When you ask a CEO or COO or even a CFO of a larger company about setting defined targets and monitoring performance with numbers, they will tell you that they would not be able to live without it. To them this is how they: control, understand, communicate and manage operations. Ask the same of a small company owner and in most cases he or she will tell you that they do not need them. They will tell you that they “already know everything there is to know about their business and setting targets will only tell them what they already know, that they need to sell more”.
It is true that most small company owners will know everything about their own business, at least from a numbers perspective. So is there any value add in having number based performance monitoring and targets for a small business? (the so called Key Performance Indicators, KPIs) I believe there is and I am looking at it from three distinct perspectives.
Psychological
The human brain is wired for competition. We always strive to be better than everyone else, to be “top dog”. This is especially true for C level executives. These guys have a drive to be better, more powerful, have higher positions than others. Their whole life is built around obtaining that goal. They use numbers to evaluate their position: how good are their sales? How much profit they have made? How effective are their initiatives compared to competition? Even though they most likely know all of this they will still look at those numbers and use them to drive their own behaviour in a certain direction. Interestingly successful business owners are not that much different. They too like competition and thrive off it. They set themselves goals and achieve them. So would it not make sense to use that competitive trait to their advantage?Knowing the numbers is good but it does not create a sense of competition. Seeing them on paper is something completely different. The review and evaluation pushes one to face the operational reality as well as increases the will to improve on it. It is an introduction of direct competition, albeit with one self. This can motivate one far more than any other method, but in a discrete way.Operational Insights
One of the great things about evaluating operational KPIs is seeing how numbers are connected. In a large corporation this chain of dependencies can span 10 or even 15 different indicators. Each number tells a story of some kind. However, a collection of numbers as seen in KPI reports paint a picture with text and arrows pointing to interesting aspects of the business. Seeing and understanding how these numbers affect each other and the bottom line leads often to interesting insights. It is the base for a successful Management System. Same goes for the small businesses.Often the things that make the most difference to the revenue are something unexpected. If a small business is using 6 different channels to sell its products, understanding which one generates most sales is valuable. However, seeing how these change after an operational redesign gives some new and interesting insights. KPIs make the person viewing them think about how they were created. What made them good or bad. That is the start of a continuous improvement approach to business.Good Habits
As a business grows, it becomes more and more difficult for one decision maker to have complete information and knowledge about the business. Decisions become more like a guessing game. Even if new staff are taken on to aid the company, they will not be able to have the complete information either. Large companies deal with this by creating KPIs, a defined way to evaluate and monitor operations. These are shared amongst the decision makers to give them a clear picture of current performance. In successful companies these numbers are discussed so that correct decision can be made. Doing the same in a small company creates a good practice of managing by numbers. It prepares the business for growth and helps to spread the decision burden as the business grows.
Using operational indicators does help. It makes the business owner and managers see things in a different light, to think and understand more. They should be used by all business owners, regardless of the size of the company. And the benefits, they will come sooner than you expect.
By Peter Kristoffersson
Peter Kristoffersson is a Director in Excelr8, a UK based management consultancy specialising in the delivery of operational excellence programs in UK, Europe and overseas. Over the past 10 years he has helped companies in over 25 countries and numerous industries to gain financial benefits through implementation of structured operational improvement programs.
