Value-Based Performance Metrics
Today many businesses are seeking to improve performance. Performance measures have expanded from the traditional financial metrics of sales turnover, profit, performance against budget, lead times, inventory turns, sales volumes, and other historical “snapshots” to include customer metrics such as satisfaction scores, referral rates, quality scores, and lifetime customer values. Every company is trying to find the right mix of metrics to enable them to improve sales, profits, growth, and—underlying it all—customer relationships.
What to Measure: No Set Recipe
While there are any number of ingredients to choose from in the financial, value-added, customer satisfaction, and performance measurement “kitchen,” the truth is there is no single recipe for success. Industry to industry, company to company, what works depends upon the level of understanding and capacity to implement a system. What matters most with any of the tools is that it is used and used wisely.
Whatever the metrics, they are not the ends, but the means for determining what needs to take place to obtain and retain a satisfied, profitable customer who keeps coming back for more products and services that generate more profits. The metrics are tools for focusing a business on the activities that are part of the process of generating revenues, managing costs, and influencing customer behaviors positively.
Recipe for Success
As the saying goes, “You get what you measure,” so companies must be careful where they place their emphasis. Measure the wrong thing and you will get the wrong focus and the wrong behavior. You can improve short-term performance with intense focus, but what will it do in the long term? Where do you really want to direct your attention? What are you really trying to achieve? Defining what you are trying to make is the first step in creating the recipe for success. Then, once you know what recipe you want to make, find the right ingredients and put them together to achieve the proper outcomes.
If your focus is profitability and growth, then focus on customer profitability, margins, costs, pricing, market trends, number of qualified prospects, conversion rates, and so on. If you are concerned about accounts receivable collection rates, then examine days of accounts outstanding, average collection terms, aging of accounts, credit terms, and changes in customer days outstanding and pay rates, etc. If you are focusing on cash conversion cycle, then look at metrics relating to each variable of the equation (e.g., accounts payable and receivable, inventory). Your focus and concentration are on these elements because you are being measured against them. If you aren’t accountable for other measures and you don’t see how they will get you rewarded (or punished) then you will pay attention to these only.
Be Careful: You Will Get What You Ask For
We are consistent in our behaviors. We like to be rewarded. We dislike negative consequences. We tend to deal with what is happening today and worry about long-term consequences latter. So if you are using metrics that emphasize the short term or can be influenced by short-term actions, then expect short-term thinking and actions. It is human nature to deal with what is happening now, what we see and feel or know will be happening, and deal with anything else … tomorrow.
Think through the selection of metrics and the actions you will take to achieve them. A small action today may set you up for significant consequences “tomorrow.” Unfortunately, tomorrow frequently comes sooner than we think when it relates to business and profitability issues.