The Only KPIs Your Firm Will Ever Need

Jul 8

We have all heard the famous saying, often referred to as the McKinsey Maxim, named after the famed consulting firm: "What you can measure you can manage."This bromide has become such a cliché in the business world that it is either specious or meaningless.Specious since companies have been counting and measuring things ever since accounting was invented, and meaningless because it does not tell us what ought to be measured.Besides, has the effectiveness of management itself ever been measured? How about the performance of measurement?Measurement for measurement sake's is senseless, as quality pioneer Philip Crosby understood when he uttered, "Building a better scale doesn't change your weight."The Triple Crown CriteriaIn his book, From Worst to First, Gordon Bethune details how he was able to turn around the failed airline (which had filed for Chapter 7 bankruptcy twice in the preceding decade) between February 1994 and 1997, turning it into one of the best and most profitable airlines in the sky.It is a remarkable story, and it illustrates the importance of utilizing leading key predictive indicators (KPIs) to focus the entire organization on its purpose and mission.Bethune basically tracked three leading Key Predictive Indicators (KPIs), known as the "Triple Crown Criteria" in the airline industry:

On-time arrival
Lost luggage
Customer complaints

What makes these three KPIs leading is that they measure success the same way the customer does. And that is critical because, ultimately, the success of any business is a result of loyal customers who return.None of the three indicators would ever show up on a financial statement, but, as the airlines have learned over the years—by testing the theory—they have a predictive correlation with profits.Is there a Triple Crown Criteria for PKFs?Now that there are well over a thousand firms that have trashed timesheets, VeraSage Institute is proud to announce, based upon empirical evidence, the Triple Crown Criteria for Professional Knowledge Firms.We are emphatically declaring that the following three KPIs are all your firm ever needs to track to predict future customer loyalty and buying behavior.Think about it: If an airline can run on three KPIs, why can't a PKF?An airline is far more complicated than any PKF, which is what makes KPIs so powerful: they are measurements (or judgments) guided by a theory.But the theory is the senior partner. It's not just measurement for the sake of measurement. It's measuring—and judging—what actually matters, to customers.It's defining the success of your firm the same way the customer does, just like with the airline KPIs.The Three KPIsTurnaround TimeMichael Dell likes to refer to the time lag between a customer placing an order and the company assembling and shipping the finished product as velocity.We believe professional firms should also be diligent about tracking when each project comes in, establishing a desired completion date, and measuring the percentage of on-time delivery.As Ed Kless always points out, a firm can measure "time spent" or "duration." The latter is the only thing that matters to the customer, hence that's what needs to be tracked.This prevents procrastination, missed deadlines, and projects lingering in the firm while the customer is kept in the dark.Imagine installing 360-degree webcams everywhere in a firm. Also imagine customers being able to log onto a secure Web site, type in their names and passwords, and the appropriate web camera would find their project and give them a real-time picture of it, probably laying on a manager's floor or credenza awaiting review.Would this change the way work moved through a firm? Would this hold the firm accountable for results, not merely efforts?Customers don't want to hear about the labor pains—they want to see the baby.FedEx and UPS do exactly this; and in fact some law firms utilize intranets that provide their customers with real-time access to the work being performed on their behalf.This one metric would go a long way towards mitigating most of the reasons customers defect from firms (not kept informed, feel ignored, and so on).Value GapThis measurement attempts to expose the gap between how much the firm could be yielding from its customers compared to how much it actually is.It is an excellent way to reward cross-selling additional services, increase the lifetime value of the firm to the customer, and gain a larger percentage of the customer's wallet.Marriott International uses predictive analytics through its Hotel Optimization program. Marriott has developed a revenue opportunity model, comparing actual revenues as a percentage of optimal prices that could have been charged. It attributes the narrowing of this gap, from 83 to 91 percent, to this metric.One CPA firm made this calculation part of its partner compensation model. What actions can your firm take to close the value gap?High Satisfaction Day™I am indebted to John Heymann, CEO, and his Team at NewLevel Group, a consulting firm located in Napa, California, for this KPI.When John's firm held a retreat for the purpose of developing their KPIs, the suggestion of High Satisfaction Day (HSD) was made.An HSD is one of those days that convinces you, beyond doubt, why you do what you do. It could mean landing a new customer, achieving a breakthrough on an existing project, receiving a heartfelt thank-you from a customer, or any other emotion of exhilaration that makes you happy you got out of bed in the morning.Sound touchy-feely? John admits it is; but he also says the number of HSDs logged into the firm's calendar is a leading indicator—and a barometer—of his firm's morale, culture, and profitability.Is this too Simplistic?No.Compare the above KPIs to what most firms are measuring now—billable hours, utilization, realization, write-downs, write-offs, and other internally-focused metrics that have nothing to do with how the customer defines the success of their firm.These metrics have zero predictive ability when it comes to future customer behavior. They are lagging indicators, not leading.Stop measuring things that don't matter, and focus on what does. The above three KPIs will work in any PKF—period.VeraSage stands by this Triple Crown hypothesis for all PKFs.Prove us wrong.We'll enjoy losing the argument, because it means we'll learn something new.