Key Performance Indicators (KPIs) for Adapting to Market Changes

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Hi, it’s Victor Cheng, author of the book The Recession-Proof Business, and founder of SaasCEO.com. Today, we’re continuing our video series on how to thrive during difficult and changing economic times. The topic I want to talk about today is around key performance indicators. If you want to succeed in business, you need to measure your business at every level. Now, in a booming economy, you can get away with being sloppy and undisciplined by not tracking your metrics. But the second the market changes, it becomes very obvious who is paying attention to the numbers and who is not.

Let me give you a simple analogy. Many, many years ago, I took flying lessons to learn how to fly an airplane. I stopped after a couple of times because it completely freaked me out, because flying an airplane at 50 miles per hour when cars drive at 70 miles per hour just blew my mind, and I could not get my head around that. One of the things I learned from all of that experience was that there are two kinds of pilots. When you’re a beginner, you have what are called visual flight rules. What that means is you fly the airplane by looking out the window. You see something you don’t want to hit, you steer away from it. That’s called visual flight rules, and that’s what a beginner does. Once you get beyond that, you learn to become what’s called an instrument-rated pilot. That means you learn to fly the airplane purely by looking at your instrumentation panel. Your airspeed indicator, your altimeter, your flaps, your horizon — I forget the terms these days — the thing that measures the horizon, your compass. Your instruments tell you what is going on in the plane, where are you in time and space, and you fly the airplanes by your instruments. This is why professional pilots can land in poor weather. They don’t need to rely on acute visual signs, at least until the very last minute, to fly the airplane.

The same is true when you run a business. The bigger a business gets, the more complex it gets. Or, the more the external environment is changing, the more important it becomes to be an instrument-rated CEO rather than a visual-flight-rules-oriented CEO. The key is to look at your metrics. Now, every business is going to be different, but there are two categories of metrics that you want to be tracking on a regular basis. One is called a lagging indicator, which is a historical measure of what happens. A typical lagging indicator is sales. How many things did you sell today? That’s an example of what happened. It’s an actual capture of your history of the business if you would. Sales, bookings, number of customers, those are all what are called lagging indicators.

The other category of key point metrics is leading indicators. Leading indicators are metrics that measure activities that contribute to sales and other positive outcomes that you want. An example of a leading indicator is lead flow. If your leads drop 80% and you have a long sales cycle, say a few months, guess what? Eventually, those leads that are now dropped by 80% will drop sales probably around 80%, all else being equal. It’s important to have some kind of leading indicator to show what is about to happen in your entire sales process. A simple example is in the retail business, Costco, Walmart, these are very large retailers here in the United States. I don’t know if they still do this, or if they do it digitally now. But, for many, many years at Costco, when I used to go there, they would have a person who stood in the front of the Costco and say, “Hi, welcome to Costco.” That kind of thing. They had a little mechanical counter. Every time you’d walk by them, they’d click the button. What they were doing was counting how many people walked into the store. It’s a simple metric, and they would report that, I imagine, every day to corporate headquarters.

Every day, the CEO of Costco would know, globally, how many people walked in through the front door. Now, that’s a really useful metric for two reasons. One is, if half as many people walk into the front door, guess what? Your sales are probably going to drop by half. Again, all else being equal. Or, if the same number of people walk in the front door, but your sales drop by half anyway, that means you’re doing something wrong in the store. Let me back up a little bit. If foot traffic is low, it means you’re not doing enough activities to get people into the door. And if people get to the door, but they don’t buy, that means you’re doing something within the warehouse store that is suppressing sales. It’s very useful to have these kinds of indicators, things that precede the sale, like showing up at the store would be a leading indicator of a sort, and then the actual sale itself.

In your business, it’s going to vary. But generally, it’s something like lead flow for SaaS businesses, and something like bookings or orders or AR or new deals also for SaaS businesses on the lagging indicators. And so, if you don’t have any indicators, you’re in trouble, and you have to put them in fast. If you have indicators, but you’re not looking at them, you’re in trouble or will be shortly. If you have indicators, you’re looking at them, but your staff is not looking at them, that’s a problem that you need to fix. If your staff has numbers, they’re looking at them, but they don’t have specific targets that they’re responsible for, that they’re accountable for, that they’re committing to you, to your board, and to your investors that they will hit, that is a problem, especially in a difficult economic time. You want your staff worrying about the metrics that are in their area more than you do.

If you worry about sales more than the head of sales is worrying about sales, that’s a problem. If you worry about your bug count and the number of errors in your product more than the head of engineering does, that is a problem. Metrics allow you to manage people and allow you to manage outcomes. When the metrics are tracked and transparent and accessible to your key employees, you allow them to manage themselves because they can see how they’re doing without you having to get involved. So, they become easier to manage.

That’s my thought for today. In this kind of environment when things are difficult, if you’re not tracking metrics, if you’re not being an instrument-rated CEO, the likelihood of you getting really harmed, economically, is extremely high. You have to have key performance indicators that you’re tracking on a regular basis, especially daily, minimum weekly, preferably daily, and in certain parts of business, even hourly. Again, two categories, lagging indicators and leading indicators. When the external environment is changing quite a bit, you need to be paying attention to your leading indicators. They give you the early warning system that something is going wrong.

I’ll give you a simple example. Back in 2008-2009, the stock market crashed pretty significantly, worldwide, simultaneously. It was a devastating event, economically. Something very unusual happened. Within 30 days of the stock market crash back in October 2008, if I recall correctly, something like half of the Fortune 500 companies in the United States announced layoffs. Yeah, about 10% or 15% of the workforce. In practice, most likely, those were the people that should have been managed out of the business through performance management, but because business was going so well, they didn’t get around to it. A lot of the startup companies, SaaS companies, small local businesses didn’t make any changes to their staffing, in some cases, until 6, 12, or 18 months later. Which was very odd, right? When does a Fortune 500 company become more nimble than a startup? Under normal circumstances that never happens.

What happened though — my theory on this — is that the Fortune 500 companies had mature KPIs, key performance indicators. They were looking at their leading indicators and recognizing that, even though sales had dropped, say maybe 10% or 15%, the leading indicators indicated sales down the road will be dropping by 20%, 30%, or even 40%, much more significantly. And startups companies that don’t track some of these metrics, especially when things are going really well, they just assume everything is fine. They were very slow to react. Those who had a more immature key performance indicator and metric tracking process were very slow to adapt. A lot of them went out of business because, by the time they figured out what was wrong, they ran out of cash.

The key is you need your instruments, your metrics, to know what’s going on so that you can make intelligent decisions quickly. Speed and adaptability are key to surviving and thriving in a recession. You need to know what has happened, what has changed, and you need to adapt very, very quickly. If you lag, if you delay, or if you miss the change entirely, then you’re at serious risk of your business being harmed, perhaps irreparably, economically.

Those are my thoughts for today. Make sure you have metrics. Make sure you’re tracking them on a regular basis, make sure your staff sees them, hold them accountable. That’s the way to run a business in all times, but the consequences of not doing that in a recession are much more severe. Have a great day. Stay tuned to my other videos on how to thrive during difficult economic times. Thanks and have a great day.

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