Know Your Metrics

Know your metrics and the behaviors they drive

Everyone at your company should understand which metrics drive the business, and what behaviors they encourage. That’s what Joe Nigro, CEO of energy company Constellation, said in a 2016 Harvard Business Review article.  He went on to say, “Everyone needs to know how each metric fits into the big picture…why and how we’re measuring something, and how it’s relevant to performance.”

More directly, I would say metrics should capture the changing environment of your business so you can make informed decisions. But how do you know your metrics are any good?

Encouraging behaviours

If you ask your fellow employees which metrics drive the business, would they know?  Would they care?  I believe their jobs should depend on them caring, though measuring that would be difficult.  If they are unwilling to do their part, perhaps they should “help” some other company.  Everyone should be held personally accountable to understand what helps drive the business and how they can help. If they knew what the metrics are, how could it change their behavior (in a positive way)?

Metrics executives may be thinking about

From an executive level, I can only imagine every CEO (from Joe Nigro to Mike Cottmeyer) start by thinking about these metrics:

1. Topline revenue – Money made from selling goods or services
2. Customer retention – Attracting the right customer, getting them to buy, buy again, buy in higher quantities or at higher rates.
3. Customer acquisition cost – The total cost associated with acquiring a new customer, including all aspects of marketing and sales.
4. Gross margin – Calculated as a company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage.
5. Overhead costs – fixed costs that are not dependent on the level of goods or services produced by the business, such as salaries or rents being paid per month.

I hope executive management will help employees understand the metrics that drive the business and why they are important. I hope the employees will internalize these metrics and consider ways to help the company increase revenues, widen margins, or control costs.

One step deeper into the weeds

From a productivity level, be it manufacturing or software development, I think the staff (and the executives) need to understand (and improve) the system of delivery. To this, if executive management doesn’t know these productivity numbers, then how can they know when they are making unreasonable requests of the system? A system of delivery in a black box and executives in an ivory tower are not a good combination.  A dissatisfied staff can put your company at serious risk, while on the other hand, a satisfied and productive staff can help drive the business.

1. Cycle time – The total time from the beginning to the end of your process.
2. Lead time – Starts when a request is made and ends at delivery.
3. Utilization – 100% being the maximum, it’s the act of making practical and effective use of people or things
4. Throughput – The amount of material or items passing through a system or process. What did you get done or delivered?
5. Cost of Delay – The means to calculate and compare the cost of not completing something now, by choosing to do it later.

I hope everyone will think of ways to shortening cycle and lead times while maintaining or increasing throughput. If maximum utilization is how you make the greatest topline revenue, how do you reach that utilization level without breaking your people or machinery?

Another step deeper into the weeds

From an individual level, I believe we are truly personally accountable. Let’s ask the first two questions from this post again. Which metrics drive the business?  What behaviors do they encourage?

1. Commitment/Completion Ratio  – What have I personally committed to? Am I meeting that commitment?
2. Throughput (Velocity) Variance – Given the things that I’ve recently completed, am I predictable? Can others make commitments, based on what I do?
3. Confidence Score – How confident am I that I will actually keep the commitment I made?

I hope individuals will be honest about what they think they can do in a given period of time. I hope they will be honest with their coworkers and with management if they don’t think they can keep a commitment.

What behaviors do you think metrics encourage?

Image Source: Calculated Velocity Variance via Notion [UseNotion.com]

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