About few years back, when I was working in a leading global financial institution, one of the senior executive asked me about if I could recommend one change that would transform entire department. I said, " let's re-define the measure of success and then re-align everything else to achieve it
I think, most of the business leaders and entrepreneurs recognize the importance of having right measure of success but rarely use it effectively to navigate their business. Many business executives rely heavily on their intuition in selecting statistics; metrics that are often called performance measure. More often than not, the statistics that is relied on to assess performance is revenue only, while it remains disconnected form other overall objectives of profitability. As a result the strategic and resource allocation decisions are not aligned to support overall goal.
Well, we can always learn form classic case studies on Nokia and Kodak failures. Although, there are various other factors that caused these giants to fail but they certainly missed a very important turn some were in their journey. Was it innovation or they forgot the customer or they defined their business too narrowly or they were too slow. Well, I can't really say, there could have been various reasons. Nonetheless, one thing is for sure – somehow they missed to identify and to assess some of the very vital elements in the changing market.
An interesting article by HBR on the same topic says that people's deep confidence in their judgments and ability is often at odds with reality. Most people, for example, regard themselves as better-than-average drivers. The tendency toward overconfidence readily extends to business. Consider this case from Stanford professors David Larcker and Brian Tayan: The managers of a fast-food chain, recognizing that customer satisfaction was important to profitability, believed that low employee turnover would keep customers happy. "We just know this is the key driver," one executive explained. Confident in their intuition, the executives focused on reducing turnover as a way to improve customer satisfaction and, presumably, profitability. However later they realized that many competitors have higher employee turnover but still they have better customer satisfaction.
So what are the right metrics?
Well, it certainly depends on what kind of business models you have, what are your business goals.
However there are some basic principles that we can always follow while defining metrics. An overarching principle is that measurements must be balanced i.e. they must encompass various key aspects of organization like financial, people and customers. Metrics must indicate overall health and well being of the organization. At functional level they must provide a clear sense of direction and should motivate to strive for better performance.
While many companies may say that they are data driven or data centric organizations but the key question is what are they measuring? We must avoid misleading or false indicators; for example number of foot falls in a store, number of visits or sing ups or downloads etc. What do they indicate really? Number of sign-ups or downloads or visits are bound to increase over the period of time. So what are you controlling here? Well, they might just indicate result of your marketing efforts but at the end of the day what’s the use of such numbers. Probably it would make little sense if we talk about customer conversion rate or ratio of visits vs. downloads. A comparative figure can be a good metric. A 5% conversion rate doesn't tell you much if you have nothing to compare it to. How was the metric last month? Last year? Are your conversions increasing?
In such cases the ratios we choose should rather be helpful in providing a good sense of direction.
It is always confusing for many people to decide that whether the KPI should be Qualitative or Quantitative. Qualitative data is always subjective, imprecise and confusing while quantitative data is always easy to understand; a number we can track and measure. As published by Alistair Croll & Benjamin Yokovitz in the book Lean Analytics- If qualitative data answers "why" then quantitative data answers "Why" and "How much".
"Quantitative data abhors emotions; qualitative data marinates in it."
So finally what is a good metric.
- A good metric is comparative
- A good metric is understandable
- A good metric is a ration or a rate
- A good metric gives sense of direction
- A good metric motivates to perform
Apart form customer feedback, which is very intuitive metric that comes to everyone’s mind immediately there are certain indicators, which can be really very helpful for startups to monitor and improve on.
Number of referrals from existing clients: It could be very meaningful to know at the startup stage that where these leads are coming from? This is also motivating to know that the current clients are happy with your work. Patrick Conley from Automation Heroes says “This is extremely important to us because outside of the ROI benefit, it means that we’re doing a great job delivering and keeping our customers happy enough to spread the word”.
Conversion rate: The conversion rate gives a very clear sense of understanding as how much of the sales effort going into getting real business. What is the effectiveness of you marketing and sales strategy?
Repeat clients: Clearly indicates how well you are serving your customer. I call it a measure of customer stickiness. As Aron Schoenfeld from Do It In Person LLC says, “No matter how many users your site may have, the real proof of success is having those users come back. If 1,000 people sign up in a week, but only 5 percent come back, there is a real problem with your business, and you need to evaluate what it is”.
Profit over revenue: It is very simple to understand; the income has be always more than outgo. More the difference betters the profitability. It is not necessary the organization, which has higher revenue, also have higher profits. Allie Siarto form Loudpixel says “A lot of businesses make huge revenues, but they actually come out in the red at the end of the year. Revenue is only part of the equation. You also have to consider your expenses and what will be left over in the business after all is said and done. A lot of small businesses have better profits than multi-million dollar businesses”.
There is much more to discuss on this topic. However one thing is sure - aligning your efforts towards your goals and objectives is the key to remain on the right course.
Author: Sachin Kulkarni. Founder at Transit Partners