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Thursday Thought of the Week - KPIs don't always work. Now, I know I immediately just made a ton of people in leadership positions cringe and probably click away, but I'm hoping enough are interested enough to at least read the argument! After all, it's not just my opinion, though a section of this blog post will definitely talk about my experience with the subject about halfway down. In fact, here's a road map of the post:
My Experience with KPIs - This will be this week's Thursday's Thoughts post, complete with my experience with KPIs as well as stories from 2 others. I'll link it when it's live!
Defining KPIs
Alright, so let's start with the basics. For those who aren't familiar with Key Performance Indicators (KPIs), what are they and why are they important? KPIs are a set of metrics that your performance as an employee can be based off of, and yes, Managers, Directors, and Leaders of all kinds have KPIs that their performance is judged on as well. ClearPoint Strategy has a post about KPIs, and they identify about 31 of them broken down into sections, but from my experience in Sales, here are the main ones people in the same group may recognize:
Dials, Emails or People Reached per day/week
Conversations or Meetings Booked
Sales, Sales Revenue, Signed Contracts, etc.
SLAs or NPS for customer support
Turnover/Retention rate for Customers
Turnover/Retention rate for Employees
New Prospects Reached
These are just a few samples of the metrics that I'm used to in my past. Most of the Sales professionals I speak to on a regular basis work for companies that prioritize Dials, Conversations, Meetings Booked/Hosted, and the amount of Projected Revenue in their Sales Funnels. These are the metrics that are supposed to define the success of the role, so in theory, if you reach the metrics on a regular basis, you should succeed in the role. If it's an SDR role and you hit your metrics, you should easily (in theory) reach your Meetings Booked goal. If you're an AM or AE, you should easily reach your Sales targets. If you're a Manager or Director, your team should reach their overall goals.
Essentially, in case you haven't heard of a KPI before, it's a set of metrics that if you're able to reach them, you should succeed in your current role. It also serves as valuable data points for the organization to assess the productivity and effectiveness of their employees and each individual team, so that they can be more successful moving forward.
How KPIs can be Effective
So, now that we know what they are, why are they valuable? That's basically the question here, and the biggest point is the last one made in the last section - The value of KPIs is to help the organization gain insight into what can help them be more successful and efficient moving forward. For instance, if the organization defines Dials or Clients Reached per day as a KPI, they can track the information to see how that improves Sales. If they define 75 as the number of people to reach a day, they can break it down to see the Salespeople that do and don't reach that metric, and they can see the statistics on their level of success. If Salesperson A always hits the desired metric of 75 people reached a day, and Salesperson B usually hovers around 65, then they can measure the difference between the two and make a decision. If their sales are identical, maybe 65 is an okay number instead, and their Sales professionals can use that time to try another tactic like LinkedIn, account mapping, etc. If Salesperson A is way ahead of Salesperson B, then obviously 75 is a good number.
Another way KPIs can be effective is when they come from previous statistics. I've been on a team where leadership was trying to establish what KPIs made sense, and the process was very much guesswork, throwing darts to see what sticks, or however else you want to describe it. The reason why is because they didn't start with previous statistics or research. KPIs are effective when you start with your businesses goals and work backwards with previous stats, but not always effective when done the other way around. Here are some hypothetical with the suggested team outline:
Team Size - 10 BDRs, 10 Account Managers/Closers
Sales Target - $10 million
Average Deal Size - $25k
Average Close Rate - 10%
Average Converted to Meeting - 5%
Average Converted Lead - 25%
Assuming this information, which I'm arguing could be found from the previous year's Sales and KPIs, you would work backwards. Your team needs to reach $100m in sales, so using the numbers we're assuming above, you would start at finding how many transactions you would need given your averages. $10m/$25k = 400 transactions given your averages, and your average Close Rate is 10%, so you need to have 4,000 potential transactions in the pipeline over the year to reach this hypothetical goal, if only using the averages. 4,000 potential transactions means each of your 10 Closers needs 40 in their pipeline throughout the year, averaging 4 (or 3.3 if you prefer) Sales in the funnel every month.
Next, for the BDRs, we're saying that the average number of touches for a conversion is 5%, meaning out of every 20 people reached, 1 will schedule a meeting. From there, it's a 25% chance they'll convert to a buying client, so the math here suggests that if you need 4,000 potential transactions per year for your team, your BDR team should reach 4,000 people x 4 for the 25% Converted Lead percentage, then multiply that by 20 for your Converted to Meeting percentage, equaling 320,000 people reached over the year. Divide that by 50 weeks (assuming some vacation) and 10 reps, each rep should reach 640 people a week, meaning 128 dials & emails a day.
Now, this all assumes:
My fictitious numbers
The org only relies on SDRs to find leads (which shouldn't be the case!)
You're operating on averages, which is unlikely. This is an exercise for finding a starting point to reach the overall Sales goal
You're not factoring in territory strengths or verticals, so that your Sales team all has an equal chance to succeed
When you start with the primary goal of the organization and work backwards, the metrics make a lot more sense. From the exercise above, I would then be factoring in how many people I want my AMs to reach on their own through Referrals and other methods, and my Marketing team as well, including the metrics they can pull for how effective their Marketing materials are for converting leads. When you can show the employees the stats and numbers behind the KPIs, you're likely getting them from the correct place.
One last thing about making KPIs work - Make them transparent. I've worked for companies that have their obvious KPIs that we were judged by, but when you asked why those specific numbers, nobody had an answer. It was like a big secret held by the Directors, and the Managers didn't even know, so they just told us we didn't need to know. In my opinion, this isn't going to help KPIs be effective, and there's no reason to hide the math! Or at least if there is one, I haven't come across it yet.
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And now, back to your featured presentation...
How KPIs can be Ineffective
KPIs can be incredibly effective if they're sourced from previous analytics and directly tied to achieving your goal. They're also effective if they're well defined and communicated throughout not only your immediate team, but the entire organization. Nobody's KPIs should be a mystery, since that's the primary way they're being judged as an employee. So what can make KPIs, these wonderful, marvelous numbers, be ineffective?
Well, obviously if they're the opposite of what we've already established! It's easy to say that KPIs will be ineffective if they're:
Not clearly defined
Not clearly communicated
Not coming from an analytics base or from previous numbers
Those are all the most obvious, but we'll offer 2 more that we haven't talked about yet. The first is that KPIs will be ineffective if they focus more on the internal vs. the external. Forbes has an interesting article about KPIs (mainly from a firm's perspective) that has a very good point about this. Here's a summary:
Internal measures lead to perverse incentives and unintended consequences as a result of employees working to the specific measurements at the expense of the actual quality or value of their work to the eventual customers.
They also argue that even though your metrics and internal measures may have increased, that can be an increase in work that doesn't actually matter vs. work that will materialize in your organization's overall goals being met. This is definitely something I've seen in my past, which I'll talk about in the next section, but I definitely agree with this idea that your metrics should not be inwardly focused. I think there is a healthy way to focus on this, such as Sales contests (in a way), and encouraging some helpful competition among the team, but 1) Not everybody is competitive like that, 2) You're welcoming those that are highly competitive to cheat the system to win, and 3) These won't always increase actual revenue.
The last way that KPIs can be ineffective is if they don't pivot or change to meet market trends. An easy example of this would be a company specializing in Events & Event Space during the pandemic. Events were one of the hardest hit industries, so can you imagine if the Sales team was held accountable for the same goals as if nothing was happening? That would be incredibly difficult and insensitive to everything going on, and would result in a very poorly motivated/stressed team.
KPIs, just like almost every other measurable statistic for a company, needs the freedom to pivot when it becomes necessary. There are a ton of reasons why a pivot might be necessary for one or more KPIs for any team in an organization, and a healthy understanding of KPIs would mean that they're allowed to ebb and flow, just like business. I've worked for a couple companies who aren't sensitive to this at all, and I'll talk about that below, but it always gives you a sense that they care more about a hard-set number than the employee, which never results in happy, efficient employees.
Personal Experience with KPIs
You can find a few stories about KPI experiences in our Thursday's Thoughts post, which I'll link here when it's live in a couple days.
KPIs matter, but they are only effective if they come from an analytics background, if they're actually vital to the job, and if they focus more on external factors than internal ones. If the KPIs come from a solid source, the proof will be in the increase in revenue, which is the #1 goal for most organizations around the world. If you're a leader of any kind, and you don't know what the KPIs are for your team, or you don't know how effective they are, spend some time to map them out and see if you're putting your team in the best possible light to succeed. If you're an employee, take some time to track your own metrics and the ROI that each type provides. See if your emails convert more leads than you outbound calls, and bring that to the conversation. Do what helps you succeed!
As I said in the beginning, I'm hoping this post can help provide some insight and value on the topic of KPIs, which is always going to be an ongoing conversation in the Sales world. If you found some insight, comment on the post and share it to others who would find it valuable as well!