One of the watershed moments in the life and growth of a business occurs when the executives design and implement a system of measurements. This signals the development of the business from an entrepreneurial effort to a serious organization that can exist outside of the hands-on involvement of the entrepreneur.
Implementing a series of measurements brings a number of important benefits:
1.It instills a system of organized, focused activity, often in place of the intuitive directions of the entrepreneur. It should be perfectly aligned to the organization’s mission and vision and, therefore, provides the bridge between the ideals articulated in the mission statement and the reality of day-to-day efforts.
It becomes, then, a key to growing a business. The process of building the system, which can take months, provides the bridge from an ‘individual driven” organization to a ‘systems driven’ business.
2. There is a management axiom that says, “The behavior you measure is the behavior you get.” That remains true because it accurately comments on human nature. One proven step to organizing and focusing human behavior is to measure some aspect of it. Measurements, then, are a key tool to encouraging the folks to do what you want them to do.
3. It provides a powerful, proven way to free up entrepreneurial and executive time and ensure that they are being used in the most effective way. Once you have a measurement system in place, you can step back a bit from the fray, and look at the numbers once a month. You can then apply your time and energy to the areas of your business that are out of sync and not meeting expectation. So, in 15 – 60 minutes once a month, you’ll utilize a tool that helps you apply executive resources where they will get the best results.
There are two fundamental efforts that you’ll want to measure: routine business processes, and progress on initiatives.
One routine business process may be acquisition of new customers, for example, or, the collection of receivables. Routine business processes are the heart of business activity and should be measured constantly. These are the things that must be done, day in day out, with ever growing excellence, if the business is to prosper.
Initiative are well defined efforts to create some change in the organization and are usually rendered into step-by-step processes. For example, you may want to create a new product. You set out a process with steps along the way that will take nine months to finish. In this case, the measurements should reflect the progress and compare it to the initial plan.
2. For routine business processes, think in terms of measuring results and activities.
A result is just that – an objective measurement (usually produced by the computer) of the outcome of some business process. For example, ‘total dollars of sales” is a result of a lot of effort and activity. It is easily measured and should be one of the cornerstones of a business dashboard.
Activities are the essential things that must happen that cause the result. For example, to cause the result “sales”, there must be a certain number of offers made to prospects and customers. Since, in a B2B environment, no one buys without being presented with the opportunity to buy the product (an offer) the quantity and quality of offers is a key activity that must happen if ‘sales’ are to take place.
Good measurement systems note both selected key results and the key activities that lead to those results.
The final number is only as valid as the means of acquiring that information.
In other words, the source of the information should be as objectively verifiable as possible. “Total dollars of sales” can be programmed in most computer systems to calculate and report each month, based on invoices created or dollars collected. On the other hand, “proposals made” may need to be collected from the salespeople.
Of the two measurements, “total dollars of sales” is more objective and, therefore, more valid. “Proposals made” relies on the salespeople accurately reporting their efforts, and, since the source is human reporting, it is not as valid. The salespeople may not keep accurate records, for example, or be tempted to fudge the numbers.
The measurement should not cause an undue amount of effort to garner.
For example, “total dollars of sales” should be readily available with the push of a button from the computer. On the other hand, if you didn’t have that capability, and you had to hire a temp once a month to manually add up invoices, the amount of time and effort required to measure may not be worth the value of the measurement.
Some information is too difficult and cumbersome to collect.
Once the measurement bug bites you, you’ll naturally tend to measure more than less.
Too many numbers can be a burden on your resources and defeat one of the primary purposes of a measurement system – to focus your energy and resources on a few high-potential areas. As you assemble your system, try to fit it into these specifications:
- No more than seven key results measurements for the company as a whole.
- No more than five activity measurements for each important area of the business:
6. Don’t expect perfection in your first set of measurements.
It is just today’s version. You’ll find some things are too difficult to measure, others will be relatively unimportant, still others will rise to the surface. Creating and implementing a measurement system is a continuously evolving project.
How to measure routine business processes
Step One. Select the areas that you want to measure. Begin with the basic results measurements for the company as a whole and stick to no more than seven. A typical list would look like this:
- Gross Margin
- Operational costs
- Net income
- Cash on hand
Step Two. Select the time frame. You can, at least in theory, measure things annually, quarterly, monthly, weekly, daily and hourly. For our purposes, we’re going to recommend a monthly time frame for every measurement.
Step Three. For each measurement, create a written definition of exactly what you are measuring. For example, “sales” can be defined as information from orders received, from invoices created, or from cash collected. Each of these is a legitimate, though different, definition of ‘sales.’ It could also be rendered in dollars, or in units i.e. “We sold $45,000,” versus “We sold 75 units.”
Be as precise as you can be. For example, your definition of sales could be: ‘The total dollar volume of invoices created from 8 am on the first day of the month through 5 PM on the last, as reported via line 32 of report XXXYYY.”
Capture these definitions so that as things change in the future (and they will) you’ll be able to compare like numbers.
Step Four. Decide who is going to be responsible for acquiring and posting the measurement, and delegate the task. As a general rule, it is better to have someone gather the numbers other than the person or team responsible for getting the results This layer of separation provides a bit more validity to the numbers.
Step Five. Create a dashboard – a summary report that lists each item with the month’s numbers. See attachment A as an example. You may want to limit the dashboard to a file on your computer system, and/or create a poster for the lunchroom, — or some other way of communicating the numbers to the rest of the company.
Step Six. Begin collecting the information.
Now, move on to key activities
Look at each key area of the business, and repeat the process, this time focusing on the activities that must happen in that area in order to get the results. In a generic business organization, the key areas are: Sales, Operations, Finances. You may want to use those or other categories that are more in keeping with your business model.
In my earlier example, I used the area ‘Sales’ and identified a couple of key activities:
- New customers created.
- Total number of proposals made to customers.
As you wrestle with defining each, you’ll find that activity measurement is generally not nearly as cut and dried as results measurement. Very often you’ll find yourself relaying on ‘what someone says” as the source of your information. You’ll need to be thoughtful and creative in order to add a layer or two of objectivity to the measurement.
Here’s an example. One of my clients, a seller of industrial and commercial kitchens, wanted to improve the company’s effectiveness in creating new customers. There’s was a long sales cycle – six months to a year. They determined the key activity to measure was the number of quotes made to prospects. Instead of just relying on the salesperson’s reporting, they created this system:
- they knew that every customer was on the data-base, and no one but customers were entered.
- because of the complexity of the quotes, a sales administrator produced each quote for the salespeople.
- so, they asked the sales administrator to report, at the end of each month, on the number of quotes prepared for accounts not on the data base.
This put a layer of objectivity to the measurements, as the sales administrator did not have a vested interest in making the numbers larger or smaller than they actually were.
Methodically work through the process for each area, and each measurement with the area:
Step One. Select the activity to be measured.
Step Two. Define it.
Step Three. Identify and delegate those responsible for collecting and posting the numbers.
Step Four. Create page two of the dashboard. (See attachment B)
Step Five. Implement.
Don’t wait until everything is in place to begin the process of posting, reviewing and then engaging with the issues that rise up. We’ll talk more about this later.
How to measure Initiatives
While the basic business processes reflect the fundamental work of the organization, there is another set of activities which prepare the organization for future challenges and opportunities. I call these initiatives. An initiative is a project designed to create something new in the future. It consists of a series of one-off tasks, as opposed to the routine and repetitive tasks we measured above. Initiatives are often born in strategic planning meetings, and often arise out of a review of the business process numbers.
Let’s use our ‘sales’ area as an example. At a monthly review, you have become concerned that number of new customers created is below expectations for several months in a row. As you talk it over with your executive team, you decide that the most likely solution is to create a new job description for a salesperson solely focused on acquiring new customers. You delegate the task to your sales manager, and ask him/her to create a process, to identify some key benchmarks along the way and to put deadlines on each.
When you have that information in hand, you create an “initiative dashboard” and consolidate the benchmarks and deadlines for all the initiatives (see attachment C) for an example.
To do this well, follow this process.
Step One. Precisely define the initiative. What is the outcome to be?
Step Two. Assign a deadline – when should it be finished?
Step Three. Create and dedicate the resources necessary. Is there a budget for this project? What internal resources will be available?
Step Four. Delegate the project to the appropriate team or person.
Step Five. Ask him or her to create the project task list, benchmarks and deadlines.
Step Six. Enter the key benchmarks and deadline on your ‘Initiative Dashboard.”
Using the measurements
As soon as you have begun to put the system in place, you can begin using it to drive the growth of the organization.
The key is to hold a monthly “Review and Fine-tuning Meeting” (RFT)
- Decide who should be there. Typically, this is an executive-level meeting.
- Schedule it about the same time each month, shortly after the monthly measurements are posted. For example, you could schedule them on “the second Monday of the month.”
- Create a formal agenda. The agenda should vary only a little from month to month. It should involve:
- Review the numbers. Begin with the results and move onto the activity measurements. Identify one or two key areas on which to focus – either strengths to enhance, or weakness to overcome.
- Create new initiatives to address the issues raised.
- Move them onto the “Initiative Dashboard.” Review each benchmark event with the person or team who is responsible. If anything requires intervention, identify it right now, and commit to it.
The RFT meeting, once the group is comfortable with the format and agenda, should not take more than an hour or two. It will become your primary management tool, to keep your fingers on the pulse of the important things in your business and allow you the freedom to apply your executive resources in the places that will produce the greatest results.
Enhancing Your System
Once you have the system in place, then you can consider some enhancements to wring extra value out of it.
1.Consider publishing it to your employees, either in full version or in some abbreviated version. This can take a variety of different forms – anything from a chart in the lunchroom, to a regular spreadsheet file that is emailed to them, and lots of possibilities in between.
You could accompany the publication with some beginning education on what the measurements are, why they are important, and how each employee can impact them. A monthly note on how the company is doing based on this month’s numbers would also add meaning to the numbers.
2. Add objectives. As you begin to be comfortable with the information the numbers provide, you’ be able to add the element of ‘objectives’ for each measurement for every month and year to date. Without objectives you’ll be able to say something like this: “Our sales were $400,000 last month, compared to $390,000 the month before.”
When you add objectives, you’ll be able to say something like this: “Our sales were $400,000 last month, and our objective for the month was $410,000.”
Adding objectives puts goals in front of the company for each of the measurements and gives everyone something to work towards. Read these blog posts on goal setting: Creating Long-Term Goals, A fresh, nuanced approach to goal-setting: Introducing FOFS
3.For the activity measurements, add quality measurements to the quantity numbers. When it comes to the activity measurements, if the measurements are points in a process, you can determine the quality of each activity as well as the quantity. Let me show you what I mean:
Let’s say you have identified these activities in the sales area with last month’s numbers:
Number of prospects identified 50
Number of proposals to prospects 10
Number of new customers created 2
Number of proposals to customers 40
Number of customers proposals accepted. 25
Notice that the first three of these activities identify a specific action necessary to achieve the larger process of “Acquiring New Customers.” In order to acquire a new customer, prospects first must be identified, then they need to be engaged to the point where a proposal is made and, finally, when they accept the proposal, a new customer is made.
To understand how effective you were in completing a step in the process, compare one column to another and turn it into a percentage.
So, 50 prospects identified yielded 10 proposals. That’s a 5:1 ratio, or 20%. In other words, you were 20% effective in engaging with new prospects, finding a need, and making a proposal. If the next month you still identified 50 prospects, but converted them into proposals at a 25% rate, you would have improved the quality of your efforts.
The percentages comparing one column to another are measures of quality — of how well you did that step in the process. To improve the results of the total process, you could focus on improving the quality of the process, rather than just increasing the raw numbers.
When you take the big step of creating and implementing a system of measurements, you take a huge step in the development of your business, moving from an organization which is directed by purely individual effort, to one that has coalesced around a quantifiable set of activities and is driven by systems. That is a necessary step in the growth of the business.