As part of the progression toward taking on leadership roles within a company, most executives become well-versed in the importance of developing and analyzing key performance indicators (KPIs) to ensure long-term organizational performance. Fortunately for today's business leaders, advancing technology has made organizations capable of being data-driven in ways that make the consistent assessment of key performance indicators easier than ever.
Then again, the unique circumstances of firms in the middle market affect the methodology that determines how execs select the right KPIs. Calculations such as operational cash flow, gross profit and net profit (for all firms), debt-to-equity ratio and return on equity (for publicly held firms) are some of the most recognizable metrics, but the vulnerability of midmarket companies to damage inflicted by employee turnover often requires a different approach to developing KPIs.
In short, strong employee retention is an essential element of middle market success, as midsize firms don't have the same room for error as larger firms. With fewer employees, midsized companies have a big void to fill every time someone leaves. These employees often leave due to disengagement: when they don't understand their role in the larger scheme of the business or when they are not apprised of the value of their contributions to the firm's performance. In light of this, simplifying KPIs in a way that connects with employees in their day-to-day duties will clarify expectations, empower employees, and boost their engagement — all of which improves company performance and job satisfaction, going a long way toward minimizing turnover that can suck the motivational and financial life out of a midsized firm.
Picking Your Key Performance Indicators
Middle market companies are unique because they vary greatly in their stages of evolution, as opposed to larger firms that are relatively homogeneous in their goals. As a result, KPIs across the middle market can focus on everything from rapid growth to industry-leading customer retention rates to maximum market visibility to minimized cost of goods sold, and so on.
Regardless of the specific performance criteria that a midsized firm determines are central to its one-year, three-year, or five-year business plan, executives must simplify each key performance indicator so they connect to the duties of everyone at the firm. There should be a KPI that focuses on at least one, and perhaps all, of the following:
- the firm's mission
- its customer experience
- its financial performance
Once any or all of these directions are adopted as a KPI focus, the rubber truly meets the road. Company leadership must now educate middle managers on the specific roles that their departments play in achieving each KPI, and those middle managers must then drill this down to direct reports. To keep these performance criteria in employees' minds, the chosen KPIs should allow for scoreboards that demonstrate each department's performance over specific time frames. This gives middle managers the ability — and the credibility — to critique individual employee performance.
By keeping KPIs simple and attaching them to the firm's mission, its customer experience, and/or its financial performance, middle market executives maximize employee understanding on how to contribute, stimulating drive and creativity. When coupled with incentive programs that reinforce behaviors that work toward attaining KPIs, high employee engagement is a sure thing. From there, the traditional KPIs of cash flow, gross profit, net profit, and others will take care of themselves.
Are there any disadvantages to tying KPIs to departmental and individual employee performance? Let us know what you think by commenting below.
Rob Carey is an NCMM contributor and a features writer who has focused on the business-to-business niche since 1992. He spent his first 15 years at Nielsen Business Media, rising from editorial intern to editorial director. Since then, he has been the principal of New York-based Meetings & Hospitality Insight, working with large hospitality brands in addition to various media outlets.