Ready for 2013? – Lean Planning & Budgeting: Part 9

Key Performance Indicators (because your plan and the reality never match up)

The objective of this series of posts is to outline a 2013 “preparation process” where you wind up having a plan and a budget that is a stepping stone to a position as the global market leader in the future and where the stakeholders are 100% aligned and committed to execute the plan and deliver the numbers for 2013.

We have already mentioned the concept of KPI’s in part 1 and part 4 of this “Ready for 2013?” series of posts.

If you are running a fast growing business and your ambition is to become the global market leader in your market segment, you need KPI’s. Having a budget and a plan is not enough.

Your budget is not your plan.  The budget is all the results which you expect to achieve as an outcome of your activities = executing your plan. How big is the delay between your activities and the numbers in your budget? In most software businesses they are quite substantial.

Let’s pick a few examples.

R&D

You have a road-map for your product development.  According to the road-map you must release 3 additional modules in Q2-2013, release integration to two third party systems in Q3-2013 and release a new version of your software in Q4-2013 with improved performance, several new features, an improved API and facilities for managing local market and language requirements. According to the company strategy you will start penetrating the German market in 2013 and need a German version of your Q4-2013 release. You must also release services packs and patches as required depending on the bugs reported on a case-by-case basis.

The critical path will provide the KPI’s

You have a plan in place for delivering. The plan calls for training your current staff in various new tools, adding 5 new developers in Q4-2012, 5 in Q1-2013 and 5 in Q2-2013. You must engage a translation agency and someone to assist with making the software platform capable of supporting local market versions.  You also have plans for adding people in 2H-2013 but they have no impact on the 2013 roadmap. You currently have 3 open positions, which should have been filled in Q3 2012.

I assume you have laid out the critical path for delivering on your plan and commitments. However, reality already differs from your plan. Some of your key people resign, you cannot hire the people you have planned (lack of qualified candidates) and those you eventually hire don’t have the skills you expected.  The software to manage your local versions doesn’t behave quite as you thought.

What can you do to compensate and still deliver according to your road-map  When do you know that your only option is to adjust the road-map?

We must assume that there is a relationship between the road-map and the revenue potential of your company (this statement will come as a surprise to many software companies!).  The sales people must do whatever they can to keep up sales compensating for the delays, but it is hard to compensate 100% and you cannot compensate forever. Expecting the sales department to maintain 100% may be unrealistic and even demotivating for morale.

Delays in product road-maps are critical to any company, but the earlier you know, the better chances management has for dealing with the challenges.

Sales

The funnel/pipeline definition will provide the KPI’s

Your current average sales cycle is 9 months, the average order size is €200.000 and your hit rate is 25% of qualified prospects.  Average number of debtor days is 45. In your 2013 budget/plan you have initiated activities that should reduce the sales cycle to 8 months in Q1, 7 months in Q2-3, and 6 months in Q4.  You have also initiated activities that will improve prospecting ensuring that you always have a pipeline value of 5 times that of your order entry budget. You have taken steps to reduce debtor days to 30. You have only included 50% of the improvements in your order entry, revenue and cash flow budget.

Your current customer satisfaction level is 85%, which you consider too low.  Your churn rate is 10%. You have started initiatives to improve customer satisfaction to 90% and expect this will reduce the churn rate to 5% through 2013.  You have also initiated up- and cross sales initiatives, which should increase order entry from the installed base with 15% in 2013 compared to 2012.

How soon will you know if you are on or off track?

Organizational health

Your most recent internal employee satisfaction survey showed low levels of satisfaction in the areas Autonomy, Management Style, Engagement and Life Balance.  The YTD attrition rate is >8%.

You have included activities in your 2013 budget/plan to improve on the problem areas and expect to reduce attrition to <5%.  However you also know that you must replace some of the low performers who may not be able to adapt to some of the new business approaches you will introduce.

KPI’s

Without Key Performance Indicators you will either:

• Miss the opportunity accelerating when initiatives work out better than expected
•  React too late when initiatives work slower/less than expected

You need an intuitive presentation of the KPI’s

We shouldn’t start any initiatives without having a cause-effect relationship “theory” and an expected outcome.  We shouldn’t wait until the money has been spent or the revenue missed before we react.

KPI’s help us stay on top of the initiatives we have started.

Reality and plans never match; corrective actions are always required.

Having the KPI’s in place we must implement a system which can present the KPI’s on a regular basis, in an intuitive way and on demand.  There are numerous platforms available for making the presentation, but the data must be provided from your operational systems.

Too much too fast

Reading through the examples above you may have gotten a little breathless.  So many initiatives!

You don’t have forever.  The market is changing, the technology is changing, and the vibes are changing.  That being said, there is a limit to how much you should change simultaneously. You can certainly start too much and when you do so the risk is high.

Rule of thumb is: Prioritize. Only start what you can manage.  Fill up as you release capacity. But keep a high pace and maintain the sense of urgency. Go, go, go.

Other posts in this “Ready for 2013? –  Lean Planning & Budgeting” series:

The objective of the blog posts is to outline a 2013 “preparation process” where you end up having a plan and a budget, which is a stepping stone to a position as a the global market leader in the future and where the stakeholders are 100% aligned and committed to execute the plan and deliver the numbers for 2013

#1: Perform an Alignment Check before Planning and Budgeting
#2: Get the Key People Involved up Front
#3: How to do an Alignment and Identification Check
#4: The Revenue Challenge
#5: Planning Fundamentals
#6: Mitigating risk and exploiting opportunity
#7: Mission/Vision and the 3-5 Year Perspective
#8: What Comes First, the Plan or the Budget?
#9: Defining Key Performance Indicators for Plan and Budget Follow-up
#10: The People on the Bus