Business Metrics. White Paper

Transcription

1 Business Metrics White Paper Abstract: This White Paper defines metrics, explains the attributes of an appropriate metric, presents an approach for deriving metrics, gives examples and explains how they should be used and maintained. Pre-requisites: The paper is intended for readers who have an awareness of business issues and an interest in improving business performance. KeyWords: Metrics, Measures, Business Performance The Author Kim has spent over 20 years working for corporates in Europe and North America in the field of engineering and technology where he won new business, mobilised projects and managed teams of up to 120 people. He is Managing Director of The Business InQbator in London which mentors entrepreneurs and grows businesses. Kim Dolman Managing Director The Business InQbator Ltd

2 Purpose This paper outlines the purpose, justification, process, benefits of business metrics and the businesses make in using metrics. Background Businesses can be complex and management difficult. Entrepreneurs and business leaders are always seeking more clarity and insight into the performance of their business. It is a truism that You can t manage what you don t measure. Some metrics are common currency and easily understood. For example, we are familiar with the phase bottom line usually meant to mean profit. This is an outcome-oriented metric. But metrics can also be used as a predictor of business performance. This paper looks at how business performance metrics can be derived and used. What are Metrics? Metrics are simply measures or numbers. Wikipedia defines a performance metric as a measure of an organization's activities and performance. What are they For? Metrics can be used to reveal valuable information about business (or project) performance. There is more to managing a business than computing metrics. Manages need to mobilise resources, organise, innovate, task, motivate and decide. Metrics can be used in any business function. Familiar metrics are: Annual turnover Annual net profit Number of full-time equivalent staff Number of job vacancies To be useful, metrics need to be the right metrics, they need to be computed accurately and need to lead to action. What are they not For? Metrics can also be a distraction. There is no point having metrics just for the sake of it. Metrics are not to: Present a professional image Introduce a facade of scientific analysis Measure what s easy to measure Postpone pressing decisions Generate numbers for their own sake What does a Good Metric Look Like? The attributes of a useful metric are: Feasible: it must be possible to realistically compute a metric from information that can be readily obtained from the business Appropriate: the metric is relevant to the business Revealing: the metric should provide insight and articulate an aspect of business performance Meaningful: something should happen as a result of computing the metric The Business InQbator Ltd Page 2 of 6

3 How do I use Metrics? Once you have invested time in defining and computing metrics, the insight they deliver needs to be exploited to realise their full benefits. As part of the process of defining metrics, business leaders should know in advance what values or range of values, each metric should achieve. For example, most sales staff are given sales targets. If annual sales (for an individual sales person, or a team, or a whole business) achieve a certain level, then commission will be paid. This should be the case for all metrics. Business leaders should have a course of action identified for all reasonably expected metrics value. What are the Benefits of Using Metrics? Metrics are easy to communicate and assimilate. They can often be depicted in tabular or graphical format for the purpose of comparison or trending. How do I Define a Metric? There a many established methods for generating metrics. None is right or wrong, but an established defined process can be useful in providing a sound basis for metrics selection. One process used to create meaningful metrics is Goal-Question-Metric. It is simple, yet effective in ensuring that metrics are relevant to business objectives. Stage 1: Define Business-Specific Goals Purpose: To define SMART Goals Method: Decide what do you want to achieve, What is important to your business? Guidelines: Don t set too many goals it may dilute your management effort. Don t set too few goals one goal is a mission. Outcome: a few explicit SMART Goals Stage 2: For each Goal, Ask Questions Purpose: To establish what needs to be known to ascertain whether a goal has been achieved Method: How would you know if your have achieved your goals? What do you need to know? What would tell you if you have achieved your goals? How do you obtain insight into your goals? Outcome: a few relevant questions for each Goal. Stage 3: For each Questions, Define a Metric Purpose: To establish meaningful metrics Method: Ask what you would measure to help answer the question Outcome: one or a few relevant Metrics to inform each Question. Challenges It is easy to be cynical about metrics. For all the negative reasons given above, it is easy for businesses to fall into the trap of using the wrong metrics in the wrong way. In the extreme, metrics can be used to mislead, obscure and confuse. This is a problem of culture, attitude and team-working: not metrics. Nevertheless, management needs to be aware of potential problems with metrics and be sufficiently decisive to tackle them. The Business InQbator Ltd Page 3 of 6

4 For Example...? Problem: Let s say that you were given the task of delivering security at the 2012 Olympics. Solution: Step 1: You might set yourself the following goals: Goal 1: Evaluate the 2012 Olympics Security Needs Goal 2: Compile the Security Processes Goal 3: Deliver the right number of trained security guards at the right venues Step 2: For these Goals you might ask the following questions: Goal 1: Evaluate the 2012 Olympics Security Needs Q1.1: Where are the 2012 Olympics Venues? Q1.2: How many guards are required? Could also ask about number of entrances, operating hours, shifts, searches Goal 2: Compile the Security Processes Q2.1: What procedures do we need? Q2.2: What training courses do we need? Could also ask about legislation, employment law, resources, recruitment, data protection, interfacing organisations Goal 3: Deliver the right number of trained security guards at the right venues Q3.1: Do we have sufficient number of guards? Q3.2: Are the guards trained? Could also ask about course pass/fail, course feedback, guards on duty, no shows Step 3: For these questions for Goal 3 you might devise the following metrics: Goal 3: Deliver the right number of trained security guards at the right venues Q3.1: Do we have sufficient number of guards? M3.1.1: Number of Guards: Control: Number of guards required M3.1.2: Number of Guards allocated to each venue: Control: Number of guards required at each venue M3.1.3: Number of Guards allocated kit: Control: Planned number of items of kit allocated each week Q3.2: Are the guards trained? M3.2.1: Number of course spaces available: Control: Planned number of guards to be trained M3.2.2: Number of candidate Guards allocated to a course: The Business InQbator Ltd Page 4 of 6

5 Control: Planned number of guards to have completed a course by each week leading up to event M3.2.3: Number of Guards completed a course: Control: Planned number of guards to have completed a course by each week leading up to event M3.2.4: Number of Guards passed training course: Controls: Planned pass rate This is not the only way of delivering Olympic security. But the metrics, if used properly, would give early insight into problems. Maintenance of Metrics Businesses and projects evolve, objectives change, some metrics are misued or fail to perform their intended function. For whatever the reason, metrics must be kept under constant review. Sometimes it is sufficient to modify a few metrics, introduce a few new ones, retire others or set different controls. When there are step changes in the business it will be necessary to repeat the Goal-Question-Metric process. The following table can help with the maintenance of metrics. Observation The metrics are on target but the business is failing The metrics are not giving me the right information People are not giving me the right data I have one person spending all month generating metrics There is no consequence if metric X is out of range Action The metrics are not well aligned with business goals Perform or repeat the Goal-Question-Metric process Look to gain shared objectives and build a cohesive team with shared objectives and remove non-team players. For a large team of over 100 this may be appropriate. For a small team, some automation may be required or the benefits analysis need to be reassessed. Either management is unwilling to take the necessary action or the metric lacks meaning The Business InQbator Ltd Page 5 of 6

6 Tracking Metrics should be used to direct management efforts towards areas of the business requiring attention. At a superficial level, if all metrics are on target, then no action is required. In reality business allocate a certain amount of time to monitor their business (or projects) and will do so irrespective of the results. If all metrics are on target then the business will have the opportunity to look deeper into the choice of metrics and their derivation. The following table gives an indication of the approach to be used depending on the business status revealed by the metrics. What the Metrics say Business Status Focus of management attention More than one metric is substantially adverse compared to plan Some metrics slightly adverse, one metrics seriously adverse Some metrics slightly adverse, some favourable Serious, pervasive, indemic flaws Serious problem Routine Serious fulltime attention required. Perhaps a red team, change of personnel, urgent action required Focus attention on adverse metric; perform deep investigation Attend to adverse metrics; look to improve, perhaps supplement existing resources All metrics favourable Sunny day scenario Check validity of data used to generate metrics Conclusion Metrics are as powerful as they are dangerous. If metrics are selected which fail to align with strategic goals then they will give a false impression of business health. Even if appropriate metrics are selected then if action is not taken they can gave an unwarranted sense of security. However, if metrics are selected and maintained with diligence and used as part of a portfolio of tools then they can give executives insight and clarity into their business s performance. The Business InQbator Ltd Page 6 of 6