Anyone who knows me will tell you that I'm a big metrics guy. I love to measure things, look at them objectively, put them in graphs, and compare present to past. Because of that, I developed strong feelings about key performance indicators (KPIs) and how important they are for running a business.
When I started the company, I didn't know much about managing a business. I knew a lot of technical stuff and how to write software, but I didn't know about running a company. Everything I did from a business management standpoint was reactive. I wouldn't find out how much money I made for the year until April when the tax returns were done, for example. I would look at the return and say, "Wow, last year was a good year," or "Oh, last year was a really cruddy year." I was constantly finding out about things after the fact. And that woke me up to key performance indicators and what they can do for you.
A KPI is a metric of your business that tells you how it's doing, positively or negatively, and enough in advance of the trend to enable you to actively interpret and react to the information.
So when I found out how my year was in April, it was too late to do anything about it. Now with the KPIs I try to achieve a strategic view of my business, digging into the data and finding out what made certain things happen.
Now, instead of looking at the end result, I back it up four, five, or even 10 steps and figure out what was done on the leading edge that ultimately went through those four, five, or 10 steps and made it a profitable year. Were the deals we were working on larger than the deals we were working on in previous years? Did we do more deals, or were we selling different types of services? Was our service blend different between infrastructure and software development?
You can narrow your business down to five or 10 key things that you can measure on a regular basis that tell you how you're doing long before the results are "official."
Everyone's key performance indicators will be a little bit different, of course, depending on the business. We don't sell hardware, for example, so we don't need to look at hardware margins. But take a look at our company's KPIs as an example (see related story, page 2), then look at your own business and identify an event that was positive--customer satisfaction up, great month, great year--and then find out what caused it.
itSYNERGY'S KEY PERFORMANCE INDICATORS
A lot of companies look at utilization, or billable hours. Instead, we look at how much revenue each employee is generating. With all the agreements and discounts we have with customers, it's not as effective to track billable hours.
We define each employee's revenue target as 2.6 times their W2. A Windows Vista gadget sits on each billable employee's desktop, showing in real time the percentage of the employee's monthly target attained. On the 8th of the month, for example, employees should be about a third of the way to their goal. An internal Web site shows individual revenue production, as well as the billing entries that make up the total. This enables employees to analyze their performance and see which engagements were most beneficial in helping them attain their goal.
We also look at gross margin percentage, SG&A (Selling, General & Administrative) percentage, and EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). As a service-only business, our goal for gross margin is 50 percent; 30 percent for SG&A; and 20 percent for EBITDA.
Another thing we look at is accounts receivable aging, which is pretty standard and applies across all businesses.
We track the number of assessments we do as well. In an assessment we evaluate a potential customer's environment for one or two days, billed at our hourly rate, and then present our recommendations. We get about an 80 percent close rate on these customers for long-term managed services contracts, so assessments are a big deal.
We also watch our opportunity pipeline--all the people we've spoken with or with whom we have identified some type of opportunity, but it hasn't gotten to the level of an assessment yet.
Finally, we keep an eye on the volume of managed services vs. project or hourly work, and we look at our satisfaction indexes--customer, employee, performance against our service-level agreements, and so on. We feel there is a direct link between response rate and customer satisfaction.
Profile: Michael Cocanower
Founder and President
Number of employees: 10
Web site: www.itsynergy.com
Company focus: Providing network infrastructure services and turnkey solutions for SMBs, as well as application development primarily for the residential construction industry
Favorite part of my job: The rush that I get from aggressively pursuing growth and building something that helps to achieve that goal
Least favorite part of my job: When things don't work the way they're supposed to
Words of wisdom: Remember that you're running a business, not an engineering shop.