Companies typically use financial measures such as sales and earnings to track and communicate performance. But what happens when those aren't the most important business metrics?
Investors and leaders can miss out on problems and opportunities if they're too focused on the wrong business metrics.
According to Michael J. Mauboussin, a contributor to Harvard Business Review, the right business metrics help you understand, track, and manage the cause-and-effect relationships that determine the value of your company.
The difficulty lies in figuring out how to make a coherent narrative out of the wealth of data accumulated by today's businesses, says Dimitri Maex, co-author of “Sexy Little Numbers.” Maex wrote about measuring what matters and making sense of your data, and says measurement planning is the way to make sense of the surplus of information available to today's businesses.
Prioritize Objectives
Too many companies skip this part of measurement planning. Maex says when you get this part wrong, everything else you do from a measurement point of view won’t be effective.
As in most aspects of business, devising a clear objective is essential to success. Maex suggests defining what success looks like by outlining your big picture objectives before you ever begin to think about the business metrics you need to track.
Rewrite Objectives
Objectives need a metric, a benchmark, and a timeframe. Maex suggests using the tried-and-true “SMART” approach. A SMART objective is specific, measurable, attainable, realistic, and time-bound.
Having SMART objectives is absolutely imperative to assuring that you're measuring the correct business metrics.
Benchmarking Your Business Metrics
You can benchmark your performance by either comparing your company to competitors or to itself over time. Even if you have to begin with a benchmark of zero, you can evaluate your progress in the first 60 days in order to create a realistic goal.
What should these benchmarks be? The ICAEW recommends you "focus on key business drivers." These could be customer care, production line speed, or another metric—it depends on your particular business.
Key Performance Indicators (KPIs) and Action Learning Indicators
KPIs apply both at the organizational and individual levels. They measure the quality of performance and assist in developing performance goals and strategies.
Though sometimes, simply measuring your KPIs is not enough.
You also need to know why the metrics you're looking at are changing. Maex suggests putting action learning indicators into play because they drive KPIs. He says it’s important to have a broad range of metrics that enable you to assess the performance and understand why you are performing as you are.
Measurement Plan
Once KPIs and action learning indicators are set, this is when you can really start measuring in a way that allows you to see how you are doing by mapping those business metrics to data sources.
Once you have a plan in place and know where to find data, you should start measuring your performance. You should update the numbers on a weekly, monthly, or quarterly schedule to drive the execution of your strategic plan.
It matters which business metrics you focus upon just as much as it matters how you measure them. Only when you approach these metrics in a methodical way will you discover key opportunities—as well as catch any weaknesses—before they become a danger to your business.
What metrics do you measure? How do you decide what data to use?
Image: aussiegall via Flickr, CC 2.0
