For a business to perform successfully, basing decisions just on financial performance alone is not sufficient. A company has to track other business measures such as quality, customer satisfaction, brand preference, employee satisfaction and retention among others.
Having KPIs and monitoring them is becoming increasingly critical in today’s competitive and integrated business environment.
The best KPIs answer the following questions:
- Are our activities aligned to our organizational goals and how well are they executed?
- Are our processes progressive or regressive?
- Are we getting the expected results? If not, why?
- Where is the money going and why is it going there?
- Are all our key stakeholders happy with us? Why and why not?
Most successful IT companies measure their business performance along 4 quadrants: Fiscal health, Service Delivery, Customers & Organization.
I would like to cover the first quadrant – fiscal health as part of this post. This should be looked at from the perspectives of liquidity, cost & profitability.
- Current Ratio – current assets divided by current liabilities
- Working Capital – current assets minus current liabilities
- Current Accounts Receivable and Average Debtor Days – measures total value of receivables and payment period
- Current Accounts Payable and Average Creditor Days – measures total value of outstanding invoices and payment period
- Cost composition
As the biggest challenge facing IT today is the speed of change, it is essential to have an in depth view of the cost composition. This would provide insights into where the most money is being spent, thereby helping in identifying opportunities for improvement. Successful companies measure their costs along these parameters:
- Total Employee cost
- Cost of billable employees as a percentage of sales. In the case of product companies, it will be product cost as a percentage of sales
- Total direct costs of IT (TCIT) including all costs associated with building, running and operating the IT environment (i.e. workforce costs, license costs, hardware costs, software costs, systems costs, outsourcing costs, etc).
- IT ROI Ratio (Net Operating Revenue – (Total Expenses – TCIT))/TCIT
- Return on IT Investment = Net Operating Profit / TCIT
High performing IT companies pay specific attention to their profitability, measured by various dimensions. In the case of IT service companies, this will translate to profitability by project, type of project, technology, verticals, horizontals, regions, business manager etc. In the case of product companies it will be profitability by product line, customer segments, type of products etc. In the absence of dimensional analysis of profitability, the company is likely to miss opportunities to capitalise on profitable ventures and discontinue business lines that are not doing well.
A wise man once said that doing the same thing over and over again and expecting a different result is the actual definition of insanity. Aiming for business growth necessitates data driven decision making. The right KPIs can bring about a major difference in the way you manage and make your business deliver better performance.