Excellent business performance metrics combined with top rate management is a recipe for success.
Recently, a group of local financial executives discussed the art of developing effective business performance measures. Participants agreed that many key metrics used today are irrelevant in helping guide their business, often wasting corporate resources by diverting attention from important issues to less important or irrelevant ones. The group decided businesses should have a process in place to determine what metrics will be most effective. The following six-step approach will help you create the best metrics for your business.
Step one – Write down goals
Understanding the direction of your company and its goals are critical to developing the best measures for your business. If these objectives are not clear, it is difficult to establish effective metrics. Write down three or four of your most important goals.
Step two – Understand your drivers
What are the business drivers that will allow you to meet these goals? For drivers within your control (example: your ability to purchase organic grapes cost effectively), establish a measure to evaluate your performance. Some drivers may be out of your control (example: new regulations for the sale of organic wine). Monitor critical drivers outside your control to prevent pursuit of a faulty strategy.
Step three – Brainstorm metrics
Reflect on your most important goals and their drivers. Develop metrics that will guide you in understanding the progress being made toward your goals or if your business drivers are changing.
Step four – Verify by being SMART
To be effective, metrics must allow you to identify important issues. They should be limited to a manageable number and be broad enough to explain general business performance. Verify all your metrics are SMART 1 (Specific, Measurable, Actionable, Relevant and Timely). If a metric does not meet the SMART criteria, rework it so it does.
Step five – Review your metrics
Make sure your metrics include non-financial measures that are core to your strategic framework. For example, the Balanced Scorecard is a common framework used by organizations to incorporate important non-financial objectives into the organization’s strategy. The Balance Scorecard recognizes long-term business success and includes customer-focused components, internal process improvements and training and development objectives in addition to meeting a company’s short-term financial goals.
Step six – Design the presentation
To be most effective your metrics must tell an engaging story. A well thought out design to present your metrics helps the user grasp the issue immediately and move on to solutions. The design is especially important when teams with diverse backgrounds are using the same metrics.
Beyond long-term corporate measures
Key corporate metrics that monitor progress toward meeting long-term objectives are critical to business improvement. Once a process is established, these principles may be applied to other areas of the business, such as projects, short-term market or operating statistics and even individual performance. The main challenge developing theses measures is to ensure a clear connection with corporate objectives.
Project-oriented measures will have a finite life. Important market and operating measures are reported at intervals that allow quick identification of trends so that swift action can be taken. Fletcher notes that individual measures that allow for self-monitoring are often more effective than command and control measures closely monitored by supervisors.
Performance metrics are the tools we use to monitor the health of our business. They drive change and help us direct resources. When developed and maintained with a sound process, your business will be on the right track.
Steve Rosvold runs KRM Business Solutions, a provider of financial intelligence, business education and interim CFO services to agricultural and manufacturing businesses. Learn more at www.krmbusinesssolutions.com.
1 1981 Management Review
George T. Doran