KPIs Applied: The Case of the Declining Profit Margin
Business Environment
The Capital City Convention Center has been in operation for six and half years. Their business model is robust with in-house profit centers for utility services, parking, and cleaning. Communications services and food and beverage were awarded as long-term exclusive contracts to leading companies. They also launched a corporate sponsorship program in 2018. In late 2014, the center launched a limited KPI program with plans to expand it as the program matured and proved itself. The center has gradually progressed toward becoming cash flow positive, which was and is a cornerstone of their business strategy. The strategy is enthusiastically supported by the board of directors and the city government.
At the end of 2017, the center achieved positive cash flow. Annual earned revenue was $13.1 million and exceeded annual expenses by $928.8 thousand. In 2018 earned revenue was $13.9 million and exceeded annual expenses by $1.57 million (see Table 5.1). A $2 million goal was attainable. For 2019 the business forecast was favorable; the number of events and occupancy rate were slightly better than 2018. Overall earned revenue, which included rent, utility services, F and B commissions, and parking revenue were all better than 2018. There was growing confidence that by the end of 2019 their cash position will be such that a capital reserve fund can be established. How did they get to this point?
1. By 2015, they found and nurtured several large events, which decided to return each year.
2. In 2016, they implemented a KPI for “Market Pricing Comparisons to Competing Venues” for all parts of their revenue-producing departments. Their main focus was on utility services, which contributed over 30 percent of earned service revenue (see Figure 5.1). The center’s pricing was found to be below the average. In 2017 they scrapped their “cost plus” model and event service raised prices to market averages.
Figure 5.1 Earned revenue percentages (2018)
The Problem
There were signs earlier, but the problem never really took hold until 2019 first quarter review of KPIs. Utility service profits were behind plan and profit/NSF and profit margin had both decreased dramatically—nearly 150% (see Table 5.1). There were some signs in the Monthly Financial Report but not so much as to cause alarm. Most of the 1st quarter losses were attributable to a decline in utility service profit/NSF.
Year |
Earned Revenue |
Expenses |
Profit |
Profit Margin |
GSF Rented |
NSF |
Profit/NSF |
2013 |
9,460,500 |
10,965,000 |
-1,504,500 |
-15.9% |
4,500,000 |
1,575,000 |
-1.047 |
2014 |
9,447,480 |
10,840,000 |
-1,392,520 |
-14.7% |
4,580,000 |
1,694,600 |
-1.217 |
2015 |
9,774,000 |
10,440,500 |
-666,500 |
-6.8% |
4,600,000 |
1,702,000 |
-2.554 |
2016 |
11,399,000 |
11,890,500 |
-491,500 |
-4.3% |
4,775,000 |
1,805,500 |
-3.673 |
2017 |
13,099,690 |
12,170,900 |
928,790 |
7.1% |
4,870,500 |
1,850,790 |
1.993 |
2018 |
13,923,000 |
12,350,900 |
1,572,100 |
11.3% |
4,900,000 |
1,862,000 |
1.184 |
2019 1st Qtr. |
3,190,000 |
3,355,050 |
-165,050 |
-5.2% |
1,470,000 |
543,900 |
-3.295 |
Table 5.1 Earned revenue profit margin and profit/NSF
The second quarter was already underway. Management resolved to get to the bottom of the problem and fix things quickly. An analysis was put together to examine the worst-possible outcome should the continued decline in utility profit/NSF continue. The idea of reaching $2 million in positive cash flow was at risk. A rough analysis showed that if utility service profit/NSF satyed the same that a possible loss of nearly $500,000 was possible. See Table 5.2 below:
EFFECT OF CURRENT 2019 UTILITY PRFIT OR LOSS/NSF - END OF 2ND QTR. |
|||
Profit |
NSF (Actual) |
Profit/NSF |
|
2019 1st Qtr. Actual |
-165,050 |
1,575,000 |
-0.10 |
2019 1st Qtr. Plan |
140,000 |
1,500,200 |
0.15 |
2019 YTD Difference from Plan |
-305,050 |
||
EFFECT OF CURRENT 2019 UTILITY PROFIT/NSF - 2019 YEAR END |
|||
Profit |
NSF (est.) |
Profit/NSF |
|
2019 - with Actual 1st Qtr. 2019 Profit/NSF |
-204,348 |
1,950,000 |
-0.10 |
2019 - Annual Plan |
292,500 |
1,950,000 |
0.15 |
2019 Possible Loss |
($496,848) |
||
Table 5.2 Effects of current utility profit or loss/NSF for full year
How did the drop in productivity happen? There was more than one cause.
1. Event utility services are led by a head supervisor and a supervisor for each exhibit hall. There are five large exhibit halls. Supervisors are responsible for utility installations. In December 2018, one supervisor retired and another took a lengthy sick leave. The replacements were skilled journeymen who had worked at the convention center for more than a year. By February it became clear that both of the replacement supervisor’s productivity metrics were far below average. The manager and the head supervisor should have seen the problem developing in January and taken corrective action.
2. A new General Service Contractor (GSC) entered the market in late 2018 and quickly persuaded a major fraction of event organizers to contract with them. At first, the new GSC was highly disorganized. They had no production plan and failed to consider contractors and labor of different trades coordinating work schedules. The consequence was that electricians and plumbers were unable to follow set routines of laying and dropping utility lines before freight delivery and exhibit building. This occurred four times on major events starting in January up to early February. At the end of February management reviewed the KPI for “Utility Order Fulfillment” for January and February. This KPI was normally calculated quarterly. The fulfillment objective was to complete 85 percent of all service orders before the last move in day. The logic is that utility work flowed unencumbered at a good pace when the floor was not crowded with exhibitors. The first quarter fulfillment rate was 64 percent, accounting for more than half of the loss as shown in figure 5.2.
Figure 5.2 Utility order fulfillment
3. In March, a major ice storm delayed the move out of a large event, which was to be immediately followed by the move in of a major consumer show. That move in was to occur on a Friday. Work was unable to begin until very late Friday night through Saturday morning. The show opened on time Saturday morning. However, the labor call had to be increased by 30 percent and the work was all on overtime.
Actions Taken
1. Several meetings were held with the new GSC’s owners and managers who conceded there were startup problems with their operation. By mid-February move-ins went as planned and utility order fulfillment and profit/NSF began to improve.
2. One of the supervisors was relieved and replaced in mid-February. The other was given a second chance.
3. With two of the principal causes resolved, it was assumed that as a minimum planned utility service profit/NSF ($.15/NSF) would resume and estimates of forecasted NSF would hold. However, in order to make up for the first 1st quarter and part of April losses, utility service profit/NSF would have to increase to $1.30/NSF. Brainstorming meetings were held with all supervisors and selected journeymen to review work procedures. The objective was to find time-saving methods for utility services. Clearly other earned revenue sources would have to step up and increase revenues and profit.
4. The reporting frequency for Utility Service Profit per NSF and Utility Order Fulfillment was changed from quarterly to monthly.
5. New KPIs were launched in the third quarter:
• Operating Profit/Loss Statements for Each Event
• Labor Hours per Billable Item (monthly)
• Utility Service Profit per NSF for each Exhibit Hall (monthly to monitor supervisor performance)
6. Profit/NSF objectives would be set and closely monitored for each upcoming event.
Lessons Learned
1. In launching their KPI program, center management relied on advice seen frequently in business literature, blogs, and magazines to start a program with just a few KPIs, which fulfill the most fundamental business statistics. Management should have gone deeper. Forgoing and delaying KPIs, which apply to major revenue generators like utility services, parking, F and B, or communications service is bad advice. Better advice is to choose many KPIs and put aside initial impressions that a KPI is redundant and unnecessary. At the beginning, you don’t know what you don’t know. Try the KPIs for a time until you can judge what really matters based on the value of data, not opinions.
2. KPI reporting frequency matters. In this case study, a quarterly review of utility service productivity measures should have been monthly. 3. As experienced in this case study, in our business things can go wrong quickly:
• Outside contractors hired by event organizers have their own agenda and methods of working. These can easily conflict with the convention centers. In - house event service divisions and GSCs have to develop and cooperate on event production schedules.
• Hiring supervisors and managers based on strong supervisory experience is essential. A skilled tradesman doesn’t always mean they have the talent and drive to be in charge.
• Managers must pay closer attention. Having a data-rich resource with KPIs is a great advantage, but you have to ask questions, closely observe and appropriately act on KPIs that do not meet plan or simply seem off, no matter how small.