‘What is measured improves.’ – Peter Drucker
‘Strategy’ and ‘Execution’ are two variables crucial to business success. But you cannot develop an effective strategy and efficiently get things done if you are not clear about the factors that drive performance and the variables that measure results. The measures of the drivers of business performance and results are what are known as business metrics, and it shall be our subject today.
After the Second World War, the Japanese needed to rebuild their country from the ruins of war. Key to the effort was to be the resuscitation of their industries. With the traditional obsession of the Japanese with quality, their focus was, unsurprisingly, on the quality of manufactured products. The idea was basically to ensure that the variation in quality of products was reduced. Consequently, statistical approach to quality control was used to improve the understanding and use of quality metrics. Over time, other processes were developed which led to the transformation of the orientation, focus, and even strategies of firms, supply chains and industries. Japan, raising from the ashes of war, led the globalisation of metric-driven success. Decades on, the world has come to accept Japanese products as being synonymous with quality which has continued to create traction for their businesses.
What are business metrics? Business metrics are quantifiable measures that a business uses to predict, track, monitor, assess and control the extent or success or failure of various business activities, processes, and overall performance. Business metrics, sometimes called Key Performance Indicators, ‘KPIs’, are often desired end results but also the direct and indirect bridges between efforts and the results.
Benefits of understanding and use of business metrics: The first major benefit of the use of metrics is the clarification of strategic objectives and operational goals. Irrespective of your business type, understanding what your key performance drivers are and using them appropriately to guide your people and business will make you efficient in the use of resources as well as effective in delivering results. These will in turn improve your service delivery, customer attraction and retention, and overall profitability. Specifically, your metrics can help you identify areas of operational and strategic successes as well as challenges and failures at individual, unit or corporate levels. Success can then be improved upon whilst failures and problems can be addressed.
Tracking the right business metrics will help you assess your performance over time or against a competitor or industry averages. Tracking your metrics will also allow you to be regulatory-compliant, clarify communications between units, strengthen business intelligence capacity, reduce transaction costs, etc.
Types of business metrics: There are literally hundreds of different metrics applicable across different business units, functions, processes, and industries. Even within the same organisation, different departments may use different metrics to monitor their local performances. For instance, manufacturing will have different metrics from sales and marketing which will also have different metrics from logistics. Accordingly, appropriate metrics will be determined by business type, corporate objectives, level of authority of official(s), functional responsibility and its scope, business process, etc. For our purposes here, however, we will be looking at possible metrics for the chief executive at corporate level.
A simple schematic below shows some of the factors that influence the choice of corporate business metrics and how they get built up from different functions.
What business metrics should you use? As several factors will determine the metrics that will be appropriate for you. Whilst there are textbook metrics that tend to be universal, you can, in fact, come up with a metric or metrics that may be peculiar to your business or situation. What is important is that your invented metrics should reliably predict and track desired performances.
Some metrics measure overall corporate, marketing and sales performances while others may measure financial, human capital or logistics performance. Key financial metrics that will provide insights into operational efficiency of a business may include earnings before interest and taxes, net income, margins, rates of return, etc. It is also important to monitor liquidity and leverage ratios, etc.
Marketing metrics may include qualified leads, annual recurring revenues, cost per acquisition, cost per lead, customer lifetime value, etc. Production metrics might include manufacturing cycle time, throughput, overall equipment effectiveness, etc. Human resource management metrics might include staff turnover, early turnover rates, time since last promotion, revenue per employee, employee happiness, etc. Social media metrics, if appropriate for your business, might include account reach, followers, post engagement rates, etc.
Characteristics of effective business metrics: To select the appropriate metrics for your people, functions and business, you have to look out for features such as:
• Strategic – Your chosen metrics must be strategic both in terms of being linked to corporate objectives as well as ‘seeing’ into the future.
• Actionable – Metrics must be actionable, meaning that your people must know what to do and be able improve results by taking certain action(s).
• Standardised – Metrics should be standardised within an organisation by agreeing on their definitions and how they will be computed.
• Accuracy – Yours systems must be reliable enough to ensure that metrics are obtained from reliable computations.
• Aligned – Metrics should be aligned within an organisation to avoid confusion, conflicts, and avoidable turf wars.
• Relevance – It is important to review metrics regularly to ensure that they remain relevant. Metrics can be dropped or adopted due to legitimate changes in goals, operations, or environment.
An understanding of business metrics makes it easy for you to apply effort and other resources in achieving results. Next week we will take up Business Modelling.
