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How Do We Develop Key Performance Indicators?

July 10, 2013

Dear Lost in Limbo:

It sounds like you have a lot on your plate, but keep in mind this is strategic work and having a hand in developing key metrics for other departments speaks to your role as part of the management team.

Key performance indicators (KPIs) are benchmark metrics to measure performance. In establishing such metrics, it is critical to understand the desired outcome for the function of each department, and then drive employee behavior in these functions to align their work with company goals.

It is said that "time is money," and both the sales and accounting functions are dealing with these two factors more directly than some other departments.

In accounting, the accounts payable and receivable functions present definite areas to measure and improve. For example, in AP there are often opportunities to take advantage of payment discounts, avoid penalties, and optimize the use of cash. In AR, there are many different ways to improve cash flow by speeding up time to invoice and, in general, collecting the revenue that has been generated in a way that helps cash flow. All of these things can be translated into benchmark metrics.

Accounting can also look at the reporting function: For example, a measurement of the average days to close the books for the month, quarter, or year. A historical look at the time this has taken in the past and the value to management in having this information will help you determine what goals to set in this area.

The sales function normally measures revenue and this is a dominating metric, but there are many facets to the sales process that represent behavior and outcomes that feed into the overall concept of revenue. Activity normally drives the business in sales and this can be broken down somewhat scientifically into what is called a sales funnel. In this model, an average number of calls or leads translate into first appointments, an average number of these turn into proposals, and from those sales are made. This varies from industry to industry and business to business, but the universal truth is that without sufficient activity at the top of the funnel, it cannot produce the results needed at the end or bottom of the funnel. In discussing this with your head of sales or your CEO, they can probably say which parts of the funnel are best to measure.

In addition, there are various other facets of sales, such as retention of customers in renewal businesses (e.g., insurance). For individual sales reps, you can also look at response time to prospect inquiries or other time metrics. Again, you want to look at the behaviors that you want to manage to drive overall business goals.

As a final thought, as I look at the various business lines you have (finance/insurance/real estate), it is worth looking into the market share you have with each customer: For example, whether or not you are also capturing finance and real estate business from an insurance customer. KPIs can be created to measure this for the sales function to see if they are effectively farming as much business as possible from customers. Good luck.

Source: Scott Weston, is the author of the HR Excellence: Improving Service Quality and Return on Investment in Human Resources

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.