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Hungry for change? Lear n about metrics and measures, the M&Ms of business. (Or, the first course of change?)
When dealing with numerical data, approximately right is better than precisely wrong. - Carl G. Thor Picture this, youre a CEO of a major corporation, and the board of directors wants a presentation on business trends and the impact to corporate performance. Heres the catch: You cant use numbers or financial data. Unless you have a crystal ball, this task would be impossible without using metrics. You need data and financial descriptors that highlight how the company is actually doing, and you need a process to analyze the data. And thats why you need measures, metrics and outcomes. A measure is defined as an agreed upon concept of quantification.1 You might, for example, evaluate the weather outside using a Fahrenheit scale (versus Celsius). Some experts say there isnt much difference between a measure and a metric, but a metric is subtly different in the sense it adds a goal or performance nuance to it. So you might say the freezing temperature is 32 degrees Fahrenheit, and that would be a metric. The difference is minor, and for that reason, the two terms are often used interchangeably. An outcome, on the other hand, refers to a conclusion reached through a process of logical thinking. Or, simply put, an outcome refers to how you use the data. In the case of 32 degrees Fahrenheit, you will know to wear a down jacket! If youre one of those people that glaze over when someone starts talking about metrics, measurements and outcomes, youre not alone. At the mention of measures and metrics, many minds fill with pages of numbers that may or may not hold the secret to financial stability, future profits, or market potential. Its hard to know even where to start! Lets break it down and begin with a basic definition of what we mean by metrics. Business metrics leverage numbers and facts that give insights to business performance, finance and sales. Metrics help influence strategic planning because
1 What Is a KPI, Metric or Measure? Klipfolio. N.p., n.d. Web. 29 May 2013. <http://www.klipfolio.com/blog/ entry/305>.
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they give leaders quantifiable indicators, rather than relying on a hunch or gut feeling. Metrics also help decision makers and business leaders plan (and achieve) long term goals and objectives, by providing a corporate road map of performance and sales. Simply put, metrics help monitor progress toward goals and expose inefficiencies across business functions. When implemented properly, they provide valuable insight for change and improvement.
Financial metrics are the most common types of measures and focus on overall corporate performance. Two common financial measures are profits and loss. Organizations track these numbers over time to assess the overall health of a company. Decreases in corporate profits can indicate signs of trouble, while increases may be an indicator of longer-term success. Strategic metrics are similar to financial metrics, but link directly to the strategy and goals of an organization. These metrics are often high-level and easy to understand. Senior leaders and shareholders use these types of metrics to evaluate customer retention, market share, and time to market. Operational metrics measure the efficiency and effectiveness of an operation or process. Think of operational metrics as those that measure the day-to-day tactical operations of the business. These types of metrics provide insight on how the business is actually running and provide a snapshot to monitor activity. Manufacturing companies use operational metrics to determine inefficiencies in the supply chain and to identify processes that can be improved. Call centers might use operational metrics to track average calls per hour or the percentage of successful customer interactions. The idea is to develop metrics that show how your business is operating on a daily basis. Performance metrics measure business contributions and performance across customers, shareholders and employees. They can focus inwardly or outwardly, or can evaluate performance against customer requirements and value. Examples of performance metrics include customer satisfaction, productivity and quality. Metrics are also used for project management to check time, cost, resources and actions across a project plan and budget. These types of metrics help identify areas for opportunity and improvement in project. They help determine where employees spend the bulk of their time and can assist with resource allocation and planning. Not only are different metrics used for different business units, but you can also categorize metrics by business functions or process improvements.2 Efficiency measures refer to how quickly things get done. In other words, how many hours does it take to produce a product? What is the lead time between order and delivery? Similarly, quality metrics measure tangible data related to the quality of your product. For example, what is the rate of returned merchandise? Or, on average, how many defects are produced during manufacturing?
2 Small Business Systems. Numbers Are the Language of Business Improvement! N.p., n.d. Web. 21 May 2013. <http://www.boxtheorygold.com/blog/bid/28325/Numbers-are-the-Language-of-Business-Improvement>
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Customer satisfaction measures apply to the customer experience. These measures focus on new customers, retention rates or customer complaints. Anything that impacts customer satisfaction could be included in this category. Employee measures track employee progress and professional development. For example, what is your employee turnover rate? Or maybe you want to track the number of hours spent on professional development and training each month? These would fall under employee measures. Finally, innovation and improvement measures track new products and improvements across the corporation. For instance, what is the percent of the corporate budget is spent on research and development (R&D)? What percentage of sales is associated with new products? What improvements were implemented that led to cost or time savings? Innovation metrics help analyze this type of data and can be useful when implementing new processes and approaches.
Another one to consider is Performance Dashboards: Measuring, Monitoring and Managing your Business by Wayne W. Eckerson. Of course, if youre looking for an authority on metrics, Peter Drucker is considered an expert in metric management and has published many books over the years.
3 Network, CIO. 7 Tips On Building Your Business With Better Metrics. Forbes. Forbes Magazine, 09 July 2012. Web. 17 May 2013. <http://www.forbes.com/sites/ciocentral/2012/07/09/7-tips-on-building-your-business-withbetter-metrics/2/>. 4 Making the Most of Metrics. Information Management RSS. Nap., nod Web. 17 May 2013. <http://www. information-management.com/newsletters/metrics_strategic_operational_performance-10017214-1.html>.
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What top factors will impact the business in the next year? What are the revenue objectives, quarterly and annually? What aspects of the business (e.g. new customers, increased sales, reduced time to market) will demonstrate success? Its also important to clearly define your metrics. Simply saying the goal will be to measure customer satisfaction is too vague. You need to outline how you will measure customer satisfaction. Is it the number of repeat customers? Or do you measure customer satisfaction by the number of first resolution calls in the call center? In short, metrics should be clearly defined so that almost anyone in the organization can assess progress and engage in the right behaviors to promote success. Step 2: Choose metrics wisely Second, its critical to implement and select metrics that promote desired behaviors to achieve strategic results. As renowned metric expert, John H. Lingle, once said: You get what you measure. Measure the wrong thing and you get the wrong behaviors.5 Choose metrics wisely and measure outcomes that promote the right behavior. Using the call center example, say you want to measure customer satisfaction by the number of customer first resolution calls. But you need to make sure employees focus on quantity rather than quality. If the number of calls handled is an indicator of success, customer service representatives may rush calls in order to meet the goal. That could lower customer satisfaction in the long term. Therefore, its imperative that you arent measuring something that will produce undesirable behaviors that have far reaching consequences. Step 3: Monitor, monitor and monitor An effective measurement strategy reviews metrics at regular intervals. You cant assess progress without regular tracking. It is also critical to create accountability and demonstrate a commitment to what you say you are going to do. Effective measuring strategies provide real-time feedback and are easily captured and monitored. There are a number of measurement tools and software applications that can help an organization extract and analyze data. You can even use office applications like QuickBooks
5 The Alternative Board Oshawa Blog. : The Great Management by Numbers Debate. N.p., n.d. Web. 20 May 2013. <http://thealternativeboardoshawa.blogspot.com/2011/04/great-management-by-numbers-debate_3075. html>.
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and Excel. It doesnt have to be fancy, but it has to be consistent and real-time to be effective. Successful organizations use dashboards or monthly business reviews (MBRs) to track progress. Step 4: Evaluate and adjust Fourth, evaluate and adjust metrics as needed to address any changes to the business or objectives. Any measurement strategy must be fluid. In other words, a measurement strategy has to be able to adapt to changes in the business and market. As priorities change, metrics change, too. Refining metrics every week, month or quarter helps you stay on track and ensure measurement of the right priorities. As noted by Axients CEO Justin Moore: When you invest time and thought into setting, monitoring, sharing and refining your metrics, youll be amazed at how much more in tune you are to the state of your business, and how much more easily you can make the critical decisions that can catapult your business success.6 Step 5: Communicate Finally, continuously communicate and involve all levels of the business in the measurement strategy. Capturing metrics is a fruitless effort if no one in your company knows how they are doing on a regular basis. Metrics should be shared across the organization, to promote transparency and accountability. Dashboards are a good way to show weekly, monthly or quarterly progress, and should be displayed in a place that employees reference frequently. Whether its a website or a weekly meeting, progress against goals should be displayed regularly. Business leaders in particular need to make sure they are promoting measurement strategies. The ability to walk the talk and share results goes a long way in showing employees that every level of the organization is committed to metrics and achieving the outlined goals. Successful companies share results from the top-down, even if they fall short of desired goals. This shows commitment and transparency and ultimately creates a cultural buy-in for measurement strategies.
A key performance indicator (KPI) is a performance-based metric that evaluates the success of a defined activity. KPIs are applied to strategic or operational goals and are defined in a way that is understandable, meaningful and measurable. KPIs should clearly link to the strategic objectives of the organization in order to help monitor business strategy. For example, lets say your company is focused on customer satisfaction, and noticed a lot of complaints because of late deliveries. You might identify deliveries made on time as a potential KPI to improve customer satisfaction. The KPI would track the number of on-time deliveries and report these on a regular basis. A KPI differs depending on the business area of focus. Below is a sample list of some the more common KPIs by business function: Finance KPIs Percentage of payments that are late Percentage of invoices overdue when paid Average monetary value of overdue invoices Purchasing KPIs Percentage of on-time deliveries Percentage of deliveries received on time Number of correct deliveries Human Resources KPIs Employee retention rates Number of applications to job postings Average number of hours of training and development provided to employees Percent of days lost to illness Customer Service KPIs Number of customer satisfaction surveys completed Number of complaints received First call resolution rates New customer retention rates To choose the right KPIs, you need a good understanding of what is important to the organization. Many organizations use a balanced scorecard framework to help identify valuable KPIs.
7 Management Tools & Trends 2013 - Bain & Company - Publications. Management Tools & Trends 2013 - Bain & Company - Publications. N.p., n.d. Web. 17 May 2013. <http://www.bain.com/publications/business-insights/ management-tools-and-trends.aspx>. 8 Balanced Scorecard Basics. The Balanced Scorecard Institute. N.p., n.d. Web. <https://www.balancedscorecard. org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx> 9 Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996): 76.
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The following (Figure 1.) shows an example of a balanced scorecard. In the center of a typical scorecard is the vision and strategy for the organization. The four boxes represent the critical focus areas: financial, customer, learning and growth and internal processes.
Figure 1. Balanced Scorecard Sample As shown, balanced scorecard collects and analyzes metrics from four distinct areas: learning and growth, business process, customer, and financial. The corporate vision and strategy is the center of the scorecard, since everything that happens should link back to and support the corporate mission. The idea is to obtain a balance of metrics in these four categories to develop a more coherent picture of the organization. Financial metrics, while important, are only one of the pillars that can impact performance. Since the introduction of the balanced scorecard in the 1990s, it has evolved to include different variations. Most of the key elements remain intact, but recent versions include strategic mapping and/or strategic linkage models. The principles of the balanced scorecard and the four key areas, however, remain the same. A number of technologies have also emerged that claim to help organizations implement a balanced scorecard. However, it is debatable as to whether or not software can uncover the basic principles required for the balanced scorecard. According to the Balanced Scorecard Institute: The balanced scorecard is not a piece of software [and] unfortunately, many people believe that implementing software amounts to implementinga balanced scorecard.10 This is not to say that technology isnt helpful; once a scorecard is developed and implemented, software solutions can be valuable ways to manage the approach.
10 Balanced Scorecard Basics. The Balanced Scorecard Institute. N.p., n.d. Web. <https://www. balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx>.
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Overall, the balanced scorecard is the most popular measurement tool. According to research conducted by the Gartner Group, over 50 percent of large U.S. firms adopted a balanced scorecard approach since 2002.11 However, this number might be slightly misleading, since the term balanced scorecard is often linked to a variety of measurement tools and methods. Other research indicates that about a third of companies use a traditional balanced scorecard method, but only about a fifth of all companies use the most up-to-date versions that include strategy mapping.12
Dashboards are often integrated into executive reporting methods. For example, you may have heard of the Monthly Business Review (MBR), which is a process that tracks progress against the strategic and operating plan. It is also an opportunity to make sure the organization stays on track and implements adjustments to the plan when needed. MBRs are a good way to communicate corporate performance and provide clarity and commitment when used effectively. Generally, MBR reporting falls under the responsibility of the team in charge of a measurement or improvement process. However, a CEO often receives MBR data, so the report should be high level and concise. An MBR is reported during a standing meeting and follows a structured agenda to review performance, assess issues and opportunities and make adjustments to the plan. Typically, MBRs are conducted on a monthly basis, after the close of a prior month. A disciplined approach is critical to successful deployment of an MBR. It needs to be engrained into the culture of an organization as a standard method to monitor performance and to constructively address issues and opportunities.14 Whether you use a dashboard, MBR, or both, the objective is to report progress on a regular basis to key stakeholders. Tracking and reporting measures is not just a best practice, its a critical piece of your metric strategy. Simply put, if you dont regularly evaluate progress, youll have no idea where youre going. The metrics you collect are valuable only if you use tracking methods to monitor outcomes and results. Think of reporting as the follow through to your strategy, and stick with it over time.
Metrics examples
Financial Measures Sales or Revenue Sales growth Gross Margin or Profit Profit or revenue per employee Return on Investment (ROI) Dividends Cash flow Inventory Turnover Ratio Current Ratio Customer Measures Customer satisfaction Customer retention Customer referrals Customer complaints Response time per customer Customer lifetime value Customer acquisition rate Number of customers Customer service expense per customer Employee Learning and Growth Measures Participation in professional or trade associations Training investment per employee Average years of service Number of cross-trained employees Absenteeism Turnover rate Employee satisfaction Employee productivity Training hours/certifications Personal goal achievement Timely completion of performance appraisals Process Measures Average cost per transaction On-time delivery Average lead-time Inventory turnover Cycle time Warranty claims Frequency of returned purchases
quality has been nearly 100 percent since 2007.16 Cost savings is another benefit of its strategy. Time reductions as a result of process and performance improvement across business units led to an estimate savings of $225 million annually. Combined with a 99.4 percent on time delivery rate, youd call the approach a success. Other companies use measurement strategies to jump start savings or promote revenue growth. Shat-R-Shield, a 40-year old company that manufactures packaging materials, first introduced a measurement strategy about 10 years ago. The CEO at the time, Karen Ponce, felt strongly that the organization needed to adopt a formalized measurement strategy to assist with strategic planning. As CEO, Ponce believed it was her job to work on the business, not in the business.17 In 2005, the CEO and senior management team attended a training workshop where they learned about the balanced scorecard and KPIs. The company began developing KPIs and a balanced scorecard approach, and over the next three years, as Ponce described, started measuring things that were really important across the entire company. The organization continued to refine and expand KPIs and balanced scorecard to include eight strategic objectives. In a short time, the organization realized benefits from becoming a measurement management business. For the first time in history, the organization tracked how many dollars they earned for every dollar spent in sales and marketing on a monthly basis. They also monitored cost per unit and identified opportunity for improvements. By 2010, the company netted more income than in the history of the company. Karen regularly shares her lessons learned regarding using KPIs and a balanced scorecard for success. As she notes: Executives get so caught up in the day-to-day running of the business that they dont work on the business. As President of the company, I should spend 80-90 percent of time working on the business. And implementing a cascaded and aligned balanced scorecard strategic planning and management system is time well spent working on the business because it gives clear direction and guidance to those I entrust and empower to work in the business.18
16 Lockheed Martin Missiles and Fire Control. Lockheed Martin Missiles and Fire Control. N.p., n.d. Web. 21 May 2013. <http://www.nist.gov/baldrige/award_recipients/lockheed-martin.cfm>. 17 Perry, Gail S. A Balanced Scorecard Journey. The Balanced Scorecard Institute. N.p., June-July 2011. Web. <http://www.balancedscorecard.org/LinkClick.aspx?fileticket=Qd7wk08IcWE%3D&tabid=57>. 18 Perry, Gail S. A Balanced Scorecard Journey. The Balanced Scorecard Institute. N.p., June-July 2011. Web. <http://www.balancedscorecard.org/LinkClick.aspx?fileticket=Qd7wk08IcWE%3D&tabid=57>.
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There are an abundance of success stories among organizations that use (and implement) effective measurement strategies. Most companies agree the recipe for success includes planning, refinement, and ultimately, patience. Measurement strategies arent implemented overnight. Collecting, planning and analyzing data over time is critical to success.
Conclusion
Without a standard there is no logical basis for making a decision or taking action. -Joseph M. Juran
Theres a reason why organizations implement measurement strategies, its because they work. They provide business and operational value, and can improve your bottom line. When done correctly, a measurement strategy can yield significant payoff and translate into serious cost savings. Whether your goal is to attract new customers, grow sales, or increase your ROI, metrics can be the vehicle to get you there. Now think about what you would do if your CEO asked you to prepare a presentation on business trends and corporate performance. Using a basic understanding of metrics and measurement strategies, you could develop a plan to track and implement critical KPIs across your business. You could even explore balanced scorecard strategies and see if they can be applied to your company. Youd probably develop a dashboard or an MBR to help report ongoing results. Most importantly, youre armed with the knowledge that metrics and measurements can be the key to process improvement and corporate efficiency, with a little effort and planning. So, what are you waiting for? If youre hungry for change, metrics and measures should be your first course.
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