Too often KPI’s are all about the result, rather than the drivers that will deliver the result. When you are measuring just the outcomes, you have missed the opportunity to improve and optimise the actions that will lead to change the outcome being delivered.
Take for example the Cash Conversion Cycle (CCC) time. This measure is a fundamental tool in the improvement toolkit.
By improving the rate at which the cash outlaid to generate a customer service or product is turned back into cash by the payment of invoices, you reduce the amount of working capital required to keep the doors open.
The real benefit is to be found in the active management of the drivers of the CCC. The days taken to complete the cycle is just tracking the result of a set of actions that take place elsewhere, Manage the inputs, and the days will reduce.
For example, detailed examination of the debtors ledger will tell you which customers are slow to pay, thereby decreasing the speed of the cycle. It then becomes an item of potential improvement. Perhaps the salesperson responsible is not diligent enough, perhaps your collection processes are not explicit, you lack follow up, or clarity on your terms. In the end, perhaps you can decide that that a specific customer should be handed over to one of your competitors, weakening their cash position.
The same analysis becomes second nature around the inventory numbers: raw materials, WIP and finished goods. Improving those numbers without hurting the levels of customer service can dramatically improve the productivity of the investments made in the enterprise. As an added benefit, customers will thank you and give you more business.
As with anything, the absence of the information that details the drivers of an outcome, makes it hard to make improvements.
Another example. Sales personnel are often compensated by commissions on their total sales. If you want your salespeople to be out hunting for the next customer, rather than glad-handing existing ones, paying a commission on all sales is a poor strategy. It discourages the more time consuming and riskier task of finding and converting new customers. Existing customers in most cases can be professionally managed by an internal customer service function. The better use of commissions might be to encourage business development.
When you spend time identifying and managing the drivers of outcomes, the dollars will follow.
