Business Performance Metrics: Can They be Proactive and Not Reactive?

That's a lot of big questions, Tim, but let me see if I can help get you started.

1) What key metrics does your company use? Well, this varies by company, naturally, and I have found that most executives do a terrible job of imagining what their key metrics are. It may be lack of imagination or understanding, but too frequently I see things like "revenue" or "operating income" or the like as their key metrics. Those are clearly key financial measures, but in the quest for metrics, the goal is typically to find something that your company (typically through its direct employees) can use to understand its operations and improve performance. Thus, gross margin on manufactured goods might be the top driver of profitability and it and attendant measures should be key metrics. Related measures might be inventory turnover, variable product margin, the cost of a high value inventory components, etc.. Once you get to the heart of what drives your business, then you set up metrics and goals for those metrics. Then you can use those to drive performance.

2) How do you benchmark against competitors? That can be very hard to do. Most public companies intentionally obscure their operating segments and detailed financials so that their competitors can't tell how they do what they do. And private companies don't report at all. So finding useful primary benchmark data is very difficult and expensive. There are companies you can hire to go out and do the digging and data collection for you and there are some that do this for a living and sell the benchmarking data. At the end of the day, with or without external benchmarks you need to come to grips with appropriate target setting within your company and that can be done internally only lacking external data.

3) I have found that if we don't fully automate the reporting, it does not happen consistently over time. This means doing the integration projects up front that connect to your reporting systems, and not relying on humans to pull all of that data. It's fine to set up manual processes at the start, while you are testing the efficacy of a metric, but automation allows for uninterrupted consistency and gets human error out of the equation. Plus it allows for automated dashboarding which helps you keep your eyes on the ball.

Great question Tim; and a great answer from Dan.

I work with a lot of clients on benchmarking. That also involves a few other considerations: market footprint; capital and leverage; strategic goals; etc.

Market footprint: big differences between multi-nationals with multiple product lines, and local/regionally focused companies. Understanding the footprint allows a company to understand what can impact or drive the economy within that area. Broad product offerings also drive more segmentation analysis.

To Dan's point, financial data for private companies is more difficult to obtain, but it is out there (see RMA Annual Statement Studies; D&B; other sector specific groups). Public companies, review IPO and Analyst reports; rating agencies also provide an abundance of comparative data.

To be proactive vs. reactive, identify the key goals; establish critical metrics; set key performance (KPI) hurdles. From a risk perspective, what can blow those KPI hurdles off track? What can a company do to minimize/mitigate those obstacles to success?

Who do you want to overtake? What makes them better than your company? What are there vulnerabilities? What is your plan to exploit both, and remediate your vulnerabilities and improve on your strengths in the process?

What "dash board" reports do you need to manage forward; not looking in the rear-view mirror. Financial statements are "rear-view" mirror; trend reports are also rear-view mirro; how do you take that information and set meaningful projections looking forward?

If your company is already public, then "profits" are critical - and sometimes that focus is "myopic". If your company is private or has an excess capital cushion, it is easier to plan and execute strategically for the medium and long term.

I hope this gives you some additional help to shape the focus of your C-Level planning, and to develop the appropriate "optics" for looking forward with more clarity.

My company spent a lot of time defining what ACTIONS result in good metrics, and then each supervisor is responsible for doing a weekly review of whether those actions were completed to satisfaction. They use key performance indicators (KPIs) to judge whether each employee is on track, and since they are reviewed weekly, if someone gets off track, it is corrected well before that is reflected in our metrics (which are reviewed monthly and quarterly)

Financial indicators are important, but they are the end result of a lot of other things happening. Looking at too few indicators and only financial ones will not give you good results because they show only a small part of the picture. I suggest you broaden your view to include categories of indicators you might not normally thing of i.e.: sales, marketing, customer service, customer satisfaction, employee utilization and employee satisfaction.

It's not enough to monitor the indicators. You also have to understand their effect on each other and on profitability. You have to have the ability to understand the story they are trying to tell when they are combined.

Once you've defined what's important, then you can define the actions necessary to produce desirable outcomes. Create systems that promote proper action and you're on your way to being proactive.

#1 What we did to develop key indicators that were predictive of say life insurance premiums was to continue asking were does the result come from? So revenue comes from renewal premiums and new premiums. Let's follow the new premiums. These come from # of agents times agent's productivity times average policy amount. Number of agents are tracked monthly by looking at # at beg. of month, plus new agents less departing agents (these were tracked in two buckets, agents that left the industry and those raided by competitors) and the sum was ending number of agents. Importance of those agents that left and raided by competition - this would have impact on renewals as they try to move their customers to their new company. If number of new agents is a relative large number of total, then you should expect productivity to drop as they are trained. You can keep line going back, for example to recruit x number of new agents, you need y members in HR to do sorting of resumes, interviewing, etc. Given these numbers, I could tell what new sales were going to be several months ahead (i.e., agents want to eat and feed their families so they are not going to stop selling).

Something less predictive so far in advance but helpful in taking correcting measure. In a different industry our revenue is based on census (i.e., how many patients we have. Some of our cases average 35 to 40 days. So we keep a rolling 35 day census. Based on this number we multiply times a factor to determine how many hours of nursing time and therapy time we need and try to adjust staff accordingly (i.e., managers know when to encourage vacation days or hiring of per diem staff).

I could keep going all night but I hope these examples help out.

I've spent a lot of cycles on this. I also come back to Albert on this.

“Everything that can be counted does not necessarily count;

Everything that counts cannot necessarily be counted.”

Albert Einstein

We tend to count the easy stuff - financial metrics - yet leave alone those metrics that really drive financial performance.
No easy answers but still a provocative question and meaningful exercise.

The comments by the (VP Finance) of the life insurance company are helpful. The proactive metrics are usually the leading indicators of future outcomes. Most commonly, this will be a sales pipeline and the life insurance example shows how that works in their industry.

There are other external indicators such as retailer inventory and orders. There are also indirect leading indicators such as new home permits as a leading indicator for major appliances. There are subtle indicators, too, such as lengthening payment patterns, longer/shorter periods between replenishment orders, changes in supplier delivery dates, etc.

It is helpful to benchmark a process. It is not helpful to benchmark a department, function or subset of a business unit.

Process benchmarks can give insights into drivers of cycle time, cost per unit, error causes and innovative ways to structure work and teams.

Department/function benchmarking is pointless since organizations make differing choices about the scope of work, service level expectations and capacity requirements. Reconciling the scope differences will be an effort many times the effort of collecting the initial cost and volume numbers. And, in practice, the results are not actionable. Organizations "better" than the benchmark are never allowed to succumb to the benchmark level and should not be relieved of incentives to continue improvement. Organizations "below" the benchmark usually have to resort to the process benchmarks to understand the opportunities for improvement.

Therefore, just do the process benchmarking.

A mixed response based on current and previous experience:

1. What key business performance metrics does your company use? Safety, volume, variable spread (net sales less truly variable costs), conversion spend, and SG&A spend, and debt reduction.
2. How do you benchmark them against your competitors? Participation in professional industry associations that conduct surveys.
3. How do you establish visibility to them so you are mot managing them to be reactive to data that is one or three months old? You have to break away from the mindset of the accounting cycle. You need to develop metrics that can be measured everyday and they need to tell you something that allows you to take action on tomorrow. It is of little value to find out during month end close how much overtime your operation worked 30 days ago. In fact, there is not a lot of value in how much you worked yesterday except as a data point to impact how you minimize tomorrow.
4. How do you use corporate performance metrics to drive your business instead of reacting to them? Can they be used proactively? If you can't use them proactively, what value do they add except keep the scorekeeper employed? I think you conduct variance analysis and determine what it tells you about the future. Has the market changed? Did someone make a bad decision? Where did the process breakdown? Do expectations need to be revised either temporarily or for the long haul?
5. What systems do yo use other than your ERP System to monitor and report your key business (corporate) performance metrics? Manually prepared scorecards.

Our experience is that getting to the right KPIs has a few steps:

1) Start with the strategy map for your organization. (Your post didn't say if you have this in place or not). Through the strategy map, you are really articulating the critical goals that should be the focus. Of course, there have been many reports on the value of having everyone from C-suite to Operations able to see and understand the strategy so they are all heading toward the same goals.
2) From the strategy map, you should take each item and ask what you could monitor/manage that shows your progress toward each strategy item. Ideally, you should have 2-3 KPIs from different angles for each strategy item. KPIs should not be repeated.
3) Test each KPI against the KPI standards. For example: is it quantifiable? is it objective? does it have a target? if it is below target will it be actioned? We have found the best way to test all this is to document the KPI. Our form has all this information plus KPI owner, frequency, etc.
4) Evaluate KPIs to determine what might be the lead indicators that predict this KPI. As others have said, there is little value in measuring past performance as it cannot be changed. Figuring out lead indicators that can be influenced and that ultimately help us to achieve our strategic goals is extremely valuable.

As for our "best" KPIs - we have recently implemented NPS throughout our organization (Net Promoter Score) and this is proving to be very insightful. It is, in many ways, a pulse on the business. If you have customers with problems, it is an opportunity to talk to them and learn what is driving their response.

Good luck!

Tim—
You’ve gotten lots of great feedback on what metrics to use and the process by which you create, track, and manage to those metrics, so I won’t elaborate on all that. I’m the author of “Painting with Numbers: Presenting Financials and Other Numbers So People Will Understand You.” I devote a fair amount of space in the book – and in my blog posts – to what the important CHARACTERISTICS of metrics should be. So here goes… your metrics should be:

1. MEASURABLE. For example, if customer satisfaction is an important metric, you should have a clear, scalable way of scoring it.
2. HARD TO MANIPULATE. No cheesy ways to get a good score on a metric, especially through nothing more than shifting effort or expenses a little bit, say from one reporting period to another.
3. CLEARLY TIED TO SUCCESS IN THE ULTIMATE MEASURE. There should be a clear, identifiable relationship between performing well on the metric and the ultimate measures of achievement, such as revenues, profit, or EPS.
4. COMPREHENSIBLE. All the participants know what the metric means and how it gets measured.
5. EASY TO RELATE TO. Most or all of the participants have a sense of how their personal efforts affect the metric.
6. DRIVEN BY BUSINESS PERFORMANCE, NOT BY ACCOUNTING POLICIES OR PRACTICES. Need I say more?
7. MEANINGFULLY COMPARABLE. Several people have commented on the importance of benchmarking. That’s critical.