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Measures and metrics

Module 1: Five questions every CEO must answer

Many CEOs are reluctant to measure. Some say it takes too much time, others are not sure what to measure. A few leaders are fearful their people won’t measure up – and if they are conflict-avoiders the idea of confronting underperforming staff is off putting.

But underachieving employees, uncollected receivables and lagging sales will have a negative impact on your company whether you measure or not – so by measuring you will at least have some forewarning of trouble ahead – and the opportunity to nip it in the bud – rather than be blind-sided by bad news after the fact.

What’s the difference between a measure and a metric?

A measure is a number that is derived from taking a measurement. For example, 30 employees added in the past year, or 400 sales generated from a single marketing campaign.

A metric is a calculation between two measures – a percentage or a ratio. For instance, if we know one of our metrics is “revenue per employee = $500,000” (total revenue divided by total number of employees), then by adding four employees, we should expect to see an additional $2M to the top line within 12 months.

Three kinds of measures

As Richard M. Schulze, the founder of Best Buy once said, “If you don’t measure, you don’t know what’s working, what needs improvement, which employees are performing extraordinarily, and whose performance to reward.”

There are three different types of measures to track in your company:

  • Activity: measures the number of times the activity is repeated. For example,  Joe made a sales call to 20 companies during the week.
  • Outcomes:  measures the result of the activity. For example, Joe made 20 sales calls and signed up 10 new customers this week.
  • Productivity: measures how productive the activity was. For example, if Joe sold to 10 of the 20 prospects he called this week, his productivity metric is 50%.

The fact that Joe closed half his prospects is good. But Joe worked all week to close ten $1000 sales. Sue, on the other hand, worked for a week on just two prospects, but closed one $20,000 sale in the same time frame. Although she and Joe have the same productivity metric (50%), ratio of sales closed is clearly not the only metric you want to track.

To determine whether Joe is using his time optimally, you’ll also want to look at:

  • the time and effort it takes to close a sale
  • the value of the sale
  • the lifetime value of each customer.

You need to figure out which measures and metrics should be considered key performance indicators (KPIs) in your company, and then track them on a regular basis

From here, you can identify whether Joe is focused on the right customers, whether he needs to shift his time and spend his effort on a different kind of customer in a more lucrative market, and whether Sue needs to stay focused on larger sales or meet with more than two sales prospects per week.

You need to figure out which measures and metrics should be considered key performance indicators (KPIs) in your company, and then track them on a regular basis. This will enable you to stay informed about what’s working, what isn’t working – and help you determine what you can do to improve performance.

Whatever metric you choose, make sure that it provides you with meaningful insight into your company’s performance

As your company moves through the different stages of growth, your outcome and productivity measures will become extremely important in figuring out how your company can become more efficient.

Defining your company’s metrics

It will take some time to determine which metrics or KPIs are most important in communicating the health of your company. So in the beginning, measure everything to determine what’s relevant to your company.

For example, measure the length of each customer’s sales cycle to determine the average time it takes to close an IT customer versus retail customer. Measure the traction you get from each marketing activity. Measure how long it takes to complete a job so that you can properly estimate the costs of future jobs.

Here are a few metrics worth considering:

  • revenue per employee,
  • expenses per employee,
  • employee morale each quarter,
  • length of time it takes for an invoice to be paid,
  • cash burn and number of days left in your bank account.

Whatever metric you choose, make sure that it provides you with meaningful insight into your company’s performance.

Create a dashboard for everyone to see

In summary, CEOs need to define and agree on a set of measures and metrics that you will use to track individual and company performance. Create a dashboard for everyone to see, and hold employees accountable for reporting on those measures and metrics on a regular basis. This will enable you – and your staff – to track performance, determine what is and isn’t working, where you need to focus, why the company has fallen off the growth curve, and how to get back on it and accelerate your growth.

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