How Establishing Specific Metrics Strengthens Your Business
How to Create Business Metrics
Our world revolves metrics. Businesses track financial investments to see how they grow. Professional and weekend runners alike continually push themselves to shave seconds of the time it takes them to run a mile. And some people monitor their vehicle’s gas mileage to help determine when they need an oil change. Metrics, after all, are used to measure performance towards a specific goal and are used to define success. But not all metrics are created equal and knowing what to track is not always obvious. Further, in a business setting, the metrics we set for our organization will often shape employee behavior – for better or for worse. Thus, it is absolutely critical that we as business leaders carefully establish measurement scheme to ensure we are helping and not hurting the organization.
Why Use Metrics in Business?
Virtually all businesses and organizations establish metrics, and for good reason. Metrics and measurement schemes help managers and executives monitor the health of the enterprise and to follow progress towards a given goal. “If you can’t measure it, you can’t manage it” the famous saying goes.
“Metrics … are used to measure performance towards a specific goal and are used to define success.”
Business metrics are typically tracked in formats such as dashboards or scorecards, which can clearly show trends and quickly identify areas where we are falling short. These tools are also used to communicate key information around the organization. Further, as managers and executives, we use these charts and graphs to identify problems in our business, and to help identify a necessary means of correction. Additionally, metrics are also a way of understanding how effective the management team is within a business. Missing metrics may have nothing to do with outside influence and may have everything to do with internal issues. Regardless of what the data tells you, we all want to see predictable performance of our organizations, and business metrics are a way of achieving this.
Common Types of Management and Business Metrics
It is easy to understand why metrics are useful and how they help business leaders understand the state of their organization. For example, we want our return on investment (ROI) to improve, maximizing the value of how we spend our money. We want our “bottom line” (profit) to grow. And we want our employee satisfaction scores to show we have a happy organization.
Other Examples of Common Business Metrics:
- Return on Sales (ROS)
- Year of Year Sales Growth
- Profit Margin Targets
- On-Time Shipments
- Employee Turnover
- Project On-Time Completion
- Customer Satisfaction Score
- Workplace Injuries
- Product Quality
Although there is no set list of metrics a business needs, these are some common examples of data which can show us how well an organization is doing. Year over year, the measures typically stay the same but the targets values are marginally increased to encourage continuous improvement and growth of the business.
The Biggest Problem: Creating Metrics That Don’t Add Value
Things like Profit Margin, or On Time Shipments can be considered critical measurements of business success. However, we can create metrics in just about any way we want, based on the uniqueness of our business or industry. In some cases we may wish to create additional metrics that help us understand what’s happening within our company, even if the exact results are not linked to the survival of the organization. Examples this might include things like the number of first time customers we obtain in a given month, new patents we apply for, or even reducing the amount of solid waste we generate from our factory. But there is a limit and creating metrics for the sake of having metrics can be an issue.
When managers and businesses lose sight of what’s really important, the quantity of metrics tends to increase, and the value of each measurement decreases. Further, when the quantity and nature of metrics becomes over burdensome and excessive, it puts the organization under stress because more focus is placed on meeting the metric, than taking care of customers. If everything is important, then nothing really is. Measuring performance and using metrics in business is certainly important, but the activity must target specific areas of concern and to identify when problems arise.
How to Measure Performance in Business
As previously stated, metrics tend to drive employee behavior. However, the key is that we set metrics that drive the right behavior. Tracking profit margin drives the organization to manage cost. Measuring on-time shipments will focus managers on pushing for efficiency. Employee survey scores should be taken seriously so that managers continuous seek ways to make the work environment better for their staff.
Areas to Focus Your Metrics:
- Business Vital Signs (Profit, Growth, Cash Flow)
- Employee Satisfaction
- Customer Satisfaction
- Specific Areas of Concern
The metrics you set for your organization should push managers and leaders to grow and expand. Equally, metrics need to be created with restraint and limited in quantity, and focus on areas of concern or weakness. As a general recommendation, limit your overall quantity of metric to the top five for the overall organization, and an additional five to ten for each business function (sales, engineering, finance, etc.).
An Example of How a Metric Was Created to Address a Concern:
In 2005, one large industrial manufacturer was rightfully concerned that 50% of their engineering and technology staff was within 10 years of retirement. This statistic meant the firm was at a significant risk of losing decades of knowledge and experience if action was not taken.
In response, the company set goals to hire a deliberate set of fresh university graduates (1,000 per year) over the next several years to ensure continuity and succession planning. As the aging workforce retired, the freshly hired employees would be ready to take over.
Final Thoughts on Metrics
By creating goals and metrics around key vital signs, and problem areas, we can systematically strengthen our businesses. But recognize that every metric we create consumes a small bit of energy from the organization to track, manage and report. Make careful decisions and limit the metrics you set to those that are truly important to your company. Just because you can measure something doesn’t mean you should.