Interview with Ken Drossman
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio video between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and Ken Drossman, Managing Director of Oak and Apple Partners.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Key Performance Indicators
Zezas: Hi this is Andrew Zezas, your host at CFO Studio. I have the pleasure of sitting here again today with a dear friend, Ken Drossman. Ken is Managing Director of Oak and Apple Partners. Oak and Apple Partners helps companies undergoing significant transition rooted in growth issues. Ken, it’s really great to have you here again. Thanks for being here on CFO Studio.
Drossman: It’s really a pleasure, Andy. I’m delighted to be back.
Zezas: Ken, we wanted to talk specifically today about performance indicators and key performance indicators. You’ve shared with me that many companies are confused and aren’t actually using them properly. Elaborate for me.
Drossman: Sure. In fact, many times when I work with a company, the first thing I’ll do is ask them what their KPI, key performance indicators are? And, what they’ll tell me is that their day sales outstanding in accounts receivable or number of inventory terms or year to date sales against budget of last year. Unfortunately, those are not performance indicators.
Zezas: So, if they’re not performance indicators, what are?
Drossman: Well, they’re actually results indicators. They tell you what happened, but they don’t tell you why. They don’t tell you what to do or how to take action that will improve performance in a positive way going forward.
Zezas: Alright, so give me an example.
Drossman: Well, I know a business products distributor. Their strategy is to be the supplier of choice to the big box retailers, like Staples. The three largest big box retailers require that orders be shipped on time and complete 99% + of the time.
Zezas: 99% +…
Drossman: That is correct. And, these folks were at 67%. What were they measuring? They were measuring each customer sales, gross profit, and backlog. Once a month they would measure company-wide on-time and complete performance. They were in serious danger of losing their customer base and obviously defeating their strategy.
Zezas: Alright, they obviously had real problems. What did you do for them?
Drossman: We implemented a performance measure as opposed to the results indicators that they had, whereby we started measuring on-time and complete performance every day for each customer. We would identify every shipment as a result of that that was late or partial. We figured out the reason why it was late or partial, and we instituted procedures to avoid a recurrence of those circumstances. We improved on-time and complete performance from 67% to 99% in less than six months.
Zezas: You hit the mark!
Drossman: Yes, and by the way, we didn’t stop measuring once we hit the mark. We kept those measurements in-place to avoid a recurrence or to identify additional issues that might come along.
Zezas: So, companies like this and other companies are obviously using the wrong methods of measurement. Help me to understand what a key performance indicator is.
Drossman: Well, let me start with what a performance indicator is. It’s a measurement that will point you toward the right action to improve company performance going forward. Key performance indicators are just a subset. They’re the six to ten most important performance indicators company-wide. But, in fact, there are, or there should be, scores of performance indicators across the company, of which perhaps at least four to six should be implemented in each department or function.
Zezas: Ok, so then, I understand the difference between key performance indicators and performance indicators; but why are performance indicators, in general, so important?
Drossman: Simply put, there’s going to be a way to improve company performance. That means greater sales and greater profits, greater employee and greater customer satisfaction, retention, traction and alike.
Zezas: Help me understand the attributes. How do I identify a performance indicator?
Drossman: Well, there are seven key attributes. The most important are the following three. First of all, a performance indicator cannot be financial. If it’s denominated in dollars, it can’t be specific enough to tell you why something happened or what to do about it. Secondly, it has to be focused on a specific action that can be taken when the measurement indicates there’s a problem or issue. And third, it has to be frequent. Results indicators are usually measured quarterly or monthly or perhaps weekly. But, performance indicators are measured weekly, daily or even in real time.
Zezas: So, it can’t be financial, it has to be action specific, and it must be frequent.
Drossman: That’s correct.
Zezas: What are the other indicators? What are the other attributes?
Drossman: Well, you need to make sure that the performance indicator provides a signal to senior management for follow up. That is, when they see a problem, they can pick up the phone or email the relevant department or function and find out if the correct action is being taken promptly. Secondly, it has to be something that can be easily understood by the company’s employees and they have to know what action has to be taken as a result of performance indicator. Third, it has to be forward or future oriented. These are measurements that don’t look back. They have to be measuring current or forward performance so that you can take action that actually will influence, in a positive way, that future performance. And finally, they have to be tied to one of the company’s, what I will call critical success factors. That is an element to the company’s business operations without which the company cannot be successful.
Zezas: Give me a specific illustration.
Drossman: Well, let’s take an example. Everybody knows that to generate a budgeted or targeted amount of sales, next month or next quarter, there’s a pipeline. And, the pipeline starts with…at the end with orders that turn into sales volume. In order to have so many orders, you have to have a larger number of proposals or quotations because you don’t get everyone. You have to have a larger number of qualified leads in order to generate a certain number of proposals or quotes. And, you have to have an even larger number of sales calls to generate that number of qualified leads.
Zezas: The “funnel” as they call it.
Drossman: Right. So, let’s assume that the company’s data shows that in order to achieve a certain level of revenue, you need to have ten sales calls per salesperson every week. A performance indicator might report whether each salesperson had ten sales calls scheduled for next week and the week after. The action that would be taken if the performance indicator that is you weren’t there would be for each salesperson to know what they’re supposed to do. They’re supposed to make more appointments and for the sales-manager or the vice president of sales to be able to follow up and make sure that that action was being taken. There would be sufficient number of sales calls to generate the desired revenue.
Zezas: The critical point that I heard in there, the operative term is scheduled. It’s not what was done in the last week. It’s what scheduled for the future.
Drossman: It’s going forward.
Zezas: It’s going forward. Okay. Help me understand the critical elements of identifying good solid performance indicators.
Drossman: Well, there are four. The first one is collaboration among management and the company stakeholders. That would include employees because they have to buy in. That would include the company’s customers because they’re going to tell you what’s important and that would include vendors. Secondly, you have to give front line authority to your employees, so they can actually be empowered to take the actions necessary when performance indicators so suggest.
Zezas: To make changes on the fly.
Drossman: Right. Third, it’s important to only report what’s important and relevant. Focus on the things that tie into one of the company’s critical success factors. And, lastly, make sure that your performance indicators are aligned with the company’s strategy.
Zezas: Wow! Ken I’m convinced. Performance indicators probably aren’t being employed properly by most companies and it certainly sounds like it should be.
Zezas: Ken, I want to thank you very much. This has been a great interview. I want to thank you for being here on CFO Studio again, and I hope you’ll come back and see us more often.
Drossman: Well, absolutely. I’d love to do so. Just ask me.
Zezas: This is Andrew Zezas, with Ken Drossman of Oak and Apple Partners, saying thank you for watching us here at CFO Studio.
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