Giving KPIs Purpose in an Uncertain Market
PE investors and operators shed light on how to develop and use key performance indicators effectively
Tracking performance is table stakes for private equity-backed middle-market companies, especially in an uncertain economic environment.
Yet private equity sponsors, operating partners and executive teams may not have the most effective strategy for managing key performance indicators, or KPIs. These leaders may be tracking the wrong metrics or measuring performance without a clear vision of how that data affects growth and goal achievement.
This section of the report originally appeared in Middle Market Executive’s Fall 2022 issue. Read the full story in the archive.
“Ultimately, the metrics are just a sign of how the business is being run. But if it’s not being used as part of the daily dialogue to … make progress, then it’s a set of metrics that’s just made for window dressing, which is not serving any purpose for anyone,” said Kush Tulsidas, operating partner at One Rock Capital Partners, during the “KPIs and Strategies to Measure and Track PortCo Performance” panel at ACG’s virtual Operators’ Summit on Aug. 16.
Tulsidas joined fellow panelists Eric Goodstadt, CEO of UpSwell Marketing, and David Venker, vice president of portfolio operations at HCI Equity Partners, alongside panel moderator and ParkerGale Capital partner Cici Zheng. The group discussed how leaders in the middle-market private equity ecosystem can extract the maximum value from the exercise of developing and tracking KPIs.
Putting KPIs Into Context
Every time we look at a metric coming in from our portcos, we ask the question, ‘What is this going to drive? What value creation initiative is that going to move forward?’
One Rock Capital Partners
Too often, operating partners and executives fall into the trap of tracking KPIs for the sake of it, rather than developing a holistic strategy. That more comprehensive approach includes identifying the KPIs that will provide the greatest level of clarity into company health, understanding which factors will drive progress toward performance goals, and embracing the opportunity to shift which KPIs are measured as a business evolves.
“Every time we look at a metric coming in from our portcos, we ask the question, ‘What is this going to drive? What value creation initiative is that going to move forward?’” Tulsidas said, adding that if a KPI is not tied to any specific initiative, like cross-selling efforts or growth within a company’s existing customer base, then leaders must ask why the metric is being produced in the first place.
There isn’t always a single KPI that will work better than the rest. When it comes to assessing the health of the sales pipeline, for instance, Goodstadt pointed to “talk time”—the ideal amount of time a salesperson speaks with a prospect for conversion—as well as customer churn. Tulsidas highlighted the need to track not just year-over-year revenue growth but year-over-year margin growth as well. Meanwhile, Zheng noted that tracking net promoter scores is now standard for all ParkerGale portfolio companies.
The panelists agreed that a lack of communication and synergy around KPIs can thwart growth efforts, even after leaders agree on the metrics that should be tracked. If a goal is to grow revenue by $100 million, or EBITDA by $50 million, for instance, there must also be an understanding of where that growth will come from. Whether it’s from product innovation, pricing adjustments or M&A, all parties must agree on what’s required to achieve the company’s financial goals.
Related content: Curating Alignment Between PE Sponsors and Executive Teams
Finally, companies and their PE sponsors should be ready to shift the data they track as a company’s needs change. “Based on the different segments of your growth plan, you might want to be measuring those (KPIs) and focusing on different areas,” said Venker. For instance, businesses entering a new market segment will want to focus on “top of funnel,” a metric that reflects marketing’s efforts to increase brand awareness. For those looking to expand into an existing core segment, however, tracking close rate and win rate—proxies for the performance of sales teams— will offer a clearer picture of progress.
Growth Through Transparency
Even after reaching a consensus as to which KPIs must be tracked, progress is rarely a straight line. In analyzing the data over time, performance as measured against KPIs might not always look the way PE sponsors, operating partners and executives would like.
The panelists agreed that leaders should not shy away from evaluating the whole, honest picture of a company’s performance.
“From an operator standpoint, you have to create the culture that operators feel comfortable telling you that the pipeline is not where it needs to be,” said Goodstadt. “A lot of times we say we want truth, we want transparency, and then we go and show you bad numbers, and it becomes a very contentious conversation. From a PE sponsor standpoint, you have to create that environment for transparency.”
Underperformance against KPIs doesn’t always signal a problem, either. Goodstadt pointed to an example of a company early in its lifecycle, for which top-line revenue growth is an appropriate metric to track. This may come at the expense of gross profit margin, but understanding that this fluctuation is part of a longer-term plan will keep growth initiatives on track. “It’s all part of the vision,” Goodstadt added, “and those things will shift or course-correct themselves over the duration of the relationship.”
As an operator, it’s actually your responsibility … to keep those qualitative metrics front-and-center.
In instances in which a business is falling short on its financial KPIs, investors and executives can still extract valuable insight, especially during periods of market uncertainty. Goodstadt noted that a company’s growth thesis might not need to change as a result of underperformance; the business may just need a revised plan for how to reach its goals.
In times of macroeconomic weakness, executives and operating partners can turn to qualitative KPIs to gain a sense of a company’s health. Venker noted that these indicators might include the progress of digital transformation, for example, or organic growth.
Goodstadt urged leaders to use such qualitative metrics during times of market pressure. “As an operator, it’s actually your responsibility … to keep those qualitative metrics front-and-center,” he said. “Sometimes, all the things won’t be falling into alignment just yet. But if you keep building out your management team, you build out your economic moat, you keep doing those qualitative things, eventually you’ll see all the other metrics turning green.”
Carolyn Vallejo is Middle Market Growth’s digital editor.