Smart KPIs 101 — Part II
Dear VCs: measure and monitor the right things and returns will increase. But how? This week we continue walking through our framework (and some of our tools) to derive smart, data-driven KPIs.
Again, let’s start with the “why.” KPIs, and reclaiming them from guesswork, is a favorite topic of mine. My hot take? The process many organizations use to define KPIs feels backwards, because it is — KPIs that matter aren’t determined by people…effective KPIs are revealed by data. KPIs derived in this “right” way can’t help but zero in on the critical levers of value for this specific company. In the right hands, they provide a roadmap to longer runways, efficient use of capital, and, ultimately, revenue and margin growth.
The four essential steps of developing such KPIs: Discover, Analyze, Distill and Implement. Last week, we covered Discover and Analyze. Today we’ll finish up with Distill and Implement.
Let’s get started.
Distill
At the end of the Analyze phase, the fundamental levers of value were just beginning to emerge. Now comes the work of applying a critical eye to each to determine what matters and what doesn’t.
- Brainstorm & Categorize. List all possible underlying drivers and root causes for each line item you previously decided was key to unlocking value during the Analyze phase. Next, determine to what extent each driver is: under the portCo’s control, predictive of the line item we’re analyzing, and aligned with core values.
- Iterate. Iterate through the drivers collaboratively, with research as needed (comparables, industry benchmarks, etc.) to determine which get shortlisted as the 3–4 draft KPIs or “working metrics.”
Here’s how we do it 👇🏾 (We’ve shown a sample financial line item: COGS for the Alpha division of Amazing PortCo, Inc.)
Pro tip: Drill down as far as the data will allow, but no further — you can continue to iterate & refine further as the quality/quantity of the data improves/increases.
Implement
You now have your 3–4 KPIs. How do you use them? How do they become active elements in your day-to-day portfolio monitoring activities? Organize them into a dashboard, along with thresholds and controls. This document (sometimes we build digital dashboards) is the ultimate “cheat sheet.” To make these KPIs come alive, document them with at least the following:
- Context. Why is this metric here? Why did we think this was important? This is critical. You’ll forget. You know how many things you’re doing. You get it.
- Actions to take. What are the questions to ask &/or actions to take when discussing this metric with portCo or other stakeholders?
- Threshold. When is a red alert triggered?
- Controls. What, if any, automatic triggers can be implemented when thresholds are breached?
Here’s how we do it 👇🏾 (…when it’s analog — our digital dashboards usually incorporate more).
Pro tip: Nobody implements controls. Be different; implement controls. Even if it’s as simple (and benign) as “when KPI #1 reaches X, you and the CMO and the CTO get on a call,” that kind of discipline in your portfolio management will drive the kind of change we’re seeking by using KPIs: the forward-looking kind. So, channel your inner trader and implement some controls.
tl;dr
So that’s the methodology: Discover, Analyze, Distill, and Implement. In short, we dive head first into the data. It’s how we coax KPIs into revealing themselves. It’s how we get KPIs that are impactful…KPIs that actually have a correlation to a specific company’s performance, and can — when studied and tracked — accelerate value.
Originally published at https://www.japlanninganalysis.com on February 10, 2023.
