This article first appeared in the March, 2004 edition of the Jacksonville Business Journal
Every organization has a measurement system that generates monthly reports that become the financial statements that describe the health of the organization. But when most companies take a good look at what they are measuring, they usually find some unpleasant surprises.
Common Measurement Mistakes
The most common measurement mistake is an over-emphasis on the financial results. Financial results are certainly important. But they do not happen by themselves. They are the result of doing lots of interdependent things correctly. If financial results are the primary focus, we may not see the underlying causes that created these financial results.
I recall a conversation after a Board had just fired its CEO. The Board member said to me: "We fired him because when we had a bad month he couldn't tell us why. What was worse, when we had a good month he couldn't tell us why we had a good month either. He didn't create results. He just observed them."
A second common mistake is a focus only on the "hard numbers". Sales, manufacturing output, inventory costs, time per service call, etc. are hard numbers - fact-based and verifiable. And sometimes the "soft data" is more important than the hard numbers. Employee morale, customer satisfaction, customer activity level, prospects who decide not to make a purchase, etc. are data that may be harder to capture and quantify. Yet they may provide keen insights and windows into the future.
Lagging Versus Leading Indicators
The third common mistake companies often make is a focus on lagging rather than leading indicators. Lagging indicators measure what has already happened. You can't change them. Financial statements are lagging indicators - the results are historical. Achievement of milestones on a project are also lagging indicators - you made it or you didn't. Leading indicators, on the other hand, give you insights into what might happen in the future while you can still influence them.
Sales forecasts are a classic leading indicator. The results aren't in yet and you might be able to initiate activities to influence the outcome. Budget and cost projections are also leading indicators. You haven't spent the money yet. Project progress along the critical path with projected schedule performance is also a leading indicator.
Unfortunately, most measures are lagging indicators. The problem is that they aren't very useful. Learning about yesterday's weather doesn't help you decide whether to take an umbrella today. Running a business with lagging indicators is like driving a car forward through the rear view mirror.
Creating A Measurement System
The first step in designing a measurement system is to identify the critical success factors. "What are the five to eight things you must do right consistently to be successful?" Think about that question hard. Examples of CSFs may include quality of services delivered, cost of manufactured goods, sales revenue, customer satisfaction, employee retention, technology development, speed of delivery, health or safety performance, etc.
Once you have determined your critical success factors, think about the measures that will give you the best information about both the current likely future condition of each CSF. Consider input, process and output measures.
For example, the input measures for sales may be both current orders and the sales forecast. Process measures may be the time it takes to fulfill an order and any changes or cancellations before the order is shipped. Output may be the invoice and the time it takes to receive payment. Of these examples, sales forecasts, processing time, and invoicing are leading indicators. Forecasts tell you what next month's sales are likely to be. Processing time is a leading indicator to customer satisfaction. Invoicing is a leading indicator to cash flow.
These measures may also be indirect indicators of other factors. The time to fulfill an order may be an indicator of operational efficiency or capacity - and a leading measure of when you need to add capacity or people. An increase in orders that are changed or cancelled prior to delivery may mean that the order was not taken properly on the front end, or there may be a customer satisfaction issue. Increasing days for outstanding invoices is often an indirect measure of customer satisfaction issues.
Look for Trends
We all tend to react quickly to the circumstances or problems of the moment. At the same time, it is critical to track data over time using some regular interval that fits your business. Three data points in a row moving in the same direction indicates a trend. It is unlikely that trends develop for no reason at all. When you see trends - good or bad - search for the root cause. It could be a warning sign or a hidden opportunity.
Measurements and Behavior
The final and most important thing to remember about measurements is that they are one of your most powerful drivers of behavior. When people know which aspects of their work are being measured they will pay more attention to those areas - even at the expense of other areas. Select your measures intentionally and you can have a very powerful impact on employee behavior and business results. What you measure does impact how people perform.
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