Developing Performance Metrics in a Service Organization
The key asset in a service industry is people and the key product is a service or a suite of services. All people are obviously completely unique and unpredictable to some extent, and services are typically sold and provided as customized solutions for each individual purchaser. Consequently, both of those key elements have a high degree of variability. In contrast, the goal in a manufacturing environment is to reduce variability by creating standardized processes that are performed repeatedly until all inefficiencies are removed. Progress is measured by the reduced waste and faster production time that come with process improvements that minimize variability.
Variability is inherent for service industries, so how can you measure performance in order to improve it? How can you reduce inefficiencies when full standardization is impossible? It can be tempting for managers to accept increased staff sizes and cushioned price contracts that will simply absorb those inefficiencies, but such practices will not support a sustainable, competitive business. Managers of service companies must, no matter how difficult it seems, define effective performance metrics (Key Performance Indicators or KPIs) for their businesses. This paper examines how to develop KPIs to drive performance improvements for service organizations.
Step 1: Understand your Client Base and Client Interface
Service industry managers can begin by carefully examining their client base, and what variances exist within that base. Managers must develop a consistent methodology to clearly define each client segment and to collect and analyze data for each segment that will drive the development of performance metrics.
Step 2: Prepare the Organization for Change
The KPIs will impact multiple units or departments within the company, and the manager implementing the metrics can probably expect some measure of resistance. The resulting data may be questioned because it is not an exact measure of the way the area is actually performing.
It is critical that everyone understands that no performance metric will ever perfectly measure the results of every part of an organization, and this is especially true in a service organization. It is the responsibility of the team developing the KPI to do meticulous analysis so that the final metrics are effective, and also to communicate to everyone that perfection is not the standard. The measurements should be as accurate as possible, applied consistently, and most importantly they should provide important information to the management team who will use the information to make critical strategic decisions to improve performance at every level.
Step 3: Developing Metrics and The Metric Perspective
In the book “The Balanced Scorecard” David P. Norton and Robert S. Kaplan questioned the efficacy of utilizing what have become the most popular performance measures – financial accounting measures. Norton and Kaplan state, “The success of organizations cannot be motivated or measured by financial metrics alone.” Financial metrics provide primarily historical information and are based on accounting data. Norton and Kaplan argue that the practice of managing a business utilizing only historical financial data is flawed, and that forward-looking estimates that reflect the strategic direction of the company is immensely more valuable to managers.
As an alternative to managing performance using traditional financial measures, Norton and Kaplan developed what they call the “balanced scorecard.” Some suggested categories of metrics to be used within the scorecard include (but are not limited to) the following:
- Learning and Growth
Thomas E. Lah the author of Mastering Professional Services in his White Paper Metrics that Matter: Measuring Professional Services Business developed some perspectives to consider when introducing performance measurements into a services organization. In his Paper, Lah states the following:
“Every metric provides a certain perspective on your business. In other words, different metrics tell you different things about your business. Some metrics tell you there is a problem today. Some metrics give you a heads up that there will be a problem down the road. Also, metrics naturally have different scopes.
Total services revenue indicates how the overall business is doing, but provides little insight on how individual consultants are doing. Individual utilization metrics provides insight on individual performance and the overall health of the business. Continuing this logic, there are at least five unique metric perspectives you can consider:
- Functional Perspective: What business function does this KPI help evaluate? Your salesorganization? Your delivery teams? Service Marketing?
- Economic Perspective: Almost every internal company initiative has one of two objectives:improve operational efficiency or create future revenue (economic value). Does the metric trackimprovements in operational efficiency or assess the economic value of the business
- Timeframe Perspective: Just like economic data, is the metric a leading or lagging indicator ofhow the business is performing? Does the metric indicate you currently have a real problem, ordoes the metric warn that soon you will have a problem if the current trend continues?
- Scope Perspective: Does the metric measure the performance of specific individuals, specificprojects, or the entire business unit
- Stakeholder Perspective: Does this metric provide insight on how your external stakeholders viewyou? External stakeholders would include customers and partners.”
Step 4: Maintaining the Effectiveness of Performance Metrics
The task of the service manager is not over once the KPIs are in place. To ensure that the metrics continue to drive performance, it is important to evaluate them continuously. The service manager should:
- Revise the KPIs as needed when changes are made in the organization, client base, or servicesoffered.
- Continue to track improvements in performance and communicate them to the company as awhole so that the momentum of success drives further improvements.
- Ensure that compensation packages continue to incent those responsible for the improvedperformance.
This may seem a daunting exercise to deploy and track these service KPIs. But until you fully understand your numbers, you cannot make impactful and sustainable changes to improve service, margins and profit.
The historical stereotype of the interaction between the CFO and the VP Sales usually involves images of fervent battles over excessive spending and ways to cut sales costs. Like most stereotypes this is a false understanding of the CFO’s potential impact on sales.
The best way to understand the CFO’s approach to sales is to list the potential questions a CFO asks when addressing this critical component of a company’s overall operation. Questions may include:
Have we carefully broken our sale process into value-add steps and are we applying the appropriate skills, effective and efficient resources at each stage?
Do we have a well-defined sales process with measurable metrics and performance indicators?
Are we targeting our sales efforts, resources and expenditures to the most profitable accounts/product lines?
Does our expenditure of sales resources by channel/segment/region coincide with the profitability for each of those?
Can we profitably accelerate growth with added sales resource?
Question #1 & 2: CFO as Expert at Business Process
In many companies a salesman is responsible for (1) cold calling to identify prospects, (2) making preliminary qualification calls, (3) development of full proposal packages, (4) presentation to potential clients, (5) negotiating the final order terms and prices, (6) closing the deal, and then (7) managing the post order follow-up process through delivery. The skill sets and impact in each of these 7 steps can be quite different. The process can be broken up and responsibilities assigned to lower cost and appropriately skilled staff and, for example, focus the skilled negotiator salesman on steps 4-6.
A CFO is typically viewed through the bias of a financial lens. However, a CFO is an expert at business process and creatively seeking ways to optimize the company’s business process to make them more effective and efficient. The sales process in most companies is one of the least measured except for the final result of “daily bookings”. A CFO will challenge and question the existing sales processes, and once optimized seek metrics to manage the process not just the outcome (“bookings”).
Questions #3 & 4: CFO as Expert in Margins
These questions raise core strategic issues for a business. Where do we make our money? A CFO will
seek to define margins by various segmentation variables such as product line, geography, sales channel, accounts. The margins achieved in each can be mapped against the resources required or assigned to pursue these segments. The results show you were the gold is buried and sometimes where there is no gold at all, just quicksand.
Question #5: CFO as Expert in Growth Management
Here the CFO looks to the future and makes assessment based on measurable experience. Does added sales efforts yield increased sales? Do the rewards exceed the costs? In this context sales effort can be things besides add manpower, but additional marketing or other sales inducements that are intended to spur growth.
Particularly in smaller companies, the sales functions rarely include in-depth financial expertise. Unlike larger companies with product management staff who will undertake much of the same analyses and strategic challenging of the status quo, smaller companies can rely on the CFO to undertake these efforts. Your CFO can be a great asset to understanding and developing strategic plans, for sales based on sound analysis.
Todd Peter is a Principal with FocusCFO based in Cleveland, OH.