Doing business in today’s economic, social, and political environment is complex. Start-ups are especially vulnerable due to their minimal resources. Strong people, experience, and finances are needed to quickly and successfully spot trends, major inflection points, and opportunities. Even with adequate resources, data is the key issue. Too little data or too much data each present challenges and prevent a business from running efficiently.
Defining your key metric:
Businesses need to identify the most important metrics to measure and drive revenue, gross margin, profitability, productivity, and the customer experience. This is standard operating procedure for most companies. The real challenge – and one that if done well can create a significant competitive advantage – is to fuse these “most important” metrics (those that measure business performance best) into one key metric that best captures the ability to measure overall success.
Once a business has identified its key metric, and the metric has passed tests for relevance and robustness, it should be rolled out across all verticals of the company to the entire management team (executive, middle and supervisory). Everyone on the team should understand the key metric, be aligned on its importance and have his or her performance focused on optimization.
Rolling your metric out:
It often helps to work within each vertical to identify a few additional metrics that are entirely controlled within a vertical AND that most influence movement of the key metric. For example, Company A’s key metric is profit per unit. The operations team is responsible for the supply chain.
They need to minimize component costs and shipping costs to help the key metric, but also have to focus on product quality (low quality components will lead to an increase in returns and significant additional per unit costs). All three of these metrics should be part of their “vertical exclusive” metrics, but the team needs to be focused on the overall profit per unit metric – the metric that whole company is optimizing towards.
If operations does not focus on the key metric, and only their vertical exclusive metrics, the team might overemphasize reducing component cost at the expense of quality control, or vice versa.
The key metric is a powerful management team-building tool. Leaders can empower management because everyone explicitly knows how they will be measured and how they can most help the company. Leaders should provide incentives to management and the whole company that are tied to the metric.
While each vertical knows they have exclusive responsibilities (and metrics) that only they can control, they also know that they are counting on all verticals to do their respective parts to drive the key metric. Verticals, managers and employees must work together and rely on each other to drive their personal compensation. They must work as a team to drive company performance.
A business with a clearly defined goal and a reliable, understandable and consistent metric to measure performance verses that goal has a good chance to succeed. A business with everyone on the same page (from the mission statement to financial incentives) has a great chance to succeed.
What do you believe your business’ biggest success driver is?
(This story was first published in 2012.)