Creating Key Performance Indicators

How is the best way to measure the business’ success?

Often business owners have a good grasp of the financial indicators and sales of their business. Knowing sales is important – owners might know off the top of their head the sales figures for the month. They know the revenues, expenses and profit for the previous year.

This is a good start. However, most agency owners look at past results to manage their business. This is reactive and not proactive management. The typical agency owner doesn’t take the time to collect and analyze the important numbers that will make a difference in the success and growth of their business.

One cannot change the past, but one can influence the future. Instead of having a rough idea of what has happened in the past, the focus must be on current and predictive indicators. Managing the activities that lead to success will create success.

Key Performance Indicators

A Key Performance Indicator (KPI) is commonly used by an organization to evaluate its success in reaching its strategic goals by measuring the performance of the critical activities toward a goal.

There are all sorts of KPIs. There are some basic ones that can apply to most businesses, such as financial ratios and sales growth rates. Others are industry-specific, such as sales per square foot for retail or a defect ratio for manufacturing.

Choosing the right KPIs starts with a clear understanding of key drivers to success, but it’s important to note that key drivers will depend on the department measuring the performance. For example, the KPIs used by the commercial lines service staff will be quite different from the KPIs to analyze producers.

Many things are measurable. That does not make them key to the organization’s success. It is critical to limit KPIs to keep everyone’s attention focused.

KPIs and Organizational Goals

Every business is unique. There are no “right” KPIs for an agency’s management to track. The KPIs that are tracked must be a reflection of the goals of that agency.

An agency that has a goal related to customer retention will have a KPI that tracks customer satisfaction or customer service by department.

If the agency tracks its customer retention rate, they would be tracking past performance, which will not allow for proactive management. However, getting customer satisfaction feedback will allow management to make adjustments close to real-time.

KPIs for Insurance Agencies

When choosing KPIs, it is best to work with real-time or predictive KPIs. Knowing the firm’s profit margin from last year is good, but it does not help with real-time management decisions.

What are some examples of KPIs that an agency might track? The key is to track activities that lead to success. Tracking a producer’s sales performance for last month is reactive management. Tracking a producer’s weekly call log is proactive.

Examples of KPIs for sales might include:

• Number of new prospects contacted;
• Closing ratio;
• Average size of sale;
• Number of referrals;
• Connections with clients;
• Customer satisfaction;
• Retention of business rates; and
• Percentage of cross-sold accounts.

Examples of KPIs for customer service might include:

• Client satisfaction;
• Problem resolution rate;
• Calls handled per day and within 24-hours;
• Mail handled in 24-hours;
• Claims turnaround; and
• Number of cross-sold accounts.

Examples of KPIs for administrative and accounting departments might include:

• Meeting monthly budget;
• Zero receivables over 30 days;
• Accuracy rates; and
• Speed in closing agency financials.

KPIs for agency financials are important KPIs, but they are a reflection of the past. They are important to know, but they are a retrospective look at the performance of the agency.

Financial KPIs might include:

• Growth rates by department and by line of business;
• Expense ratios for each major expense category;
• Contingent commissions to total commissions ratio;
• Reported profit margin;
• Pro forma profit margin (EBITA);
• Trust ratio;
• Current ratio;
• Age of receivables; and
• Agency cash flow.

It is also important to track investment in new people, especially producers.

Collecting Data and Creating a KPI Dashboard

The data required for the chosen key KPIs by department can usually come from the firm’s accounting system, agency management system, Excel spreadsheets, handwritten notes, logs, surveys, etc.

Based on the circumstances the data can be collected daily, weekly, monthly, or even yearly.

Once the data is collected, it needs to be organized and displayed in a way that will help the user evaluate the situation and make decisions.

Excel is a great way to collect, analyze and display the data. There are many systems that will also help in the analysis of the data, such as the firm’s computer system, SalesForce, Constant Contact, BaseCamp, or any of a whole slew of software tracking systems that can be purchased.

The most important thing is to track the data. If it makes sense, the data can also be converted into some sort of graphic representation.

A dashboard is a collection of charts and graphs that display the information.

Some software systems automatically create reports and dashboards.

Others, such as Excel, will need somebody to develop the dashboard.

There are many companies that offer dashboard plug-ins for Excel, QuickBooks or ACT.

Take Action with KPIs

Now it’s time to take action. It is important to maintain the real-time data collection, creation of the dashboard and a review of the information that will lead to the success of the agency.

When the KPIs show the firm is off track, real-time changes can be made and then reevaluated at the next measurement.

Creating systems that will track the key drivers of the business will allow the owners to make timely decisions that will improve the business and help attain the firm’s goals and manage proactively.