Key Predictive Indicators for a Professional Knowledge Firm

(Excerpted from Measure What Matters to Customers: Using Key Predictive Indicators, Chapter 11, by Ronald J. Baker. New Jersey: John Wiley & Sons, Inc., 2006).

Our VeraSage Institute Team has been fortunate enough to conduct hundreds of workshops around the world on this very issue, and have had professionals from all categories brainstorm to come up with some Key Predictive Indicators (KPIs) for a professional knowledge firm. We believe the following KPIs are a superior alternative to timesheets, as they attempt to define success the same way the customer does. This provides the firm with a competitive advantage, which translates to enhanced pricing power.

Here are some firm–wide KPIs selected by those firms who have quit using timesheets for a more customer–focused set of predictive indicators.

Firm–Wide KPIs—Velocity

• Turnaround Time
  

Firm Wide KPIs—Financial

• Innovation sales
  

Firm Wide KPIs—Customer

• Customer loyalty
  
• Share of customer wallet
  
• Value Gap
  
• Customer Referrals
  
• Number and quality of customer contacts per week
  

It is important to note there is ample evidence that between three to five KPIs should be enough for any business in order to have predictive value for customer behavior. Though I wanted to provide enough so you can at least begin to think in this direction—and perhaps develop even better KPIs for your particular firm—it is important to keep in mind I am emphatically not suggesting you adopt all of the preceding KPIs. Do not boil the ocean. If you try to track too many KPIs, you end up knowing nothing, and would simply replace the timesheet measure with something even more burdensome.

Another caution: When choosing your firm’s KPIs, do not over–intellectualize the process. Selecting KPIs is not merely a matter of left–brain analysis; your firms right brain is important, too. You are testing a theory, which will greatly influence what you are measuring and observing. You are looking for KPIs that will measure and reward results over activities, output over input, performance over methodology, responsibilities over procedures, and effectiveness over efficiency.

Let us analyze each of the firm–wide KPIs above, explain their logic, the results they are trying to measure, the behavior they are trying to encourage, how some professional knowledge firms have implemented them, and even improved upon how they can be used to enhance a customer’s experience in dealing with their professional. It should be noted that not all of the following KPIs are leading, some are coincident, and some may even be lagging, depending on how often they are disseminated throughout the organization.

Turnaround Time. Michael 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 knowledge 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. This prevents procrastination, missed deadlines, and projects lingering in the firm while the customer is kept in the dark.

Turnaround time can be tracked at the firm–wide level, as well as the team member level. If a particular team member is missing deadlines, it is a good indication s/he has been given too much work, does not have adequate training to do what has been assigned, is unclear on the assignment responsibilities, or is simply not up to the job. Whichever it is, the turnaround time provides a leading indicator to firm executives to intervene and correct any problems in real time. The timesheet does not provide this advantage, because once it has been discovered, the problems are history.

Innovation Sales. This metric measures revenue from services introduced in recent years, and measures the firm’s innovation in offering additional services to its customers. It is an essential measurement to determine the lifetime value of the firm to the customer. For example, Hewlett–Packard wants 50 percent of its revenue from products that did not exist two years ago. Intel achieves 100 percent of its revenues from products developed within the last three years. 3M targets 30 percent from products that did not exist four years ago.

Firms spend an enormous amount of resources measuring billable hours, realization rates and other internal metrics, but we have found very few that measure innovation sales and make it a key component of its strategic vision. This is not to say firms are anti–innovation, it is more a matter of not being pro–innovation, by not having measurements and reward systems in place to encourage this behavior. Innovation is essential to creating new wealth.

Customer Loyalty. Frederick Reichheld, in his work with Bain & Company, estimates fewer than 20 percent of corporate leaders rigorously track customer retention. For professional knowledge firms, who derive anywhere from 80 to 95 percent of their revenue from existing customers, this is a big oversight. Also, when you consider it costs an average of four to eleven times more to acquire a customer than to retain one, this metric must become part of the firm’s value system.

Share of Customer Wallet. This changes the firm’s focus from market share and revenue growth to better growth by increasing the percentage the firm derives from each customer’s budget for professional services. To increase this share over time, the firm must be up front with all customers that share of wallet is an important part of their long–term relationship. Unless it has a strategic reason for doing so, the firm should not allow its customers to distribute its work among many firms. It should make it part of the expectation with each customer that it wants the lion’s share of their work, over the long run. This insures a deeper relationship, increased loyalty, higher switching costs, premium prices, and greater profitability.

Value Gap. This 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%, to this analysis. What actions can your firm take to close the value gap?

Customer Referrals. Because word of mouth is the most effective way to acquire the right kind of customers, referrals from existing customers are a leading indicator that the firm is delighting its current customers. A firm has no business taking on new customers if its existing customers are not completely happy. Also, if the firm’s leaders are interested in promoting rainmaking activities at all levels within the firm—and rewarding them commensurately—customer referrals can also demonstrate the firm is asking its existing customers for contacts they believe could derive the same benefits as they do from doing business with the firm.

Number and Quality of Customer Contacts Per Week. Since two–thirds of customers defect from firms because of perceived indifference, why not encourage all of the firm’s team members to meet regularly with the customers they serve? This keeps the firm visible and in front of the customer; will lead to a higher wallet share, more referrals, and increased loyalty; and aid in the development of communication and listening skills of team members.

However, this KPI cannot be gamed just to achieve some arbitrary quota of contacts per week; it must also consist of subjective evaluations of the quality of each contact: what was discussed, the body language of the customer, additional services discovered, and a host of other judgments that are simply too oblique to be measured quantitatively, but are the true characteristics of providing a good experience for customers while demonstrating you care about them.