Imagine buying a new state-of-the-art motor car with an incredibly powerful engine, excellent acceleration, smooth handling and a stunning interior. You get into the car for the first time and you are enjoying the comfortable, powerful ride; then you look down at the dashboard and there is nothing to help you understand the car’s performance and fuel reserves. No speedometer, odometer or fuel gauge. Without these critical instruments to give you feedback on the car’s performance, you will never get maximum benefit and enjoyment from the vehicle. You will be constantly worried about running out of petrol, concerned that you may be breaking the speed limit and wondering when to take the car in for a service.
Driving a powerful new car without instruments to give you feedback on its performance can be equated to setting up a promising new business and not measuring and reporting back on its performance. Too many business owners find themselves in this position. At best they have a handle on one or two metrics such as revenues, unit sales or usage. At worst they have absolutely no idea how their business is performing and they just hope that the bank doesn’t call to say they have run out of money. The astute businessperson thrives on feedback and information about the performance of all aspects of their business. They use real numbers, comments and metrics to drive their decisions and they openly discuss the performance of the business with all those involved in making it work.
The process of using business performance metrics to understand and respond to what is happening in your business is imperative. You measure, report, adjust then measure, report, adjust again and the cycle is ongoing.
As you keep going through this cycle the business goes through a process of ongoing improvement as a result of deliberate effort. Without metrics, ongoing improvement can only occur as a result of chance. Creating this sort of discipline early on in the lifecycle of the business is relatively simple. The metrics and measures for new businesses are not overly complex. Measuring what is important in a more mature business can create a little more of a challenge but it is certainly not impossible. The principle is to start as early as possible and make measurement and accountability part of the culture of the organisation. Remember: what you measure is what you get.
The Principles Of Good Business Performance Measurement
Having been involved in the development and implementation of business performance measurement systems for a range of different businesses over the years, I have discovered a set of overriding principles that tend to apply regardless of industry or size. As you go about devising or revising the metrics that you use to measure your businesses success, I would recommend that you consider these principles and integrate them into your performance measurement system:
Accountants often wonder why so few people in smaller businesses pay attention to the information they produce. One of the primary reasons is that people don’t understand it. Accounting rules are complex and this makes it difficult to make accounting information understandable and useable for the normal person. If you want to get people to buy into a measurement system then keep it simple. You want employees to speak about the performance of the business in the passage and over their morning coffee. They will only do this if measures are clear and simple.
- Focus on a few important metrics rather than providing people with an overload of information
- Explain the metrics and the mechanics behind each of the important metrics to everyone in the organisation
- As the business grows, inform new employees what these metrics are and what they mean
- Try to make the language of your important metrics part of the organisational DNA. For example, any Kulula.com employee talks quite comfortably about “load factors” (number of people on each flight relative to the flight capacity) and “turnaround times” (time from the offload of passengers to when the airline leaves the bay full of new passengers, luggage and fuel)
The traditional approach was to make almost all the metrics financial. This addressed symptoms and overlooked the real causes of problems or successes. A business is an interrelated set of activities creating a fairly complex system and one needs to try to measure the performance of the whole system, not just its financial output. Two Harvard Business School professors by the names of Kaplan and Norton proposed that to really understand the interrelated activities that make up a business, we should look at what they called a balanced scorecard measuring four areas of activity:
- People – how motivated and skilled are our people for the work they are doing and how are they performing in their designated roles?
- Process – how efficient and effective are our
- Customers – how happy are our customers?
- Finances – how are we doing financially?
- An effective performance measurement system will measure performance in all four of these areas.
- Devise a balanced set of measures that take into account all the important elements of the business
The old way to run a business was to withhold information from people, empowering only a few with the information. Luckily this is no longer the case and progressive companies have realised that sharing results with everyone involved in achieving the results is a productive activity. If you want to maximise the benefit of measuring the performance of your business, be open about the results. People can only act on the information that they have and if your employees have an idea of how the company is performing they can do what is necessary to improve things. As a follow on, it is good practice to discuss the results, particularly with senior people. This enables you, the owner/manager to draw on the consolidated intelligence of everyone in the organisation to interpret the results and take corrective action. Different people have different roles and therefore different views of what is going on in the organisation. Sharing of their insights and understanding of results enables cross-functional or inter-departmental learning and provides the owner/manager with an opportunity to understand what is really happening in the business.
- Share business results with employees as regularly as possible – at least quarterly
- Ask people for their interpretation of the results. Interpret the good and bad results with the people in the organisation.
Accountability and Rewards
Too often I have come across organisations that measure the performance of different aspects of their business and then do nothing with the results. They avoid addressing the problem areas and neglect to reward those responsible for outstanding performance. I once had a mentor who said that the most important lesson in business is to be “tough on results and easy on people”. If there are problem areas get explanations for poor performance and talk straight with the people involved about how the issues can be resolved. Glossing over problems creates uncertainty for the employees involved. Most people prefer to have negative issues out in the open and discussed directly. Similarly, when someone performs well, be sure to give them the recognition and reward they deserve. Winners thrive on recognition. Rewards don’t always need to be financial. Time off, a hand written letter or a congratulatory word in front of others can serve as excellent motivators for those who have done well. A good business is a sustainable system that is continuously rejuvenated and re-energised – rewards keep people motivated and focused on doing the right thing. If you are not going to act on positive and negative results coming out of a performance measurement system, don’t bother with the system at all.
- Deal with poor performance by discussing the results openly and directly with those involved. Focus on the issue, not the person
- Reward good performance by focusing on the person and recognising their contribution
Business Life Cycle
A business is similar to a person growing up and going through distinct life stages. A person goes from birth to childhood to adolescence to adulthood to ageing. The characteristics of each stage are different and transitions from one stage to the next are not always clear when they are happening, but when one looks back years later the different stages are evident. A business goes from idea, start-up and early growth to later growth, maturity and possible decline or re-invention. The length of time for different business stages depends on the industry and the quality of management. An effective business owner needs to be able to adapt as the business goes through progressive stages because the demands and challenges are different at each stage.
The idea stage is characterised by a very small team (many times it is just one or two people) researching, developing an idea, crafting a business plan, raising initial capital and turning the idea into a business. The entrepreneur’s goals in this stage should be to get going with a well researched, viable business model.
The start-up stage is characterised by building trial products or prototypes, expanding the team, putting infrastructure in place, fostering relationships with partners and suppliers and making the initial sales. In the start-up stage the goals focus on building a management team, establishing the business and making sales.
The early growth stage is characterised by an initial uptake of sales of new products or services, heavy demands on a growing team to deliver products or services, lack of clear structure around organisational processes, strains on cash flow to fund sales growth and an energy and excitement that comes with growing a business. In the early growth stage the goals of the owner focus on putting a workforce in place, creating systems to deal with increased workflow, managing cash flow and keeping sales going.
The later growth stage is characterised by continued growth in sales, clearer role definition within a growing team, the establishment of processes and procedures to meet sales demand, more efficient cash flow forecasting and the challenge of trying to reduce costs. The later start-up goals focus on keeping people motivated and incentivised, eradicating unnecessary costs, retaining customers and making profits.
The maturity stage is characterised by the slowing down of sales growth and levelling off of sales, the stabilisation and possible shrinkage of the team, clear definition of process and procedures and striving for process efficiency to eliminate all unnecessary costs and maximise profits. In the maturity stage goals can either focus on getting the most out of the current business before it goes into decline or innovating to launch something new for a new phase of growth.
The decline stage is characterised by declining sales, rationalisation, very well defined but possibly stale processes and procedures, outdated technology and attempts to reinvent the business. If the reinvention works the business may find a new growth curve. If the reinvention does not work, it is likely that the business will die a slow death.
The measures to be considered at the start-up, early growth and later growth stages have been captured in tables throughout this feature. The tables illustrate an example of a balanced scorecard at each stage of the business lifecycle.
Business measurement is not a sexy topic. It is not something that we spend hours chatting about at cocktail parties or something that would be the topic of a best-selling book, but it is something that is critically important for creating business success. It may seem like a “boring” or “conservative” thing to do in your business; you may think that it is far more exciting to chase a big new account or come up with a new advertising campaign but you ignore the concept of business performance measurement at your peril. Without it you are driving blind, and who knows where you might end up.
Business performance metrics enable an entrepreneur to:
1. Better understand the business. To really know whether the business model you have conceived is working, and to understand where money is coming from and going to, you need insight into how all elements of the business are performing.
2. Focus on all elements of the business and keep the business in balance. The trap that most of us fall into is that we (or our accountants) only measure financial results: revenues, costs and profits. We have insight into how the business is doing financially, but we don’t understand what is causing the financial results. A good set of metrics will measure more than financial results and enable the business manager to keep an eye on customer satisfaction, employee performance and process efficiency within the organisation. Getting feedback on a broad set of measures will enable the business owner to understand what really drives profits.
3. Make intelligent business decisions. Making strategic and tactical business decisions without information is a bit like choosing a hotel for an upcoming holiday without ever looking at a picture, brochure or getting feedback from someone who has been there. Without accurate information it is almost impossible to make good business decisions.
4. Motivate themselves and employees. Information and feedback have the uncanny ability to inspire and motivate people in two ways. Firstly, knowing that what we are doing is going to be reported causes us to be more conscientious in actually doing it. It is a natural human condition to want to look good when something that we have contributed to is evaluated. Secondly, when those results are made known, good results can be uplifting and make a team want to do even better the next time, and poor results correctly communicated can inspire the fighting spirit in people to overcome past failures.
5. Reward people appropriately. If you don’t know how the business has performed it becomes very difficult to recognise and reward exceptional performance. One ends up giving blanket rewards to all people in all departments and the good people begin to feel that it is not worth putting in extra effort because there is no reward for good performance. A well constructed business performance measurement system enables the business owner to isolate and reward pockets of exceptional performance, which means you have a much better chance of retaining the exceptional performers.
6. Address problems before they get out of control. Without a business performance measurement system, problems can sneak up on you and you only realise that you have the problem when it is a crisis: the cash has run out, the customers have all gone to a competitor, the key employees have resigned or the system does not have the capacity to meet demand.
Ideas of what to measure at each point in the life stage of a business
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|Later Stage Growth|
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