“KPI” for Whale Watching!
A few days ago, I came across a post that suggested “need-to-know 25 KPIs”. A reader was suggesting a sprinkling of KAIs on the KPIs. (If you can count five KPI and ten KAI for your business, off-the-bat, you may move on.) If you are still reading, however, let us remove the K and think of “performance indicators” and “activity indicators”.
Value Based Whale Watching!
Let us say PRINCE OF WHALES is our consulting client. PoW is in the business of providing tourists with close encounters with whales off the coast of Vancouver Island.
Manager Michael Orca knows that more tickets sold to tourists is generally good, more revenues can be good and bad, longer wait lines is good and bad, more passenger capacity (boats) is good and bad, higher ticket price is good and bad, a longer dock is good and bad. Unpredictability of weather is bad, unpredictability of the number of cruise ship passengers is bad, more whale sightings is good, more labor cost is good and bad, more fuel consumption is good and bad. More debt is good and bad. The challenge and excitement of running PoW appears to be in making the right choices for a shot at “maximum value” at the end of the season.
To get a grasp on the business, we set out to normalize all the factors that PoW keeps track of. Revenue/Number of Tickets, Labor Cost/Revenue both quickly make sense. Fuel Consumption/Number of Cruise Ship Passengers, Labor Cost/Whale Sighting or Debt/Whale Sighting do not. Too many factors are involved in the balance and not all are manageable. Some of the normalized measures are just not as relevant to management for value as others. It seems like we need a framework to overcome the KXI confusion and make good decisions.
The success of any value oriented strategy is measured by how well it can generate and attract the funds needed for growth.
Prince of Whales must make sure that it can pay the RENT to financial institutions and the equity investors whose funds were used to buy boats, extend the dock, pay the labor to remain open on rainy days. Even if PoW is profitable, if it cannot attract fresh equity from existing or new investors, in balance with financial debt, the strategy can fall victim to a Catch-22 scenario. As financial credit limits are reached, first source to turn to for operating capital is more vendor credit. The cost of vendor credit is buried in the price of the goods purchased, hence, higher the debt to vendors, higher the costs of production and lower the profit margin.
Next and most expensive source of funds is equity. To the investor, every new project is added to the accumulated investment from earlier projects (invest in boats, invest in new dock, invest in signs, etc.) and the net profit after taxes, from ALL projects, needs to meet the investors expectation.
In CFO jargon, RETURN on CAPITAL EMPLOYED needs to MEET OR EXCEED the INVESTORS` OPPORTUNITY COST.
Translated: Costs can go down, revenues can go up, vendor debt can go up, boats can be sold off, investments can be postponed. OR: debt can go up, ticket prices can go down, investments continue.
Soon, it becomes clear that there are numerous value sets on the “efficient frontier”, where risk, returns and growth find a temporary balance.
Until a balancing model and algorithmic tools are also in place, how many KPI candidates are identified seems to matter very little.
For a better solution visit; http://altabering.com/alta-bering-epo/epo-demo