Selecting the right metric for your business
Metrics are adopted as part of the deployment process of identifying a vision, defining a strategy, setting goals, and assigning actions. The vision identifies where the business wants to go, the strategy explains how the business will want to get there, the goals define where “there” is, the actions say who will do what by when, and the metrics help to measure how well the business is doing on the path and how far it will have to go.
What is the definition of Metric?
A business metric is a quantifiable measure business used to track, monitor and assess the success or failure of various business processes. Good metrics have three characteristics.
- Good metrics are important to your company's growth and objectives. Your key metrics should always be closely tied to your primary aim. A good metric example might be a month-on-month revenue growth or LTV: CAC ratio. The key point is to choose metrics that show where you are concerning your goals.
- Good metrics can be improved. Good metrics measure progress, which means there is a need for improvement. For example, reducing churn by 0.8% or increasing your activation rate by 3%.
- Good metrics inspire action. Examples of these are, why has our conversion rate dropped? Did we make site changes or test a new acquisition channel? By asking these questions, you can determine possible causes and work to resolve them right away.
Basis for metrics
Within the strategic framework, goals can be set in several ways. Using historical data can help to set goals and metrics for achievable continuous improvement. Benchmarking against direct competitors, within similar processes or technologies or compared to other successful groups within the organization, can motivate workers to understand and implement best practices. Setting visionary goals that match a disruptive strategic change can guide workers to be creative in gap closure efforts.
Qualitative vs. quantitative
Metrics can be qualitative, often yes-or-no results. They can be quantitative, with clear measurable and differentiable levels of performance. Quantitative metrics are easier to measure and often more effective, especially as they provide information on the degree of performance. Many qualitative metrics can be converted into quantitative. For example, project implementation can be articulated as a series of milestones with percent completion vs. a time-based plan. Other soft qualitative areas can be measured with surveys, yielding percent satisfaction with various elements.
Local and departmental metrics must be aligned with the overall organization. This may be a simple cascade or roll-up process. Sometimes departments and the total organization may measure different outcomes, but they must fit together to achieve the overall vision, strategy, and goals. Remember that the focus is on serving customer needs vs. optimizing a single department. For example, delivering to meet a customer lead-time goal may drive different local metrics than if the department sets goals and metrics to increase uptime and reduce inventory, which may hurt the lead-time goal.
“Good enough” vs. Competitive
Over delivering something that the customer does not value is simply waste. Goals and metrics need to tie to the needs of the customer and the capabilities of others in the marketplace. An organization can serve a customer with parity goals, matching the competition in most baseline areas, and using the strategy to the one or two areas where it will differentiate performance from competitors to become preferred by customers. Metrics align with this matrix of goals.
Lagging vs. leading
A good deal of metrics is lagging. Monthly and quarterly financial reports reveal how the department or organization did on managing waste, controlling costs and driving revenue during the past If the results are disappointing, nothing—other than cooking the books—can change what has already happened. Alternatively, or often the organization can use real-time leading metrics to predict performance. Using metrics for SPC (statistical process control), activities-based cost tracking, and sales prospect tracking can provide much earlier indicators of problems or progress, giving managers and workers early triggers to make course corrections long before results are collected and reported.
Any process could have many measurement opportunities, possibly too many for most people to understand and integrate. Simplification by using aggregates of key items can be helpful. For example, a supply chain operation may use an OTIFNE (on time, in full, no error) measure or a customer-facing department may develop a client happiness score that incorporates customer response time, right-the-first-time answers, and customer feedback. At a higher level, the leadership team may create a balanced scorecard that incorporates KPIs (key performance indicators) in areas such as customer service, operational effectiveness, financial performance, and resource development.
One of the best ways to help people know where to focus efforts on achieving goals is by making the metrics visible. At a leadership level, this might involve a monthly review and discussion of the visually balanced scorecard, perhaps with KPIs linked to rolled-up departmental metrics. Misses are given gap closure actions. On the shop floor, performance charts can show graphs of performance—being careful to show “up” as “good”—and allowing the opportunity for annotations with actions, suggestions, and more. All of these metrics can be marked as red, yellow, or green showing unsatisfactory performance, progress, or goal achievement. Items with red and yellow indicators will have gap closure, attention and green will be reinforced.
It is important to remember that metrics do not just track what has been done. They also serve as triggers for people to take desired actions. Setting expectations for goal achievement helps people to be more effective and be motivated to achieve those goals.
The more you understand your business, the better you will be at setting growth targets for your team. However, start somewhere. Setting out on goals that you might not hit is better than not having goals at all because you are too scared to draw a line in the sand.