Episode 6 - KPI Deep Dive

Hey everyone, welcome back to Owner Occupied. This is episode 6. I'm really excited for today's discussion. Uh, we do a deep dive on key performance indicators and the EOS Traction Model. So we start out today talking about some of the KPIs I use in my own property management business. We move on to a discussion about using KPIs within the sales and marketing functions and how I came to an understanding of sales and marketing and, and began to use KPIs to really flesh out those functions within my business. We, we continue with the discussion of KPIs in comparison to other companies. So do I use KPIs as a, as a way to benchmark my company against other property management companies? And we also discuss using KPIs in the sales process to troubleshoot problems and uncover opportunities. And then we wrap up today with a long discussion about the EOS Traction System. And Russell is learning about this and I've started implementing it within my business. And we talk about whether it's worth hiring a professional implementer to come in and roll that out within your company. So I'm thrilled for today's episode. And let's get started.

Peter, the last podcast, you talked about your business buying process. And I was really struck by the precision that you had on how much it costs you to service a door, how much you would make. And you, you allowed for some flexibility, but you described a level of detail that is completely foreign to my, to my high margin service business. But it got me thinking, uh, and you recommended a book, Traction. Uh, and I didn't read the whole thing, but I read chapter 5 on key performance indicators. So I'm looking forward to chatting today about how you use KPIs, what you think about them, and and just understand how they form in your business and how they might be useful in mine. How do you use KPIs? How do you think about them?

Yeah, great topic. I'm excited to get into this. So, so KPIs, key performance indicators. So we use them in a few different ways. At a high level, we review our KPIs on a monthly basis. My business partner and I the other owner, we look at a few metrics that give us a sense of how the business is doing. And some of these are going to be very familiar, like profit margin, number of units under management, how much money's in the bank account, some of these things that you just kind of have to keep an eye on as a business owner. And then some of them are going to be much more specific to my business, which is property management. And I'll probably dig into some of those as we get a little further in the talk today. But so, so that's so from a high level, KPIs keep you informed as to what's happening in the business. And the way to think about how to pick an effective KPI for that purpose is that there's a great sort of a thought experiment that I think is presented in Traction and probably elsewhere. Pretend you're, you're alone on a deserted, on a deserted island and you're going to be gone for a year. And the only way that you are going to know how your business is doing is you're going to get like 5 numbers on a weekly basis. What are the 5 numbers you need to know in order to understand if your business is on track or off track? That's a great sort of jumping off point to think about KPIs and how they can be used to sort of keep tabs on things from a high level. So, so that's the first way we use them in the business. KPIs are also very effective for driving change within an organization. You know, the old saying here is what gets measured gets improved, if I'm getting that right. And there is a certain element of truth to that. That little cute saying has always rubbed me a little bit the wrong way because I think it overlooks some of the important intangibles within an organization like, like the strategy. But be that as it may, KPIs are great if you need to zoom in on a certain part of the organization, figure out what's going on and change or improve it. So for example, say you were having trouble with growth. And you needed to understand why you weren't winning new clients as quickly as you wanted. Well, you would look at things like the cost per lead could be a good KPI. Maybe we're spending too much on marketing, or maybe, maybe the cost per lead is really low and that means we could really step on the accelerator. Another thing you could look at would be what's your conversion ratio? So how many leads that come in the door actually turn into clients? And if that number is too low, that, that means there's something's gone wrong in your sales process. So you could sort of highlight that and then track it over a course of weeks or months as you experimented with different things to try to improve it. So that's kind of a summary of how I think about KPIs. Of course, with my engineering background, I'm a numbers analytics type of guy, so it sort of fits right in naturally with how I think about things. I feel thankful for that because I think it's helped us be successful. And I think it's helped our business overcome areas in which I'm inherently weak. And I would identify probably sales and marketing as areas that I'm just not naturally talented, but understanding the numbers helps me sort of get a handle on that and understand exactly where I need to improve.

It was, it was interesting as you were talking about the, the ones that you went, if you were on a desert island, what would you need to know? And my, my first 2 years in business, I started and I had a, I had a partner who does the books and numbers. And he's an auditor and spreadsheet guy. And we didn't talk all the time, but I didn't write any checks for the business. I didn't, I didn't pay the bills, but I knew in my head what the numbers were. And you would joke that I kept this running tally. And in my mind, that was— it was a good day when we got to the point where I wasn't exactly sure what the numbers were.

Yeah, that's exactly right. And that's natural as a company grows. You know, I used to be the same. I knew, I knew the name of every client. I knew the address of every property we managed. I even knew the name of every tenant for a while, and every dollar going in and out of the bank account I knew about. But yeah, as you grow and scale, that changes and you sort of have to zoom out a little bit.

[Speaker:ROBERT_LEONARD] And so I still probably have a pretty good idea what the cash balance is every day. And as I'm looking at some of the businesses I'm moving into, that weekly revenue then becomes more of a number. And I like that leading edge. So it's not gonna, it's not going to trip me up at the end of the year or at the end of the quarter that if I'm expecting a weekly number and it's lower, I can at least ask why, like what would be going on there? Do you know what your desert island top 5 numbers are for a property management business? How do you think about that?

Yeah, I'll actually, I'll pull up, I'll pull up those exact figures. So we do a weekly level 10 meeting, which is an EOS traction concept where we get together with some of the higher level folks in the business and talk about how things are going. And one of the things that we do there, excuse me, is review the scorecard. And the scorecard is exactly that. It's It's about 7 or 8 metrics that we would need to know to have a good understanding of how the business is doing. And the nice thing about the scorecard too is that you actually plot out the scores over, I think it's like 12 weeks. So you kind of keep like a 12-week running. I don't know if I'm explaining this well, but you show them all on the scorecard. And you sort of just update the most recent date and then the 12-week-ago numbers sort of roll off the end. And that can sort of quickly show you which way the numbers are trending. So I just pulled ours up here. Here's what we track. We track new leads, which is customers inquiring about our company and could turn into clients. New units, which is essentially new properties under management. And that could come either from sales from a new customer, or it could be an existing customer adding properties. We track how many units we have listed for rent, so that's a good sort of indicator of, of the workload on our leasing team and, and sort of how stale those listings are. We track open work orders, so every time a tenant requests a maintenance item, a work order gets entered. And by tracking how many of those are open at any given time, I get a sense both of the loading of the maintenance department and how up to date they are on closing out those work orders. We track our Net Promoter Score for clients and tenants. We track that separately. Net Promoter Score is the thing where if you've ever got one of those emails and it says, how likely are you to recommend this company to a friend or colleague? With 1 through 10. We, we, we survey our clients and our tenants 3 times a year and we track that. So that's essentially an indicator of customer service or how well is the overall operations department doing. If they were failing in some way, that would sort of be exposed through a lower net promoter score. And then the last 2, we track the total number of units under management. And then we track the total occupancy of how many of our units under management are currently occupied. So that's, that's the list.

And you, you would— do you have a target for each of those? Do you know what you want it to be? Are you kind of looking at the 12 weeks and you've seen it and you're familiar with the number? So if something pops out, are you looking for a pop out? That kind of thing?

Yep, we do track a target. So Each KPI here has a target that we should be hitting, and then we can see if we're hitting the target or not. And then each KPI also has someone who's responsible for that item. It's the old, if you ever heard that lovely expression, you need one throat to choke. You need one person who you can get your arms around their neck and say, what's going on here? Not literally, of course, but—

But they would know what it is. There's a sense of responsibility. Yes. And they want that number to be good when they go into that meeting.

Right. Yep. And so not only are they responsible for the number in terms of is it hitting the goal or the target, but they also are responsible for sort of bringing the number to the meeting and reporting on it so that I'm not running all over the organization trying to dig up these KPIs.

So are you— when you look at that as a management technique, Is it burdensome, unpleasant? Are people rolling their eyes about their number, or is it culturally— you don't want to obfuscate, you don't want people lying, you don't want people engineering to a number artificially to not have a bad report at the weekly meeting. How do you manage through that?

Great questions there. So I think the first thing is, if a number is bad, I know I kind of joked about it, but I don't usually look at it as a personal failure of an employee. I more see it as a systemic issue, like something in the system or process is breaking down because I know that the people who work here are good at what they do. And if we're missing a number, it's probably not because someone was just being lazy or skipping work or something. There's probably something else going on. So It provokes good discussions. Any issues that are identified when we're reviewing the KPIs in the EOS model, they sort of drop down to what's called the issues list. And then later on in the meeting, we review all the items from the issues list. We prioritize them in order of severity, and then we tackle those issues one by one sort of collaboratively. So the culture is very much, hey, that's interesting that there's something There must be a reason that we're not hitting our goal with this KPI. Let's explore that as an issue and talk through it. It's not like, you know, there is a certain amount of personal responsibility, but it's a collaborative environment when we go to solve the problem. So the culture, I wouldn't say I don't think that the people in this meeting, which is a small meeting, it's me, my business partner, and our director of property management. There's none of— there's no sense that people would be like cheating to make the numbers or anything. I mean, it would be quite obvious if they tried that. But I think everyone who's in that meeting wants to see the company be successful and agrees that these numbers need to be hit for that to happen. And so it's much more about how can we make that happen?

Well, in an area where you didn't have expertise, the marketing, the sales, How did you benchmark or how did you create benchmarks for new leads, for instance?

Yeah. Well, it was sort of a long journey for me to educate myself about sales and marketing. A lot of that actually came through listening to podcasts about property management and hearing some of the— hearing from some of the vendors that actually service our industry. With sales and marketing products and services, and hearing them talk about sales and marketing, the language that they would use helped sort of unlock those, those KPIs because things like a conversion ratio or a cost per lead, marketers and salespeople talk about that all day long. And so it's very much a part of the lexicon. So just hearing other people discuss it in an analytical way, really helped me sort of dive into that world. And that clicks right in with my engineering mindset. And so I'm like, okay, great, how can we drive down our cost per lead? How can we drive up our conversion ratio or our closing ratio? So it was a long process and I'm still learning for sure.

Do you benchmark against other property management businesses or when you do an acquisition or you've gone through that sales process you mentioned last year, do you, do you compare their net, their numbers to yours? How's, what's that look like?

Yeah, we do. So there's actually, there was a study done a few years ago where a group of 50 property management companies was surveyed by an accounting firm and the numbers for those 50 management companies were standardized and then benchmarked against each other. And that provided, it was called a benchmarking study and it provided a baseline for a lot of KPIs like revenue per door is another one that we look at. And so a lot of the KPIs that I look at, I'm able to see from this benchmarking study, how we're doing versus other folks in the industry, especially in terms of profitability, size, and other sort of high-level metrics. So yeah, it's something that we do think about. I mean, I try not to obsess about it because you don't want to spend too much time worrying about what other people are doing because I don't think that's a productive use of time, but certainly I think it's good to know if you're in the range of what's normal for your industry. I feel really thankful that that's available. I don't know that something similar is available for other industries. The folks who put that together are real thought leaders and innovators in our, in our space. And those are the same folks, sort of that same circle where I learned a lot about marketing and sales.

I think I'm— I think I would spend— I think I would spend money on the new business line that I'm going in to at least give me a baseline for benchmarking against what everybody else is doing. Like, to see what's happening today and what good looks like would be— will be some— I won't necessarily drive to a point on day one, but it'll give me a framework for how to think about that. I know as I've gone through the acquisition process, and putting another business's numbers through the wringer, so to speak, and working with that spreadsheet, it has been fascinating. I know what the profit margin on 7 different products is and multiple different businesses that are producing the same product. There's different numbers there and why. Asking those questions has been really good. One of the places where, when I was reading Traction, they gave a list of KPIs in Chapter 5, and mentally I broke the first two into sort of CEO basic job categories. That was, you know, sort of weekly revenue and the cash balance. You need to not run out of money. And they had payroll further down, but mentally I put payroll in that same category, that can't ever be a problem. My employees have to get paid, but then some previous advice, the book you gave me said, you also have to make sure you're getting paid. You have to put that in. So I've done that, but the one where I could see adding and something that's an intuitive process for me were sales calls, sales meetings, proposals, and close business. And I do all of those things now, but I don't have metrics, numbers, and accountability for those things. And even if it's just me, if there's not someone that I'm accountable to, forcing that kind of discipline to say, have those things happened. I know that when the cash balance isn't what I want it to be, or, I'm looking at new business, it's okay, I need to kill something, focus on sales, or, and it becomes herky-jerky, as opposed to systematized. And we'd all be better off if that were systematized. And so, for you, is do you, those wouldn't be the top 5 numbers necessarily that make it into your desert island or into that meeting. But for your sales team, do you break it down further beyond those for, for different categories?

Yeah, we do. And that's, you know, each division or department within your company, as you grow and scale, they're going to develop their own set of KPIs that's going to help them hit their sort of departmental KPI. So for the sales department, The KPI that matters above all else is the closing ratio. So that's kind of like the output from the sales department, but the internal operations of the sales department, there's all kinds of great metrics that can be used to monitor the performance of the various segments of the sales process and then the overall effectiveness of it. So sales is a great example because Using KPIs within your sales function, there's two great things that come out of it. One of it is discipline, as you just mentioned. Just the mere fact of knowing that something is going to be measured and reported on a regular basis, it affects you or your salespeople or whoever's actually doing that. So, so simply tracking and measuring has an effect of, you instilling sort of action and discipline. So that's very useful. And the other one is sales in particular lends itself to using data and KPIs to figure out how to improve things. So for example, if you were sort of, if you had a systemized sales process and you were tracking within a CRM, every single lead that came in, And then you were tracking them through the stages. So all the way from first phone call to follow-up call, to request for proposal, to proposal sent, to proposal discussion, to signed contract. Well, now, if you really had that all mapped out and you were keeping the CRM up to date with every single client and where they were in that process, you start to see patterns. So you might notice that 50% of the leads that you talk to on the phone end up getting a proposal, but only 20% of those end up ever having a follow-up call with you. I'm just making stuff up. But so, so that's really interesting, right? So now you can understand your sales funnel is leaky in that one particular area. What is it about the proposal being sent that's sort of slowing things down? Well, let's take a look at the proposal. What's in the body of the email that the proposal is sent with? Is the proposal confusing? Can we shorten it? Can we install some software so we know if they ever even opened it? Can we move our proposal to an online PDF signing solution that would let you see actually how far they even scrolled down and maybe they're bouncing off something somewhere in the proposal? So you can really get technical and detailed with what's going on in your sales department with KPIs and actually, you know, improve things. So that's— I love that as an engineer, I want to dig into the systems and tweak and tune things.

I like it when you explain it that way. It seems less foreign to the process I have. It's just systematizing it. So, of course, I think about all that stuff and I hate to— I don't— I hate to waste time in a venue that I just don't think is going to lead to a sale. And so all of my business comes from people who I know that I've worked with over 30 years in California politics. So I haven't really reached out to people who don't fit in that box, or I've reached out in a scattershot way, but I don't really care because it hasn't ended up in my proposal closed bucket. And so I care about the closed bucket, but it's quite possible if I put the energy to think about systematizing that, that I might get results that are different, but I've optimized for the stuff that's working, but that's the stuff that's important to me and I'm measuring. So it's— It's— that's good. That's good that, uh, it's— it bears digging in and, and getting it out of my head and on the paper and into a system, that it's worth some effort to do.

I inevitably find that when I, when I track something, um, when I, when I document a process or when I track outcomes or I, I start putting KPIs around things, inevitably the results never line up with what my intuition was about the situation, which is frustrating because you feel like you've got a good sense of something. I think a great example would be a closing ratio. So if you talk to most small business owners and you ask them, "How many people who reach out to you about your business actually become customers?" If 10 people reached out to you over the course of a week about hiring your company, how many of them would you say eventually end up hiring you? And I think most small business owners would say, "Oh, almost all of them, probably 8 or 9 out of 10, maybe 10 out of 10." But I would be willing to bet money that if you actually tracked it, you'd find it's much, much lower because I think there's a tendency the human mind will just discount the guy who didn't call us when he said he was going to, or the gal that we sent the email to and they never replied, your mind sort of discounts that lead as like, well, they weren't serious or they weren't interested anyway. But you don't know that. And until you start tracking this stuff, you're going to walk around thinking that you're a sales champion. In reality, you're just a beginner. That was certainly true for us. I mean, our closing ratio is, is around 10 to 20%. I think we've got some room for improvement and we've come a long way, especially after we hired a professional salesperson. So yeah, I think putting numbers to things, it really, you know, the numbers don't lie, right? And it can be painful because for one, it's extra work to track all this and then review it, but then you also have to come to grips with, with failures, right? There could be parts of your business that aren't working as well as you thought they were. And that's never a comfortable discovery. But you got to kind of push through.

So in that process, you mentioned hiring a professional salesperson. Did you do that before or after you produced your KPIs? Did the KPIs reveal a problem that you that you decided to outsource? How did you think through that? Yep.

So the KPIs came before. And so we knew that there was an issue with closing ratio in our sales department, which was me. I was the issue because I was the only one doing it and I was super busy. And also I was losing my passion for it. Plus I just don't have a natural sales talent, I don't think. So So that, it would, that was instrumental in us not only reaching the decision to hire a salesperson, but feeling confident about that decision. Because I could, I could look at the numbers and show in black and white, if a salesperson drives our closing ratio from 15% to 20%, they've paid for themselves 5 times over, or whatever it is, right? Because the additional business generated by those extra those extra clients more than covers their salary and their commission and everything else. So, so yeah, there was, there was other reasons we hired a salesperson, but that definitely played a part.

So going to the, to the Traction examples, we haven't really talked much about it. It may not be relevant to, to your business, but the, the accounts payable, accounts receivable customer problems, that, that sort of ranking you put, you mentioned customer problems, I suspect, but accounts receivable and accounts payable. Do you use those metrics?

So the beautiful thing about property management is that there essentially is no accounts receivable, because we're, we get paid directly from the rent, and we collect the rent, we essentially get paid first before our clients even get paid. So there's a lot of things that make property management challenging. And that's our one little freebie is that we don't have to worry about accounts receivable. So accounts receivable is essentially nonexistent. We pay ourselves directly from the rent. Accounts payable. Yeah, I mean, that's basically just, you know, bills coming in that need to be paid out and that's just kind of handled as an accounting function. It's not something we really have to pay too close of attention to.

And so, tenant complaints, and obviously client complaints, actually, how I assume that, but the person paying the bills is really important. But so is the tenant. So, you can talk about both those measures. But I'm especially curious about why the impression of the tenant, they're not going to hire you. Why does the tenant's impression of the property manager matter?

Yeah. So we track, we track both of those with this net promoter score. We kind of watch that trend line over time. And the reason, of course, as you mentioned, it's important to understand what our clients think about us because they pay the bills for us. And when it comes time to renew their property management agreement, which happens annually, we want them to feel really confident in signing a renewal. Now, for the tenants, Keeping tenants happy is super important for a few reasons. One is, quite selfishly, unhappy tenants are just a complete nuisance. They make a huge fuss and they have the ability to really disrupt things around the office and make our employees pretty miserable. So having a good system and process in place to make sure that tenants are having a great experience is very important. The other reason that it's important is it's actually in the owner's best interest to have a happy tenant. And we have a fiduciary responsibility to act in our owner's best interests. And I believe that includes doing right by the tenants because a happy tenant is much more likely to renew their lease, pay their rent on time, and take care of the property itself. Not tear the place up and treat it like they don't care. So for those reasons, and also there's legal risk that comes with upsetting tenants too much. They have the ability to not only bring just a traditional lawsuit, but they can put their rent in escrow. They can file security deposit disputes. There's legal options. You know, they can call in the health department, they can call in, like, they can register a fair housing complaint. So there's a lot of things that a tenant can do to really kind of muck with the system for us. And we don't, we don't want that to happen. For one, we don't want, you know, one of our customers to be that unhappy, but also it's, it's very uncomfortable for us to have to deal with those issues.

Well, we're getting toward the, toward the end, and I wanted to check one other thing. They— when, as I was Googling around on this, there's all kinds of EOS implementers, and I'd never heard the phrase before. And, and some of the pricing was hugely variable for what it took. I was— it was hard for me to imagine how much value someone could add in one day that I would pay that, that, that work for. I— there's a person, I think you may be Michael Yarmo with the Newpoint, and and his firm provided enormous value over 8 weeks, changed the way I think about the business, gave me pictures of numbers I couldn't have imagined. But that was over an 8-week period, and I felt like he knew that he and his team knew the business better than I did and took 8 weeks of explaining, giving me work to do to produce that outcome. So, yeah, Are you familiar with an implementer and, and how do you think about them?

Sure, I am familiar with implementers. So, and I don't mind sharing these numbers. I mean, if you hire an EOS implementer to help you roll out this Entrepreneurial Operating System or EOS, which is what this Traction book is all about, you can hire a professional implementer to come in and help you implement that in your business. And they charge anywhere between $4,000 and $8,000 a day to do that, plus travel expenses. So, but the— and we, we are looking into using one later this year, one that's on the lower end of that spectrum that I know, to sort of help us finish our rollout. And we would only need that person for a short time period. The idea with these implementers is that they come in, they help your team and your business fully get on board with the EOS system, and then they get out of the way. The idea is that you use them intermittently over a period of anywhere from a few months to a few years, and then once your team is sort of fully up and running with EOS, they— you don't— it's not like a long-term engagement. Um, and in terms of the cost, it is eye-watering. I'll never forget the first time I learned how much it costs. I was on the phone with this guy and I was sitting in my car and I almost dropped the phone. I couldn't believe, you know, it's just, it is shocking. But, um, it's easy for me to imagine the value. Um, now that I'm— we sort of half run on EOS, we haven't finished our rollout. That's one of the reasons I want to get some help finishing. But I think especially as you grow and scale, I think getting EOS up and running and fully shipshape within your business, it could be life-changing, I think, because the problems that you start to run into as a business grows and you have more and more employees, it's so easy to get stuck at a revenue or an employee level that you just can't get beyond. And these guys, What the EOS implementers bring is not domain-specific knowledge. So the guy that we're looking at hiring, he really doesn't know much about property management at all, but what he does know is how to run an effective level 10 meeting, how to set a vision and a strategy, how to select KPIs for the scorecard, and all the other things that go along with EOS. So I've talked to a bunch of entrepreneurs who have hired implementers. They almost universally say it was well worth it. And there's other folks who self-implement. If you read Traction and you feel like you've got the time and you've got the understanding and you're willing to do all the work it takes to really, to really integrate into your business, you don't need an integrator. I know people that have done it on their own as well.

So I'm curious, that's— but since you've already done so much of it, when you say finish rolling it out, is it, is it other departments? Is it giving every employee a set of numbers? Is it, it's that that next step, or is it getting everybody bought in, or is it using it the right way? And if they don't have the domain expertise, how— it's hard to see the value. But then I had the same experience when human beings talking about it, not from their websites, but on Twitter. That were encouraging other people to do it, saying it was great. So, so I don't assume it's garbage. I assume it's good. And I just don't get it yet. So, so that's— how do you— how do you— so you've done most of it yourself, and you're still thinking about bringing someone to finish it off?

Yeah, I think it's a little bit of everything of what you listed off. There's something about having a person who's not familiar with the day-to-day bullcrap of your business and is not going to accept your own excuses. There's something about having a person like that walk through a process with you, especially around a big part of the EOS process is creating what they call this VTS or Vision Traction Organizer, VTO, I think it is. And it has you set like a mission, vision, and values, which a lot of people are familiar with that, but are still really important. And then it has you set a 10-year target and a 5-year goal and a 2-year plan or something like that. And then it has you select your annual rocks or your annual goals for the year, and then you get quarterly rocks as well. So there's a lot to this. And these guys have kind of done it all, seen it all. They've been in all kinds of different businesses. They've heard all kinds of different excuses and complaints, and they've overseen hundreds and hundreds of small business owners take their business to the next level. I'm starting to sound like an ad for these guys. But I'll report back. Hey, I'll invest the money. It'll be a business expense. I'll charge it to the podcast or something, and then we'll see. We'll see if it was worth it. I'll give you the straight take.

Yeah, you can, you can bill me. Maybe I can, maybe I can fly out and you can get a discount because I get a pitch meeting to watch, watch what he delivers for, for you guys in a, in a, in a one-day, in a one-day deal.