Management Matters with Mike Myatt: Developing Meaningful Success Metrics
- Jan 23, 2009
Developing Meaningful Success Metrics during tough economic times is more challenging than one might think. The economy is certainly not static, so why should the manner in which you assess the effectiveness of your business model not be fluid in nature as well? How do you measure success, are you measuring the right successes, and are you using the right measurements to determine your success? Complicating matters along with the current economic conditions is the reality is that each industry, sector, vertical, and micro-vertical all have unique business drivers. Furthermore, depending on how a business is positioned, where it is in its maturation lifecycle, or what its current financial condition looks like will dictate which factors may be most important to measure. In today’s column I will attempt to provide some general guidelines that will be useful to any business attempting to analyze success metrics.
I believe that most measurements can be broken down into the following 5 categories:
1. Static Historical Measurements;
2. Quantitative Return Measurements;
3. Qualitative Return Measurements;
4. Quantitative Performance Measurements, and;
5. Qualitative Performance Measurements.
It has been my experience that most businesses at least attempt to measure items 1 and 4, but often times fail to measure the other 3 categories, which also happen to be the most meaningful measurements. The best managed companies measure all 5 categories (as well as various subsets) with their focus being on items 3 and 5.
Let’s begin by stating what should be the obvious…All businesses need to monitor the basic static financial measurements of revenue, expenses, breakeven, earnings and cash flow. While analyzing these drivers will give you some basic operating information and should be measured by all businesses, they are also somewhat myopic. The reason I say this is that while historical analysis is important, it is taking the next step of using these historical measurements as baselines to calculate forward looking return drivers that will help you fine tune your business.
Quantitative Return drivers such as Return on Assets (ROA), Return on Equity (ROE), Return on Investment (ROI), Return on Cash (cash-on-cash), and Return on Human Capital (ROHC) calculations will give you more useful information than the static calculations mentioned above. The great thing about return analysis is that each area can be broken down into several more refined qualitative return calculations.
Examples of qualitative return analysis might be Return on Marketing (ROM) which is a qualitative measure of marketing expenditures and investments. Another example would be Return on Innovation which would be the qualitative measure of the contribution impact on new ideas and initiatives (see “Measuring Innovation“). These types of qualitative return drivers allow you to make forward looking investment decisions that can have immediate impact to the business.
Examples of Quantitative Performance Measurements would be items like revenue hurdles, billable time, production hurdles and service levels. These are the metrics of how an organization performs against its benchmarks.
Implementing Qualitative Performance Measurements are where an organization truly becomes productive in its analytics. These sets of metrics focus on the measurements surrounding things that develop talent, build teams, manage the customer experience, improve customer satisfaction and increase brand equity. Getting to the qualitative level of performance measurement is difficult in that it is often necessary to overcome a set of traditional leadership behaviors and beliefs.
Ask yourself this question…do you measure the metrics that are critically important, or just the ones that are obvious and easy to measure? If company leadership can make the attitudinal adjustments necessary to create accountability and focus on qualitative performance metrics they will find that it is these measurements that help to catalyze growth, enable execution and create dynamic organizations. Bottom line…locking onto the right set of success metrics will not only help you survive the recession, but may actually allow you to thrive in the months ahead.