The ability to simplify means to eliminate the unnecessary so that the necessary may speak ~ Hans Hofmann (1880 –1966)
- Data Availability today – Infinite possibilities
- Sources of Data – Myriad
- Reports and Dashboards – Every possible permutation and combination of detail
- Results from Data Reporting – Further and Further away from Outcome based Decision Making
Tracking and making sense of data to arrive at a meaningful conclusion and an action plan is not exactly an easy job. But then, running a business successfully was never supposed to be easy. This week’s post is focused on performance metrics that act as leading indicators and as pointers to changes needed in strategic direction specially when monitored or tracked over a period of time.
We tend to focus on those things which are easy to measure, simply because they’re easy to measure – metrics based on revenue and margins for example. Performance targets are usually set on these metrics and they are met or exceeded by hook or crook (I have always believed in the maxim – torture data enough and you can get it to admit almost anything). And if they are not achieved, it is often too late at that stage for corrective measures.
This is where it becomes very important for business operations to keep an eagle’s eye on a few key metrics that can give the pulse of the business to allow for course corrections. Here are five that I have seen serve the purpose very well in the services business:
Key Metric #1 – Customer Satisfaction Score: There are many metrics that can be used to measure this – VOC (Voice Of Customer), CSAT (Customer satisfaction), NPS (Net Promoter Score) etc. It is important to measure customer satisfaction for every function and every service of an organization and to do it for both internal and external customers over a period of time. Apart from the primary objective of knowing how well the organization/function is serving its customers, this score and its trending over time helps in identifying the functions that need the most attention. I have found this useful particularly in zooming in on process gaps and lapses and bureaucracy within the organization.
Key Metric #2 – Employee Satisfaction Score: Attrition hurts the top line and bottom line – everybody knows this now and there is increased focus on happier workplaces and organization culture. One SMART (Specific, Measurable, Attainable, Realistic and Timely) way to gauge the mood of your people and the levers at your disposal to reduce attrition is through the metrics arrived at from employee satisfaction surveys (Gallup is a market leader in these surveys). With the pressure on margins and the constant competing demands on resources, this is one metric that can provide you the guidance on the best ways to improve performance by focusing on the areas that matter the most to your people.
Key Metric #3 – Productivity: And I don’t mean lines of code per person kind of productivity metric here but one tied tightly to business. This is one metric that you can choose based on your strategic goal for the time period by deciding the numerator and denominator for the output per unit (productivity). Is your goal the launch of a new product offering – measure Return On Investment (ROI). Do you want to determine which accounts to focus on (with limited sales resources) – measure sales productivity across accounts. If your new business exceeds your sales and marketing expenses, then you know that you’re on the path to success.
Key Metric #4 – Cash Flow: Cash is the life blood of the business – and hence one the most critical aspects of performance management. There are two metrics here that I look at closely and in conjunction – DSO (Days Sales Outstanding) and DPO (Days Payable Outstanding). DSO gives the average number of days it takes a company to collect their accounts receivable or payments outstanding. DPO gives the number of days it takes a company to pay its creditors or vendors. There are a number of operational inefficiencies that can be pin pointed based on the trend of these two metrics. So for example, if we are paying our vendors appreciably faster than we are collecting our own payments – that’s a big red flag and needs digging to identify the source of the problem. Again if the DSO has increased over the previous period, more often than not it is due to a gap in the order to cash process internally. And if it has dipped considerably, one of the reasons could be that we have not raised invoices for earned revenue, again a big red flag.
Key Metric #5 – Gross Margin: This is like the mother of all business metrics and the best indicator of a business’s health in my view. The higher the gross margin, the more the indication that you are on the right track in every operational aspect. You do not have to wait for the quarterly or annual financial results to determine profitability, productivity and customer satisfaction. Managing and monitoring gross margin on a regular basis goes a long way in reducing unpleasant surprises in the long run and also in deciding critical strategic initiatives for pricing, investments and sales efforts.
The choices of key metrics need to be reviewed periodically – business is dynamic, why should metrics remain static? What makes sense to measure in today’s scenario may be irrelevant tomorrow. Also, it is not enough to measure, you also need to act. No metric is useful unless there is an action plan that arrives out of it and is communicated and implemented with urgency. Otherwise, a metric becomes just another number on a report that nobody pays attention to till it is too late.
What metrics do you as a business owner or as a business manager focus on? Are you part of a culture that is addicted to reams of reporting or is the focus more on analysis and results? Have you tried some or all of the above and it did not work for you? Please share your tips, thoughts and success/horror stories – would love to hear and learn from you.
Love Metrics ? Here is some more food for thought :