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[0:10] Everyone you are with the ESOP guy we are on a journey to an ESOP thank you so much for joining us today we are doing this podcast to really help folks think about. And consider the Employee Stock ownership plan as a possible solution for what they're going to do either with their business right now when it comes to. Exit planning or succession planning or even using the ESOP as a growth strategy so thanks for joining us if it's your first time please go to our website at journey to an ESOP.com for all of our episodes, we are going or approaching really the end of the year and the end of season 2 which is blowing my mind because the whole year has gone by so fast. So much is going on in the ESOP community and just excited to continue on with with things I hope will help you when you're thinking about an ESOP today what gets measured. Gets managed written by Peter Drucker if you familiar with with that guy he's a business book writer long from long ago big business consultant but the idea of what gets measured gets done what gets measured can be leveraged provide strength to the organization given its repeatable and predictable so what I'm going to we're going to talk today about. [1:23] In the ESOP world as we think about our businesses is how and how are we going to measure the things that we need to measure and looking at this concept of key performance indicators so anyway I really appreciate you tuning in today and if you are contemplating your succession and exit plan then you're definitely in the right place because I think esops are one of the best options going and if you have have heard otherwise do your research do your homework it's their phenomenal so let's start off with this right now. [1:57] Come to McFarland this is a farming Town these kids working here are invisible they come from the fields and they go back to the fields. Mr. white if we're going to reach him now sit time coach what the new PE teacher Diaz yes. Yes up your name where you guys come from White that about their name where you come from alright 10 laughs go. [2:29] McFarland ever heard of it it's a cool movie actually Disney produced a movie. And it's got Kevin Costner in it and it really is about a guy who goes to a town. And is never been a cross-country coach before and he goes there to help. Basically teach these kids how to do that and to go cross-country run and the whole concept behind cross-country running as you would imagine is. Do you have to measure what you're doing to figure out what you're doing so that so you can kind of tell why I'm using this movie as a great metaphor and a great way to open up the concept of, the idea of measuring and kpis and what's on your scorecard you might have heard your dashboard what are your critical numbers for Success all those things get thrown around so much in one of the things I look for. When we're talking through the initial steps of an ESOP for a company is are they in a position. [3:31] To manage Pathak company managed in a way, that I would say is driven by not people specifically because while companies are just are driven by people but also processes and, you know question mark is the company overly depend on the owner or one or two people in the company what happens if they have those people that work in they're so good at what they do what happens if they had a bad day, or bad month or even a bad year what happens if they if they don't show up to the company at all and what happens to the company. [4:03] I would I'd solely I solely believe this that the companies that are able, to build strong kpis and use you know not every single number in the world and your business is going to matter but meaningful numbers I solely believe that that is a very strong, area where you see a Common Thread of success in companies that can can manage it so why does this matter as we start thinking about the podcast why should you listen well I think first off just know this that this definitely affects your business valuation what your company is worth. If you are not proactively measuring kpis in your company. In we're going to give examples of a lot of what those are but if you're not measuring them in you're just seeing like some of the major output. Numbers which is profitability or Revenue then you're missing something and there's definitely areas where you could improve your valuation, I believe having good kpi's talking through you know a. When we go through the process of doing a site visit and going through the presentation and be able to show a trustee and evaluation firm, how the company manages its success is is much easier that sets us up to do really great a great job in negotiations, gives it gives the company a depth and a strength to it which mitigates risk and gives us a better approach to getting a higher valuation. [5:29] I think kpi is also provide, a great way to help the company go through if they haven't really done a lot of transition planning or succession planning and even continuity planning is to is to help the company know how they're going to succeed, in specific areas and I think to culturally it just makes sense culturally when you think about a business. That wants to show the company employees rank-and-file what is what does success look like. Mmm break that down with some of these numerical metrics. So that the vision of the company is clearly communicated to the entire company and so that in every person in the company knows how they can affect success in their own respective roles so all those things I think are going to be you know, and the outset of this podcast really important to think about all right so let's let's jump into the the actual podcast so again thank you for tuning in if you like what you hear please subscribe to the podcast if you think you're going to be a good friend to somebody else will go ahead and share it with somebody else because they might be thinking about an ESOP and you know might be something that would help them as well. [6:43] So thinking about the movie itself McFarland. It's kind of a cool movie it pulls you in definitely emotionally to the idea behind kids that really are down and out, and that don't have a good good role models and there they work really hard, and this guy it was kind of interesting movie where this guy kind of comes into this town as kind of a last resort in his career and what he finds is, just the meaningfulness of helping others and eventually they end up becoming a championship team kind of a similar story with a lot of Sports movies and then he has a decision to make whether he stays there or not and it's and it's just really honestly a real good movie but it does make me think, constantly as I watch it how much, how much numbers are so important when you're in any kind of sports and especially when you're doing any kind of running and you have to figure out what your time is, and you're constantly looking at how do I shave another half a minute how do I shave you know another 10 seconds off my time and so regular measurement. And Reporting keeps everybody focused on what they're trying to achieve and gives a very clear goals to everybody involved. [8:00] Now let's start off with this when you start thinking about kpis and sometimes people like what is a kpi kpi is a key performance indicator. And I like to start off with the difference between a kpi and an activity measure because the kpis are. Some things that could be measured in the output or the result of other things that are not necessarily giving you information on what activity was performed to do that so let's just say we're going to focus in on. The sales aspect of things are basically of sales and marketing. [8:40] In on results-based kpis what would be thinking about is, of course what new sales we got so are we going to get number of new customers and how many customers did we did we want to get so maybe that in a typical business we're measuring not only the new customers but, maybe the average size of the customers, purchase price maybe if you're a contractor what's your average job size or which Your Average. Hey you know sale if it's a retail company how many how much was that each of those sales or those kind of things so those are all what I would say are X good kpis but they're what they're doing is they're measuring. The output of other things that have happened that have gone into activities and so the one thing I think is important when you start thinking about building good kpis in your company. [9:35] Is you want to think about what those should be and let me just kind of go from. You know an over overarching kind of concept so at the very beginning of the process what I would what I do is I start thinking what is my desired outcome just in general like, you know of course we all want to grow our Revenue but being specific to that growth we want to know I want to grow my Revenue by you know a million dollars next year okay that's my desired outcome is a bring it back to the kpi I'm going to know that I'm going to in order to have a million dollars of new Revenue I'm going to break it down for example to be, I need to have you know it's a 10 new customers at a hundred thousand dollars. [10:18] It's kind of simple right so that's my kpi I'm I know what I want to measure the number of new customers and now I know the average size but what what has that helped me at all in building out a scorecard or an activities based measurement. Or metrics that help me then to give my team say in this case I'm managing a sales group the specifics of what they should be doing on a weekly basis on a daily basis. Because measuring something like I just talked about a million dollars of Revenue growth. Is an annualized type of thing and you could even split that up into quarters and say we need you know if we need 10 new customers a hundred thousand dollars we could break that in a you know. You know quarters are based on our seasonality or whatever it is so all that because it is helpful to set some good goals are measurable they're smart. [11:11] Either timely you have all the essence of that but we got to do now is Bring It Back. You know the team that we have in now this is this is you know as I start thinking about the activity metrics this is very you know specific to the skill set of the team and so it may be that, we look at what what you have in terms of who's doing what and maybe your company isn't skilled at doing, cold calling for instance and that's not something we want to care about so these are just ideas that you want to take around like okay what is it that we're actually doing that's effectively working. [11:49] Pin and then take that and look at the activity metrics around the effectiveness of those things and then now build metrics around that as opposed to. Let me come up with 10 things on an activity-based metric that people need to do and then, create all these numbers that are meaningless so all I want to do is focus in on what really does work so to affect that I might start thinking okay what we do we do have to have some phone calls I know companies that have have. You know maybe never done any any cold calling and their businesses and if they did maybe that would lead to something so that we might have an activity metric, that is in some ways experimental to so it's not always let's just focus on the effective ones it's all so let's try some new things what I like about activity-based metrics is they give you a sense of how much effort is going into an activity, and helps you to determine where you're spending your time and how much time you should be putting forth for each thing so maybe for the company in this case we have a number of cold calls. [12:58] On a daily weekly or monthly basis so that's pretty easy to manage it's pretty easy to. Sit down and have a weekly meeting and follow-up hey how many calls did you have last week. Maybe the second one is a number of emails just like phone calls how many emails you know were sent out and now some some people send out emails that are mass emails. Other send out personalized emails so the combination of phone calls and emails might be something that you would track from an activity-based. [13:32] Maybe the number of actual appointments and the meetings that were were conducted in a weekly monthly based you know scenario so I had this many meetings with this many prospective clients in, um or I'm doing that with customers or however that works so how much of that was being done and so. I think you get the idea that it's connecting itself so at the end of it my activity metrics my activities that are being tracked are going to relate themselves back to my overall, output kpis and in this case all we're doing is talking about sales and I think I want to say this as we talked about this. That this can be done throughout the entire organization whether it be production sales and marketing Finance. You know any kind of like operational work even HR anything can be broken down into kpis in activity-based metrics and I think that's. Um hopefully a good takeaway if you're not doing this already to be thinking about how that might really play out. So that brings us to how to build the key performance indicators and activity metrics in our company so we're going to get into that right after this part of the movie trailer McFarland. [14:57] Danny Diaz and we needed son yes are Runners not six Runners and Danny Diaz hey girl I'm not the coach of fat you are. Okay so better lose some weight just try and remember lowest score wins like off Country Club. Anyone got a Kmart animatronic. [15:18] So poor Danny Diaz Kevin Costner calls him fat there so the point is is they start to, think about their team and they've got six guys and they have seven is Danny Diaz and he's like hey you know you are a little fat and I feel bad about that but the point of that is that he's creating and he's looking at the strategy of how this team is going to be successful and that's really the first place we're going to start when to start thinking about. Our kpi is in creating these is that you should always start. With strategy now this is something that you should know in my strengths finder I'm like my top five strengths one of those is strategy I love business strategy I love thinking and talking about strategy. [16:04] Even though it may be overdone at sometimes we think about strategic planning it is still really important to think about. Why and I'm going I'm going about a certain way, in order to accomplish something and instead of just kind of moving headlong and I know we need to get kpi so let's just do it so I want you to start thinking in the this very first step of how do I employ strategy into the concept of creating, my kpis now. [16:35] When we think about it a strategy for a kpi what I would just kind of say is thinking about the. Debt the definition of those objectives that you have within each of the business units so. I kind of mentioned this before when I'm thinking strategically I try to do what. The Covey guy says like start with the end in mind and what do I want this to look like at the end of the day, and then also one of the things I do when I when I create business strategy is I'll analyze the things that have worked in the past like for instance how have we gotten new customers in the past, in a where did our new customers come from well they came from this area that came from that area and and then you start saying well why did that customer choose us in that and so if he's really break open the like take each one of those as a case study for instance and you start looking and evaluating some of the decisions that the customers have made, then I think that can help you now develop a strategy like this hey if it's worked this way. And the other ways we've looked at the different case studies this is the theme and the Common Thread let's start concentrating on what while that worked and let's start doing it better so that's one way to take an approach at strategy. [17:52] The second thing you're going to want to do is Define the questions you need to answer you know in terms of the kpi so in the case where we're wanting to say I want to become more profitable, in our business unit that we have and I want to look at segments of profitability. Where are we most profitable in terms of how we deliver it and so so that's why when you think about it. [18:22] Asking the question in terms of what you really need to understand so. Sometimes if I know I have say for instance I have a customer who has a lot of. Procurement and their contracts which means they're basically buying equipment. And they're they're looking at that equipment that jacks up the amount of Revenue that have but they're really not making as much money on the procurement part of it they're making way more money. On the the percentage of the labor that they charge on that and so the kpi there might be I need to ask the question about where my making money when it comes to those types of contracts in. And then that will allow me to see maybe segregate out the procurement versus the labor and really then build kpis around that question because sometimes the, a procurement piece can really a balloon something where you think you're doing a lot and you're really not doing a lot so something like for example like that will help build some some requirements that I need to really now measure. Profitability in this market in these revenue and cost center segments as opposed to just in the total so those are just an example of how that would work. [19:35] Next thing you'd want to do is you want to identify the the needs for data once you once you know what questions you're trying to answer you needed to find your data needs to establish what kpis metrics are data you're needing or on order to answer those questions, I think this is a difficult phase sometimes because we can kind of get caught up in. Trying to have a hard time are having a hard time accessing data in the period and the places that we need it but I would just say be creative and make it simple as simple as you possibly can so you're not. You know creating some software program in order to generate data that might be Overkill and so part of the way I develop a kpi is or a metric is I'm looking for simple sources of data. As opposed to trying to create a kpi around some complex sources of data so if you can find, where your data is easily retrievable, that's very helpful and so some of that part of looking at the step by step process would be now think about that now where is your data coming from I got financial data from say my bank account my credit cards I have, data coming in from my billing system and I have data coming and just look at all the different sources of data. And sometimes that can generate ideas about where your kpis should be created. [20:57] So in going through that the other part of this is not only creating the right sources of data. [21:03] Not only creating the right kpis but what you really want to do too is we want to understand how much frequency do I need to measure this on a daily basis. [21:12] For instance if I have if I'm measuring a collection company that we're looking at average days receivables. Does it make sense to look at it every single day probably not and in that aging report maybe I want to measure certain aspects of that, um you know maybe on a weekly or monthly basis to say a certain thresholds that we want to we want to avoid say being over 90 day so we want to really focus our energy on what our 90-day receivables looking like, and making sure that we've. [21:46] Really just focused in on so we're not overwhelmed by the frequency and the amount of measurements that we're taking we might want to just look in it that every every maybe week and saying write the number of receivables over 90 days is. Twenty percent of the total revenue or the total receivables we want the threshold to be something around 18% so then we have built in some some Flags but we're looking at it you know. Frequent enough to make sure we're on top of it and I think that's going to be customized around the type of kpi that it is and what you're really measuring. [22:22] So another aspect of the process of creating a kpi as a signing ownership of your kpi so. Really there's two types of ownership the first is the ownership of the kpi in terms of its meaning and interpretation so someone really does need to be in charge of looking at the kpi interpreting its meaning monitoring how it's changing in deciding what that means for the business so that's the that's the. The person who is responsible and hopefully is good at the number side that can that can create something that's reliable and meaningful so that you don't have wrong information going out. The other ownership is going to refer to the data collection so sometimes you can automate this process but more often than not data collection requires some human interaction so some. Personnel are going to be involved in transferring data from one database to another and that might need to be collected manually and so those are the the ownerships of where the data comes from to support the kpi. [23:20] And then the other part of the ownership equation is is who owns the kpi, in an organization and I get this from a lot of different sources of consultancy but specifically out of say traction with an EOS company is everybody needs to have a number in the company, and so if that is your number so I'll just go back to the collection number for receivables that could very well likely be the controllers. Financial controllers position that they're responsible to manage the collection and that kpi that we created of say 90. 90-day receivables less than 20% could be their number so there needs to be ownership at that level to like that's your you're responsible for, what happens with that number so I want to make sure as you build the kpi's out your all your also assigning those properly in the organization and they completely understand, the sources and the reliability of that data and are accountable, ultimately to the management to make sure that they have accomplished and meet those, numbers effectively so that's going to be part of their performance in the company as well. [24:31] So that then addition to that I think it's important to be able to build out a. A road map of all of those numbers so that the whole organization really is knowing and understanding what they're responsible for and again comes back to the idea that everybody in the company really should have some type of number that they're shooting for, this is where that would come from you know and then just being able to kind of incorporate this in a communication plan I think it's really important one thing I will. I would always try to do is connect the kpis as best you can to an overall business plan that you have on a one year basis so how does that work through the whole company in relationship to obviously I'm just going to keep staying on collections for a second the more, that we stay on top of our collections then we are not going to have as many cash flow issues or we're going to have the cash flow we need. To support the different and sent invent in Investments that we have in a company or just meeting our operational cash flow budgets or any of those types of things specifically with an ESOP company. [25:35] As you start thinking about this we have this obligation of it as a leveraged ESOP company going into that next year once the transaction is over with to meet what the debt payments and so, clearly this is Neff definitely going to fit together within our overall business plan, and the primary goal of the business plan for the ESOP is hey let's pay off acquisition debt that's got to be part of our overall business plan so the kpis are certainly going to have. A legitimate connection to all of those things and I think the Management Group you know if we go from CEO all the way down throughout the entire Management Group. That their job is to take and make sure that there's meaning behind those kpis and hopefully you know as you build up kpis. [26:20] You're going to do it with the the, appropriateness of making sure it's something that is really needing to be measured because if it's not needing to be measured then it's really why are you why are you really doing it. On an ongoing basis than. As you start getting into this if they're if your company doesn't do any kpis and metrics so this is really just very beginning steps for you you're going to walk into. The more or less like a an experimental thing had this is working this is not working you're going to need to continue to review that process, if you're mature in this process if you're going through the steps on an annual basis or maybe every couple of years you're going to want to kick those around and make sure that they're valid and important in meaningful. [27:07] So as we go through this there's a lot to do with kpis and I wanted to kind of finish with just the idea behind, what it might look like four different examples of kpis so before we get into all the examples of the kpis that I wanted to share with you let's let's go into this real. [27:28] This is going to come down to which Runners can handle the pain let's hit it again mr. white each hour that my voice train with you they do not work, that's with of our table no one stays in McFarland unless they have to thank nothing American dream about this place. Guess I'm running the best thing you got me too I'm guessing run is the best thing you got. [27:56] Me too so here's what I wanted to share about that as we as we think about the examples and we look at closing out this this episode. [28:05] I did a lot of things in the role of managing partner and. I remember going through and saying that's a great idea and starting something and stopping starting and stopping I want to say this as we start thinking about these types of things is do your homework. [28:21] Don't shortcut the process do a really good job of creating the kpis. And communicating those and building those in your business plan and then stick to it so stick with it it's really important for your organization from a long-term perspective, so that you don't confuse everybody and have you know a new thing that you're doing every you know a couple of years or a year or whatever hey we're going to try something new, it's good to try things new but just stick with it that's really the message I want to I want to make sure I got across pretty well. So quickly sales kpi some things that you might be tracking already some things you may not be there's a million permutations of these different ideas that. [29:02] Hopefully this helps you think about those in jars some things, number of new contracts are number of new customers sign per period dollar value of new contracts signed per period number of engage qualified leads, in a sales pipeline hours of resources spent on sales follow-up average time of conversion of new customers. The net sales whether it be dollar or percentage growth you can look at then Financial kpis being growth and Revenue. You can look at net profit margin or gross profit margin specifically operational cash flow you could look at account receivables balances you could look at inventory turnover inventory balances you can look at. For an ESOP company for sure your earnings before interest taxes depreciation and amortization because that's it a measurement on the valuation side. [29:51] Customer kpis might be number of customers retained percentage of market share net promoter score which is super popular now average price per customer average revenue per customer, some operational kpis might include how much time it takes to fulfill an order, how much time it actually takes to get to the market with a product you could look at, employee satisfaction ratings on the HR side you could look at your employee turnover on the HR side, marketing kpis might be monthly of website monthly website traffic you could look at number of qualified leads conversion rate from a call from A New Perspective customer to an existing customer, keywords in the top 10 search engine results you could look at number of blogs published so there's just a million kpis and keep in mind as we started with the concept between a kpi in an activity measure. [30:46] You want to move into as many activity measures that can help your people think about what they're actually doing and numerical form and quantify that so. Hopefully that was really helpful for you I hope it I hope it was as we start and continue our journey to an ESOP I pray I hope that that you will use this information to help build your valuations and all the things that you need to do to manage your company as well. We're going to I'm going to sign off we are moving into the week of Thanksgiving so I'm super excited about that. Hope everybody has a wonderful time with their families and enjoys Thanksgiving and with that I just like to say thank you for tuning in today and we'll see you on this, on your next step on this journey to an ESOP.
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