Don’t Measure That, aka When is a KPI Not a KPI?

Data is exciting. It's also a little dangerous. You can measure just about anything in your business from the cost of goods sold to the amount of toilet paper used annually in the employee bathroom. What makes it dangerous is how hard it can be to discern valuable metrics from distractions. Useful data is actionable. It’s more than numbers on a screen; it’s knowledge you can use to create meaningful change in your business. 

If you’re going to measure something, you don’t just need to know what the metric is; you need to know what you’re going to do with the information. 

Before we dive in, let’s define a few things: 

1. 1. Performance Measurement

      Performance measurement is the collection and analysis of data to evaluate how well an organization is performing across key areas such as profitability, team effectiveness, and operational efficiency. It provides the insight needed to make informed decisions, improve outcomes, and drive sustainable growth.

   2. Business Health

      The degree to which a business is functioning in a sustainable and profitable manner.
      
      

   3. Key Performance Indicators (KPIs)

      KPIs are measurable metrics that show whether a business is progressing toward its defined goals over a specific period.

Key Performance Indicators are essential tools for measuring success and driving business performance. When done well, KPIs tell you how your business is doing and help uncover what is needed to reach well-crafted targets.  

However, not all metrics that are labeled as KPIs serve their intended purpose. When misused, they can be (at best) a waste of time, and (at worst) a source of confusion and unnecessary stress and anxiety.  

Understanding when a KPI is truly effective is crucial for A/E firms striving for operational excellence and strategic growth. 

Defining Your KPIs 

At their core, KPIs are measurable values that demonstrate how effectively a company is achieving key business objectives. They provide insights into performance by helping firms track progress over time and are essential to strategic decision-making.  

Smart people love data… sometimes a little too much.  

It’s important not to fall victim to the impulse to measure for measurement’s sake. There isn’t time to analyze every potential data point, and it’s not feasible to suppose you could do anything if you drown yourself in data. 

Let’s start with a quick suggestion – limit yourself to 2-3 metrics at first, and choose them wisely.  

It’s often best to start by identifying the one metric that would have the biggest impact if you tracked it regularly and understood it deeply. For most firms, the right place to start is to track your gross margin percentage—an essential indicator of operational efficiency and profitability. Start there for the highest return on insight.

Effective KPIs share several characteristics: 

• Tied to a target or initiative that is currently in the company's goals

• Show a trend over time, not just a snapshot

• Measure something relevant, that you will actually use and respond to

• Structured around complete and reliable data

• Understood and contextualized – you know the sources of variations in the data, and the root causes of those factors

• Balanced with other needs of the firm, including change management, staff engagement, values, and culture 

When aligned with vision, values, and strategic goals, KPIs allow you to assess not just a baseline, but the results of the initiatives you have underway toward achieving desired outcomes. 

A caveat: It’s easy when considering KPIs to get locked into the numerical values and forget an essential tidbit: KPIs measure the inputs and outputs of people. People with different levels of motivation, commitment, skills or lack of training, bad habits, missing systems, and lots of creativity. And the data you are measuring? It is input by those same fallible, wonderful human beings that make up your team. 

When choosing your KPIs, it’s important to remember this human element.  

How will it change the way you analyze the meaning of a given data point? How will it provide context? How will the accuracy of the data be impacted, and how can you control for that? 

Common Pitfalls  

Despite their importance, many firms fall into common pitfalls that render their KPIs ineffective: 

Lack of Relevance: A KPI can quickly become obsolete if it no longer aligns with the firm’s current goals or the evolving market landscape. For instance, a KPI focused on the number of projects completed may lose significance if the firm shifts its strategy toward quality over quantity. Regularly reviewing the relevance and effectiveness of your KPIs is key. 

Overcomplication: KPIs should be straightforward and easy to understand. When KPIs become overly complex, they can lead to confusion among team members, making it difficult to derive actionable insights. For example, a KPI that combines multiple metrics into one may obscure the underlying performance drivers: budget vs actual by closed task presupposes a lot of important behaviors in budget creation, time logging, and task design and management!  

Data Quality Issues: The accuracy of a KPI is only as good as the data that feeds it. Poor data quality can lead to misleading results, causing firms to make decisions based on inaccurate information. A&E firms must ensure that their data collection processes are robust and reliable to maintain the integrity of their KPIs. This means carefully training your team to input relevant data consistently and predictably. 

When KPIs Become Misleading 

A strategic and well-defined KPI is essential, but even well-defined KPIs can become misleading if not managed properly: 

Disagreement on Definitions: I have a whole soapbox speech about the dangers of tracking your Utilization Rate, but I will limit it here to the fact that there are at least 3 solid ways to define utilization rate in order to set appropriate targets. The range in “appropriate” Utilization can swing as far as 30% depending on which definition you are using – not just what role you are setting a target for. And your team members will have their own definitions and beliefs about what utilization is and how, or if, it should be used. Get on the same page about definitions from the beginning. 

Misinterpretation of Data: KPIs can be misinterpreted, leading to incorrect conclusions about business performance. For instance, looking at a “simple” budget-to-actual doesn’t tell you what the problem is, just if there is a problem. This could come from a variety of sources: underbidding in the original proposal, onboarding and training a new team member but not separating this time 

Focus on Vanity Metrics: Vanity metrics are numbers that look impressive but do not contribute to meaningful business outcomes. For example, if your firm focuses solely on revenue growth without considering profitability at the corporate level, it will overlook critical information that could jeopardize long-term sustainability – investing in proposal time that is ineffective, bringing in projects by cutting pricing, overshooting capacity abilities of the team and burning out your key staff. “Revenue is vanity. Profit is sanity. Cashflow is king.” 

Inflexibility: Rigid adherence to KPIs can stifle innovation and adaptability and can set up the circumstances that lead to employee disengagement and burnout. In a dynamic industry like A&E, where project requirements and client expectations can change rapidly, firms must be willing to adjust to new realities.

Transforming Ineffective KPIs into Actionable Insights 

To ensure that KPIs remain effective, A&E firms should adopt several best practices: 

Be Intentional: Start from your strategic plan/business plan. Book a meeting with your CFO, or a business consultant, to explore your financials and identify performance gaps. Understand the various factors that contribute to the key numbers that you are looking for and dig into the story behind those numbers to identify what matters most to you based on your firm’s maturity and strategic goals. 

Regularly Review and Adjust: KPIs should not be set in stone. Regularly reviewing and adjusting KPIs ensures they remain relevant and aligned with business objectives. This practice allows firms to pivot quickly in response to changing market conditions. 

Engage Stakeholders: Involving team members in the KPI development process fosters buy-in and ensures that the metrics are relevant to their work. When employees understand how their contributions impact KPIs, they are more likely to be motivated to achieve KPI targets. 

Foster a Data-Driven Culture: A corporate culture that values data accuracy and interpretation will lead to more effective KPI utilization. A&E firms should invest in training and resources that empower employees to understand and leverage data in their decision-making processes. 

Take Action 

Here is your big actionable takeaway: implement the latest accounting features in BQE CORE and start closing your month with accurate accounting, revenue recognition, and WIP processes. Use this practice to identify your Gross Margin Percentage and track it against industry benchmarks every month. Build a dashboard or report that shows a chart of the performance of this metric for each month for the past 1-2 years. You want to be able to easily spot trends and see when you had a strong or weak-performing month. 

Take your time as you start using new measures. It is important to understand the story underneath the numbers, ascertain if the data is true, and test your assumptions thoroughly.