What gets measured gets managed and done. It is essential to provide information on how well work is performed. How well are we doing? Reviewing your company’s performance metrics should be a regular and ongoing practice.
I am a big fan of metrics and believe that they should be simple to collect, easy to interpret, and relevant in their use. Let us start with the purpose. The metrics should provide information on:
- Results—the actual performance measured by some pre-defined metrics.
- Relative performance to a standard framework—the comparison of results against an acceptable level of performance.
- Action items—so that adjustments can be made.
To report on the right things, the business needs to figure out the ideal outcomes for its success. It must ask itself what results it wants to achieve if it can fulfill its mandate and satisfy the customer needs. Though it sounds straightforward, it is a challenging question because the business must identify the specific, tangible results.
The use of metrics is important because they answer the question, “What does success look like?” and, more importantly, “How will I measure it?” Financial information, customer surveys, employee interviews, completed work orders, and several website hits can all be used to create meaningful metrics.
The key is to understand that the metrics should be unique to each department in order to be relevant. Think big picture (company profitability) and then drill down (departmental goals). Ask questions of all the stakeholders and set unique goals that each contribute to the business’ overarching goal. These should be SMART goals – specific, measurable, attainable, relevant, and time-bound.
To be useful, metrics must also predict the result the company is seeking. Companies often rely on statistics that are neither very persistent nor predictive. Because some metrics do not reveal cause and effect, they have little bearing on strategy or even on the broader goal of earning a sufficient return on investment.
Most companies will argue that they do not have enough information to develop meaningful metrics. If this is true, how are decisions being made? Companies generally have more information than they know, but they do not understand how to use it. With a little extra effort, businesses can collect more actionable information and develop useful metrics that will allow them to make meaningful decisions on their business. Even qualitative data can be quantified. For example, instead of using an open-ended customer service questionnaire, ask questions on a scale from 1-5. Make sure that the items that are being measured are not dependent, and if they are, that they are being used to check that the data is accurate. Managers should also be flexible in the metrics that they choose to ensure that they are useful.
While this article mentions different departments, it is relevant for companies of all sizes, since they should have people performing different functions. In smaller companies, there will simply be an overlap in the staff that will be striving to meet the targets.
Financial metrics should be the easiest to obtain because even with the most fundamental inputs, companies can assess the overall corporate health. Almost all companies generally have an accounting system or process that collects their financial data. Once the metrics have been identified to determine the state of the company, management needs to determine where the business sits relative to the marketplace objectively.
By overlaying corporate health with a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) will determine how management should focus on the business. First, organizational health measures that can be any relevant financial ratios. They can be as simple as a quick ratio (current assets/current liabilities) or as complicated as a DuPont Analysis, which tells you what is driving the return on equity.
While these are acceptable metrics, they are dependent on the reporting systems that you have. If they can be extracted simply, then they are useful. Once the relevant figures are obtained, and a determination is made on the strength or weakness of the company, management can look at the market. If there are opportunities in the market, the company can look internally at other metrics to determine how to achieve their goals.
Once the financial metrics are used to determine the corporate health, and the company’s position in the external environment has been objectively assessed, the changes that should be addressed rely on the other metrics that are developed.
If the goal is to sell more products online, then the metrics might be to have a more significant number of website hits or lower bounce rates.
If the company is in a strong financial position, with lots of opportunities, they should innovate. The other metrics they select will help determine if it is product innovation, a service improvement, a reduction in cost, or some other method to get increased market share.
When a business is in a good financial position, but is not competitive in the marketplace, the business must transition to take advantage of new opportunities. This could include using their strong cash flow to extend their product lines or push into a new market.
A company needs to transform when it is taking advantage of market opportunities, but is not financially sound. It requires setting metrics that allow the company to change its internal structure or operations to be more competitive in the market where opportunities are available.
The worst situation is a turnaround, where the company’s financials are poor, and the demand for their products or services is weak. This is generally when outside help is needed because management has not focused on being efficient, nor has it noticed that their products are no longer sought after. Management typically has missed the opportunity to develop metrics or have chosen completely inappropriate means of managing the business.
While this article discusses a basic framework on how to use metrics to determine when you should reinvent your company, many other metrics can be used for many reasons: to manage efficiency, employee performance, follow sales leads, determine product sales mix, or set staffing levels. The trick is to make them easy to collect (even if they are not simple), relevant, and objective, so that the interpretation is consistent.
Prior to the pandemic, companies were slow to use metrics to reinvent their business. Now, more than ever, companies must evaluate their business and make decisions quickly, using all the information that they can collect. In this environment, leadership should make decisions and adjust as needed. New information comes in every day from a variety of sources (federal, state, local governments, CDC, SBA, etc.) so being able to pivot is important. Knowing your options by understanding your metrics will help guide you in your decisions. Choosing to manage without a plan will only lead to pain. Identifying and exploiting metrics is the key to seizing advantages and reinventing your business to remain competitive.
Check out C2CB.co if you need a clarifying, no-obligation discussion, or some pro-bono consulting help about how we might help you identify and mitigate risks.