score (NPS) to quickly determine customer satisfaction. Given it’s a 1-10 scale, this is something tangible and measurable. If you believe customer service is a potential issue, NPS is a way to quantify any improvements you make.
- Track effectiveness and measure: You likely have weekly, monthly, or quarterly management and team meetings that are already in place. Review and update the scorecard over some period of time and track to success.
- Example: Depending on how often you survey your clients, develop a weekly or monthly scorecard to track all data, and review any changes with your team. Having a discussion on change in NPS score will bring some anecdotal insights on why it might be changing in real-time. Record any data points.
- Review for relevance to results: After tracking leading KPIs over a predetermined period of time, review any trends that show up in trailing KPI results. This will take time to evaluate, but if you’ve selected a good Leading KPI, correlation with its Trailing KPI will become apparent.
- Example: Average monthly NPS scores increased by an average of .5 per month for six months. Churn decreased by an average of 4% a month after you saw a half-point increase in NPS score. You realize customer service was causing the churn issue after all and start to build this ratio into your forecasts.
- If the opposite happens, and you don’t see any changes to churn even if your NPS score improves, now you know the churn issue is something else – maybe pricing, competition, macro events, etc.
- Example: Average monthly NPS scores increased by an average of .5 per month for six months. Churn decreased by an average of 4% a month after you saw a half-point increase in NPS score. You realize customer service was causing the churn issue after all and start to build this ratio into your forecasts.
- Bonus! Iterate and narrow down the list of KPIs: When you’ve identified the most impactful leading KPIs, reduce them to 5-10 indicators in which you are confident there is a correlation between activity and outcomes.
Leading KPI Examples and Ideas
Every business should go through these five steps to determine leading KPIs based on stated goals. That being said, many businesses are similar and the following are some examples of Leading KPIs that could be used as inspiration to measure progress towards your goals:
Sales and Marketing
Sales Pipeline Conversion Rates by Stage – Your sales pipeline is the most obvious place to start to identify Leading Indicators. An example pipeline could be:
- Prospect
- Qualified Lead
- Assessment
- Proposal
- Close
Within each stage of your pipeline, measure the percentage of customers that make it to the next stage. This will provide a barometer of how efficient you are in moving customers through the pipeline. For example, Closed Deals divided by Qualified Leads might tell you how well you’ve identified your target customer. Or a decrease in Closed Deals/Proposals could indicate that there are issues in the way you are presenting your solution or aren’t priced appropriately. There are many variations of Leading Indicators that can be found in each step of the sales process.
Sales Cycle – The sales cycle measures the length of time it takes for your sales team to close a deal from their initial contact. The longer this process takes on average, the more money your business will need to spend on personnel and marketing before generating revenue from that investment. Quicker sales cycles are a good leading indicator of increased profitability and reduced customer acquisition costs.
Call to Action / Click-Through Rates – This depends on the type of business you are and how you interact with your customers online, but if your strategic goal is to increase customer conversions, measuring CTA or CTR could be a good leading indicator. Optimizing your website’s landing pages or A/B testing call to actions in your newsletter could increase these rates, ultimately resulting in increased conversions.
Number of Qualified Leads – What is your Ideal Customer Profile (ICP)? These are potential customers that are most likely to experience the pain your business solves and fits your target industry and size. Tracking Qualified Leads and focusing on increasing ICPs in the sales funnel are a good leading indicator that you’re targeting clients more likely to convert.
Operations
NPS Score – As mentioned in the example above, the NPS Score is a quick and easy way to survey your clients without overbearing them with questions. It measures the willingness of your customers to recommend your products or services. This simple survey can highlight a lot about how you handle customer service and delivery of service.
Resource Utilization Ratio – How effectively are you billing your customers for your employee’s time? Especially significant in service-based models (law firms, accountants, creative agencies), understanding how much of your employee’s time is being utilized for billable vs. non-billable time is an important leading indicator of profitability. This requires adherence to a project management or time tracking system to work and can help identify scope creep for work being done outside of a client’s contract.
Finance, Administration, and Human Resources
Employee Satisfaction – Employee turnover significantly increases costs to your business. Whether it’s the time required to search and interview new employees or pay recruiters, Employee Satisfaction could be a good leading indicator of the likelihood of an increase/decrease in turnover. By decreasing turnover, you will increase profitability and reduce intangible costs like experience and employee knowledge drain.
A/R Average Days Outstanding – A simple metric that most companies track is their A/R Aging Schedule. This is simply the average number of days it takes to get paid on an invoice. This will vary based on the terms of your customer contracts, but decreasing the number of days outstanding is a good leading indicator of increased free cash flow for your business. Whether it’s getting better at collections or identifying more creditworthy customers, decreasing A/R days will result in a healthier business.
These are just a few examples of potential Leading KPIs you can explore tracking for your business. Leading KPIs take time to develop, so don’t get frustrated when trying to figure out what to measure. This is an iterative process and will change as your goals are updated. Start with the strategic goal and get more granular to identify the best Leading KPIs for your company!
Questions? Finance and Accounting needs? Schedule a Free Consultation today!
John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com