CFO Talk: The CFOs Guide to Great KPIs with Bernie Smith

In this episode of CFO Talk, Bernie Smith gets us up to speed on the 7 steps to KPI bliss, KPI trees and where CFOs can make an impact on these important measures. ​

Steve Rosvold: [00:00:00] Welcome to CFO Talk. I am your host Steve Rosvold, Chief Learning Officer at CFO.University. Joining us today is Bernie Smith, founder of Made to Measure KPIs. Bernie trains and coaches businesses to develop meaningful KPIs and present information in the most meaningful way. His client list is impressive and includes the likes of Airbus, HSBC, UBS, Lloyd’s Register Credit Suisse and the Royal Bank of Scotland.

[00:00:32] His books on KPIs regularly top the category on Amazon and he is a frequent keynote speaker on performance measurement. Early in his career, Bernie worked as a consultant, leading teams and delivering exceptional operational improvement using Lean and Six Sigma approaches. His broad industry experience gives him a unique perspective when it comes to developing KPIs to improve organizational performance.

[00:00:57] Bernie lives in the borough of Sheffield in the United Kingdom with his wife Liz, two children and some underused exercise equipment. Welcome Bernie. It’s great to have you on the show.

Bernie Smith: [00:01:07] Hi, Steve. Thank you very much for having me along. It’s a real pleasure.

Steve Rosvold: [00:01:11] I have really enjoyed our conversations in the past. I love what you do and your enthusiasm for it. Speaking of enthusiasm, how did you become such a passionate advocate of KPIs and performance management?

Bernie Smith: [00:01:24] Well, that is an interesting question. There were a couple of things that really drove it. Firstly, I thought it was neglected. So when I was a performance improvement consultant, it tended to be the thing that we would rush through.

[00:01:38] I mean, everyone delivering improvement knows it’s important. But, people would normally sit in a darkened room with some spreadsheets and perhaps some data collection sheets, squeeze the information out that they needed about which problem to solve and then rush off and help the team solve the problem. It always seemed to be the bit that didn’t see any love. So that was part of it.

[00:01:52] The other part of it was, I’ve always wanted to work for myself and I was looking for a gap in the market. I looked at the gap between what businesses want and what the IT departments are doing and thought that’s an area that I could definitely help in and that seemed to be underserved. I saw lots of people struggling with confusing metrics and KPIs. A lot of frustration, a lot of uncertainty, and I wanted to bring a clearer, simpler method for bridging that gap. So two reasons really, I saw a gap in the market, felt it wasn’t being done well and set my mind to coming up with a better way of doing it.

Steve Rosvold: [00:02:35] Well, you have really done a good job of showing the way. I read your book, KPI Checklists, love your stuff and I am really interested to learn more. Speaking of the KPI Checklist, in your book, you write about the seven steps to KPI bliss. Do you have a few seconds to tell us about those seven steps?

Bernie Smith: [00:02:55] Absolutely. I could probably talk for more than a few seconds, but I will give you the really high-speed version. The idea behind it is that KPIs are just tools which will help you achieve whatever it is you want to achieve.

[00:03:15] The example I use when I train is, you would never go into Home Depot or your local DIY store just to buy some tools. You would go there to buy specific tools to help you do a task. It’s just the same way with KPIs.

Step one is figuring out exactly what it is you want to achieve and doing it in a really specific way that is going to make choosing our KPIs easier as we go through. So we need to follow certain rules, but basically it’s deciding where you want to go with this.

Step two, and this one came through hard experience, is if you don’t bring the right people along with you, everything you do from here on in is wasted because they will turn around at some point and say, I wasn’t involved in this, I don’t agree with this. So step two is getting the right people in the room.

Step three and four is about figuring out what your options are with KPI’s. I have discovered there are two types of people in the world, the dreamers, they tend to be senior managers who want to measure everything, and then there are the pragmatists, the people who actually have to make this stuff happen.

[00:04:16] You cannot keep everyone happy with creating lists in one step. So we have two steps here. We have the long list, which is for the dreamers. We use KPI trees for that. Then we have shortlisting where we get real. We say, how important is each KPI and how easy is it to measure?

[00:04:35] We use the product to those two numbers to rank the KPIs. 100 is your best. Zero is your worst. We use that as a tool to shorten the list in a structured way.

In Step five we spend time focusing on getting the definition right. I share lots of horror stories when I train about what happens if you don’t do this. It is everyone’s least favorite step, but it is probably the most important one.

[00:04:58] There is a structured approach I teach, asking certain questions to make sure you have your KPIs nailed down precisely.

Step six is using the tools that we use to communicate, which are dashboards and reports. It is called prototyping. I learned the hard way that you do not build a fully baked dashboard and then take it to a client.

[00:05:22] You always do a mock up and you probably do four or five mock-ups until you get to the right answer. Then you go off and build it.

Step seven, you go live, which is all about this messy business of getting the KPIs in, making sure that they’re accurate and making sure they are working the way they should.

[00:05:36] Those are the seven steps to KPI bliss. They are designed to be learnable so that it does not require special KPI superhero skills. Each of these steps is broken down into checklists in my book. I believe anyone can apply them as long as you go through the sequence. So that is the idea behind it.

Steve Rosvold: [00:05:55] That is very helpful. Your book is very mapping oriented, right? I mean, it tells you the steps. You do such a good job with the lists. You have a bunch of checklists within the checklist book and that is really helpful. You highlight the KPI Tree in the book and I found that interesting and very compelling.

[00:06:17] I thought it was an interesting way to see what the managers want versus what you need to get where you want to go. I think the KPI tree is an interesting way to help people come together and decide on that. Would you take a few minutes and tell us about the KPI tree.

Bernie Smith: [00:06:34] Of course. KPI trees are the things that seem to sort of capture people’s imagination. The bit about engagement and strategy are super important, but the KPI trees are where we actually start looking at which KPIs we are going to use. Let me give you an example.

[00:06:54] This is what I used during my training. It is early January, lots of people, particularly middle-aged guys like me, thinking I need to be healthier. That is a perfectly great goal, but it is too big. We cannot measure it directly. There is no one measure of being healthy. What we need to do is break it down into smaller bite-sized outcomes.

[00:07:13] In fact, we go through two levels of that. So I’ll just show you how we do this for one strand of the KPI tree at one branch. Managing weight, someone who likes his food spends too much time on zoom. It’s something I need to think about. So that’s one of the aspects of being healthy. Now it’s still pretty broad.

[00:07:30]Managing weight has got a few different drivers. You know, how much you eat, how much you exercise, what your metabolism is and so on. Managing calorie intake is one of the outcomes that will help you manage your weight. Now we’re down to something we can actually measure directly, which is calories eaten per day.

[00:07:46] There’s obviously a lot more going on here. What we can do is build a whole tree. Getting the right amount of good quality sleep, being in a relaxed state on a regular basis, minimizing unhealthy habits, eating well and being aerobically fit. This is simplified. I love the fact that every time I teach this, new stuff comes up.

[00:08:06] People have really interesting ideas. I was having a conversation with a chap yesterday. He said, “I use my heart rate to predict when I’m going to get sick. When my heart rate goes up by 10 beats per minute, I know I’m about to get a cold.” I actually remember reading this somewhere a long time ago, but at the time I didn’t believe it is a good leading indicator of oncoming illness.

[00:08:32] Then we built up this diagram (below) which shows, a high-level objective, how that breaks down even further and the KPIs that are relevant. By the time you get down to the purple level, it’s pretty obvious what you should be measuring and we can start to explore relationships. If you notice, there are some red lines on the diagram, so we’ve got a red line between alcohol intake and good quality sleep and also alcohol intake and managing calorie intake because it obviously gives you some empty calories as well. So we can start to explore how the KPIs and the different levels of strategic outcomes interact. Really good for generating lots of KPIs. Good for understanding how they interact and brilliant for getting engagement with your team.

[00:09:18] We will print this on a roll printer. Sometimes they are 15 meters long, so 45 feet long and posted on the wall for people to see. Then I explain what we have created and by the time we finish, they get it. They are in there looking at the KPI tree and figuring out which KPIs are relevant to them.

Steve Rosvold: [00:09:36] That is a great team exercise. Do people ever get caught up coming up with the first bullet point, strategy. In this example “Be healthy”?

[00:09:52] If they do, how do you get them off that first step? Because that might be one of the hardest, right? Just agreeing on what that first box should look like.

Bernie Smith: [00:10:02] That is a, really good question. The first time I ran a proper KPI workshop, the client brought along their strategy, which was “Provide brilliant service.”

[00:10:13] We started discussing this with a lot of bright senior people in the room, and after about 45 minutes, we realized that no one could agree on what brilliant service meant. We had a very lengthy debate. I came away from that thinking, Hmm, we do need some guide rails. We need something that’s going to help us.

[00:10:35] After running lots and lots of strategy sessions, I realized there are six fundamental strategic objectives that almost every commercial organization strives to achieve.

  1. Be Profitable,
  2. Stay Solvent,
  3. Grow,
  4. Strive for Innovation ,
  5. Manage Risk and
  6. Be Compliant

So, stay within the law, have a good quality of life and exercise and corporate social responsibility. Most businesses strive for at least five of those.

[00:11:03] There are a few that are mission-based. For example, NASA in the sixties, it would’ve been boots on the moon by the end of the decade. But, would they need to be innovative? Absolutely. Do they need to manage growth? Absolutely.

I use these 6 fundamental strategies as a starting point. I call those the big six and where most businesses actually spend their time and effort is focused on the things that create profit, that create innovation, that create growth.

[00:11:28] Actually, the next tier down is where businesses tend to differentiate themselves and be a little bit special. I use a framework based around the big six and I have found that it accelerates the process and makes it a lot smoother. It really helps build alignment as well when we are developing the strategy. Learn the hard way, but I think we’ve got that.

Steve Rosvold: [00:11:50] Excellent. You mentioned in your book that using words like brilliance, excellence, best in class, these things that are a little bit nebulous can really lead you down a path of no decision-making. A place where nobody can agree.

[00:12:06] You make it crystal clear that your goals can be lofty but they have to be something tangible that people agree on.

Let’s steer this into the finance realm, where do finance teams get hung up when they are creating and implementing KPIs? Do you have any special areas that we should be focusing on to make sure we can add the most value in this area?

Bernie Smith: [00:12:34] That is a really interesting question. The finance people tend to be the most switched on when it comes to KPIs. So they’re normally ahead of the rest of the company, except possibly production, and normally within their finance world they are very much on top of things. Where a lot of my inquiries come from is where the finance team have taken on broader responsibilities. So they become the beachhead for performance measures in the wider organization. I am working with three pretty large clients at the moment looking at just this. So “How do we develop the KPIs for the rest of the business?” And, in particular, “How do we develop leading indicators for things where we really want to know the answer, but it’s not at all obvious how we are going to measure it?”

Here is an example of a company developing a KPI to measure customer intent.

[00:13:25] I worked with a major pension provider where they were trying to figure out an indicator of a customer about to transfer their pension out of the business. We actually found one. The key is to look at behaviors and proxies, what happens around the time just before they transfer their account.

[00:13:44] So headline is, the thing that I think is most challenging, is exploring outside the world of finance and creating indicators that give you the opportunity to head off disaster or to capitalize on an opportunity. So leading indicators rather than lagging.

Steve Rosvold: [00:14:07] Very interesting. That fits in so well with what we teach at CFO.University. We have to be broader than finance by getting into understanding and being able to speak the language of the other parts of the business is such a value add.

[00:14:21] You just confirmed that. If you are developing KPIs that require you to get in the sales function, the operations function, the human resource function, where you are working with those disciplines, that creates a more well-rounded finance professional who can add a lot more value to the company. So that makes a lot of sense.

[00:14:37] The leading versus the lagging concept - a lot of financial measures are lagging measures – is great advice. Thank you for that.

During this pandemic, have you seen any changes in the way people are developing KPIs, implementing KPIs or any changes in performance management that we should know about?

Bernie Smith: [00:15:00] I think the most obvious thing is there is much more urgency in KPI development. I’ve seen a big uptick in interest. If you just take book sales, they have doubled during a lockdown. So clearly people are reading and thinking about KPIs a lot. I guess it’s because, for a lot of businesses, it is life or death and it has become a lot more competitive as well.

[00:15:21] So, I have seen a big uptick in interest and, on a practical note, the acceptance of Zoom calls and Zoom training has been an amazing opportunity. I’m quite happy to get on a plane to Canada or the U.S. or wherever, but That has got its practical limitations. What I find is people are very comfortable with the idea now of checking in on a regular basis remotely. Actually, that works really well for KPI consulting and coaching. Typically, you need a bit of advice, go off and do something, then come back for a bit more advice. From a personal point of view, it’s actually been quite an interesting opportunity. Definite uptick. Definite sense of urgency.

Steve Rosvold: [00:16:04] We’ve seen that too with forecasting. Everything, is being done quicker and faster. People need the information because we have to be more agile. So it makes a lot of sense that they are looking for more and better information on the KPI side.

[00:16:17] I am going to throw you a little bit of a curve. We haven’t talked about this before but I am curious. Have you seen a time when somebody’s KPIs led them astray? Where you came in and said, Oh man ,you are measuring the wrong things and here’s why.

Bernie Smith: [00:16:43] The most common one is where you’ve got a multi-divisional business. The example I use in my training is a very large engineering consulting firm, 8,000 people globally. They use a measure of utilization. It is very common in professional services. It is a measure of how busy were you, compared with how busy you could have been? If I have 30 billable hours in the week and I actually sell 15 of those to a client, that’s 50% utilization. It is a really important measure in professional services because you’ve got an expensive asset. Which as a consultant or an engineer or whatever, it is, how much billing did we get from them? The organization I was working with had four global regions. They were comparing the regions. One of the regions was underperforming by about 10 percentage points. So, cutting a long story short, it was a huge amount of stress. The guy running the region was on the verge of being fired. All the management meetings focused on that region’s underperformance. Then we discovered that actually, that region was calculating utilization in a different way. That one region included non-billable resources in the available hours. So what we found was, they could only actually achieve 75% utilization on the same basis that all the other regions could achieve 100%. If you recalculated it on the same basis, you found that they weren’t the worst performing region, they were the best performing region. They had spent all their time discussing a problem that didn’t exist and almost fired their best performing director.

[00:18:16] The key learning point for me here is, never have multiple KPIs with different definitions under the same name. It is a really classic mistake. I have seen the same in manufacturing with OEE (Overall Equipment Effectiveness ), a really common efficiency measure calculated on a different basis between different sites. Then you get this beauty parade, where people who do not deserve to be are sort of kicked around the room for their poor performance purely because of a difference in the way the measure is calculated. So that is one of the most common problems you see.

Steve Rosvold: [00:18:52] Do you see companies using KPIs for compensation?

Bernie Smith: [00:19:00] Incentives and targets are very much a growth area. I am writing a book on it at the moment. People are creating strong incentives , strong sets of targets and scorecards to drive performance and to motivate their team.

[00:19:16] It is potentially very powerful, but it’s also like putting gas on the barbecue. If you get it wrong, you can pare yourself straight over a cliff.

Steve Rosvold: [00:19:25] You can create that management incentive to manage the KPIs but, before any performance incentive, if it isn’t set up so carefully, it can all of a sudden create some real problems in what people are willing to share, what they include and the definitions you are talking about.

Bernie Smith: [00:19:45] I am digging into 13 case studies. Maybe there is some significance in that number. I am looking at things like Wells Fargo. You just see how an arbitrary target with very serious incentives attached to it destroyed a brand, created billions of dollars in fines and damage to their reputation quite severely. That can be traced back to well-intentioned but ill all conceived incentives and targets.

Steve Rosvold: [00:20:12] Interesting. We are running out of time but, aside from buying your KPI Checklist, if you were going to give a piece of advice to a CFO when it comes to KPIs and performance management , what would that leading tip be for them?

Bernie Smith: [00:20:43] The one piece of advice I would give is when you are considering your KPIs, you’re going to see a handful of KPIs that you would dearly love to measure, but it is apparently impossible or too hard to measure. Something that you think, hmm, there is no way we could measure that. My advice would be stop. And think laterally. Take a look at the measure and think what else happens when that thing happens. For example, thinking back to my friend when he noticed his heart rate goes up just before he got sick. There are a lot of proxy indicators, things that happen at the same time as the thing you care about.

[00:21:35] My advice would be, do not reject something just because it appears to be impossible to measure. If it is a game changer for your business, spend some time thinking about what also happens and see if you can measure those things. It only takes one or two of those things that your competitors have not cracked, that you can crack and you can transform your business.

[00:21:57] It can give you a unique, competitive advantage. Do not discard those things that seem to be impossible.

Steve Rosvold: [00:22:03] Great advice. Now, what I can do, is tell people “I love this book!” (holding up the KPI Checklist) It is very worthwhile, easy to get through and ” map driven”.

Bernie Smith: [00:22:15] Thank you. That is very kind of you Steve.

[00:22:16]Well, that wraps up today’s CFO Talk. Thank you for joining us, Bernie. How can people get in touch with you?

Bernie Smith: [00:22:23] The best way to get ahold of me is to type “Bernie Smith KPI” into LinkedIn and you will find me or Bernie@Made-to-MeasureKPIs.com . Either one of those will work.

Steve Rosvold: [00:22:34] Perfect and thanks again for joining us.

Bernie Smith: [00:22:37] My absolute pleasure. Thanks for having me along, Steve

Steve Rosvold: [00:22:40] CFO.University is a community of member scholars, companies and trusted advisors committed to the professional development of financial leaders. Learn more about us at www.CFO.University.

Until next time, enjoy, learn, engage and be safe.


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