Whether you're leading an entire company, a single division, or a department of two, chances are you use a collection of metrics to measure business performance. You may have as few as three metrics, or as many as 20, but if there is one thing for sure, you have numerous options. We are living in the age of data.
You could even argue that data is the currency of business. After all, it was W. Edwards Deming who once said, “In God we trust. All others bring data.”
What metrics do you use to measure business performance and success? Which metrics are essential? Have you ever changed which metrics you track?
Every business leader has their answers to these questions, but the good news is there are those metrics that are considered best practice, even though measures or KPIs (key performance indicators) can also differ by industry and company size.
Jack Welch, former GE CEO says, “There are only three measurements that tell you nearly everything you need to know about your organization’s overall performance: employee engagement, customer satisfaction, and cash flow. On the importance of employee engagement, he notes that “No company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it.”
What Makes a Good Metric?
But what are the characteristics of a useful metric? Joel Trammell, CEO of Khorus Software shares his thoughts:
A helpful metric should be relatively simple to measure. If you have to build a new system or implement a complicated process just to measure the metric, it's probably not worth measuring in the first place.
Directly correlated to business performance
The metric should be tied to business-oriented goals you establish for the department, group, or company. The right metric will tell you if you are successfully executing the fundamentals.
Predictive of future business performance
The best metrics do not tell you just how well you've done (your financials tell you that); they say you how well you're going to do—in the next month, quarter, or year.
Isolated to factors controlled by the group it is measuring
It's difficult to do, but identifying those fundamentals about a particular team will tell you much more about their strengths and performance.
Comparable to competitors' metrics
This will help you judge how well you're building or maintaining an operational advantage, holding on to top talent, and retaining top customers.
He says that not many metrics will reflect all five of these characteristics, ”But they should meet as many as possible.”
Tips From an Entrepreneur
Entrepreneur Chirag Kulkami suggests business owners organize metrics into separate buckets. Here are a few of his recommendations:
While it's clear that when your business is making money - it means some measure of success, especially if there is money left over after you cover all your expenses.
Number of Customers
Every company needs customers. Your measure of success should show a growing customer base with a steady stream of leads in the pipeline.
Level of customer satisfaction
Happy customers tell other customers about your products and services. Therefore, "The ability to satisfy my customers meant that what I learned from them and their needs was being applied correctly to the service I was offering them."
Level of employee satisfaction
Happy, motivated employees tell you a lot about your real success. Satisfied employees work hard and are fully engaged in the business.
Tips from a Midsize Company CEO
To better understand the breadth of metrics a leader could use to track the performance of a typical midsize company, we spoke with Mike Litwin, former CEO and general manager of Target Commercial Interiors, a $200 million business he successfully led for several years. His detailed insights suggest a deeper level of metrics you could consider for your own business:
Primary Monthly Metrics
- Sales vs. forecast
- EBIT vs. forecast
- Margin % and $
- DSO (Days Sales Outstanding) - This increases for only two reasons (a) weakening collection practices or (b) declining economic conditions for our clients
Mr. Litwin says for the above measures, “It helps to watch trailing 12-month trends.”
Secondary Monthly Metrics
- Expense rate
- Personnel expense rate
- Win / Loss rate
- New business % of sales and growth/decline
Key Annual Metrics
- Employee Engagement Score (Gallup survey)
- Net Promoter Score (External survey)
- Client Satisfaction Score (External survey)
Want more insights into developing your company's metrics? Consider joining a Vistage peer group.