Want to really find out how your business is performing? Setting and analyzing key performance indicators (KPIs) for your company is the best way to stay on track with your business goals.
The question is what to focus on when it comes to performance. Should you rely on classic standbys like financial- and customer-focused indicators? Or opt for a newer indicator coming into vogue, one that prioritizes employee performance.
How you measure performance can say a lot about your company’s objectives. Let’s take a look.
Financial-based performance indicators
These are the most commonly used metrics for performance, including revenue growth rate, net profit and return on investment (ROI). In terms of employee performance, these are often quantified using output-related measurements. These can be useful for growing your company’s finances, but companies that focus solely on profit-related indicators often face an innovation problem.
A focus on financial goals can pressure managers to prioritize short-term profitability over creativity. Financial indicators also don’t provide a full picture of a company’s performance. Rather than taking risks on new ideas, these companies can become known for creating “one-hit wonders” that sell and repackage past successes. Eventually, quality and customer satisfaction can become compromised and employee motivation drops.
MSFT and stack ranking
Microsoft learned that lesson at the expense of its top spot in the tech world. Originally a leader in cutting-edge technology, after 2000 it began slipping in the rankings against companies like Google and Apple because of its inability to keep up with trends. While these companies released paradigm-shifting products like the iPhone and Google Maps, Microsoft treaded water by simply updating Windows Office. Financial indicators reflected the company’s shift in popularity but not the contributing factors.
Internally, Microsoft took a cut-throat approach to performance management called “stack ranking.” In this system, employees were ranked according to their performance, with the top being put in line for promotions and the bottom 5 to 10 percent shown the door.
Rather than boosting productivity, this system merely increased competition and discouraged teamwork. Ultimately, instead of collaborating on new ideas, employees focused on gaining favor to survive.
These are increasingly seen as the most important performance-based metric.
Main customer-centered KPIs include conversion rate, customer retention and Net Promoter Score (NPS). Due to varying objectives, companies that focus on customer-centered indicators prioritize gaining a loyal customer base by producing great quality products, utilizing different marketing techniques and emphasizing strong customer support.
An example of this is Riot Games’ Free To Play games, which helped the company gain a loyal customer base by allowing gamers to play some of their best games for free online.
Zappos’ customer service is famous for providing unsatisfied customers with gifts and free shoes. Creating a customer service culture is an essential part of its business strategy and the focus of CEO Tony Hsieh’s book Delivering Happiness.
However, for companies that don’t take off straight away, the money and time put into each product can lead to slower profit generation and financial instability. While customer satisfaction is an important key to success, what customers ultimately want are state-of-the-art products. Customer-focused indicators can help you build a loyal client base, but they do not necessarily solve a company’s innovation problems.
Companies should use a combination of both financial and customer-focused indicators, but there is a third key measurement essential to meeting your company’s goals.
Why employee-centered indicators are so important
More and more companies are beginning to realize the importance of employee-centered metrics. These types of indicators include employee engagement, satisfaction and turnover.
Studies show that higher employee engagement is linked to higher customer satisfaction. When employees are happy at work and believe in their product/company, this comes across to customers. It’s a byproduct of company culture. Gallup revealed that companies with high employee engagement levels outperformed companies with lower levels of engagement in customer ratings by 10 percent.
Engaged employees take fewer sick days, achieve more
A study by Workplace Research Foundation found that engaged employees take an average of 2.69 sick days annually compared to disengaged employees, who take an average of 6.19 days. Most important, they’re motivated to achieve more. Gallup’s study also showed that engaged companies outperform others in productivity by 21 percent and profitability by 22 percent.
The treatment of employees is also an important factor for consumers. Deloitte’s 2015 study on millennials revealed that this generation considers the treatment of employees as the top characteristic of industry leaders, even over profit generation and impact on overall society.
The report concluded: “While they believe the pursuit of profit is important, that pursuit needs to be accompanied by a sense of purpose, by efforts to create innovative products or services and, above all, by consideration of individuals as employees and members of society.”
Atlassian benefits from autonomy
Companies with employee-centered strategies are also more likely to foster innovative environments that promote autonomy and employee ownership.
For example, Atlassian became famous for its “Shipit” days, which encourage employees to drop their normal work in favor of spending 24 hours on a creative project of their choice. Allowing employees the freedom to try new ideas sounded like a financial risk but it resulted in great returns. In fact, projects developed during these sessions resulted in some of Atlassian’s most profitable products.
The company not only dominates Australia’s tech industry, it has also been named the best company to work for the past two years.
Employee-first takes off
More and more companies have started focusing on an employee-first strategy.
In an interview with Inc., Virgin Atlantic CEO Richard Branson disclosed that the company puts staff first, customers second and stakeholders third. “If the person who works at your company is not appreciated, they are not going to do things with a smile,” he says.
Southwest Airlines, consistently in the top 10 in employee and customer satisfaction surveys, follows the same ideology, motivating employees with its company values and an environment that recognizes employees for going above and beyond.
A final word about performance
In the end, perhaps a company’s success ought to be reflected by a combination of indicators: finance, customer and employee, all working synergistically.
As Southwest founder Herb Kelleher put it: “A motivated employee treats the customer well. A customer is happy so they’ll keep coming back, which pleases the shareholder. It’s just the way it works… They can buy all the physical things. The things you can’t buy are dedication, devotion, loyalty—the feeling that you are participating in a crusade.”
Matias does Communications at Impraise, a web-based and mobile solution for actionable, real-time feedback at work.