By John Stretch, author and business consultant
Business owners during the COVID-19 recovery period need to choose the right measures to drive the right behaviour. While you are rebuilding your business, while countries are rebuilding their economies, you need to measure and manage the right things. In this new world, the solutions aren’t immediately available. Past results can’t guide you to the future. The financial targets and benchmarks in your past performance scorecards are most likely worthless.
The drivers of success
When I watch sport on television, I pay attention to the performance measures during the game. I like to follow the on-field events that build up to the final result – scrums, lineouts, penalties and yellow cards.
Managers also need to measure and report the drivers of success as well as the outcome or final score. You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal. This may seem basic, but it is amazing how often it is not done and how hard it is to get right.
Your measures and management reports need to focus on the small daily incremental gains that rebuild confidence and long-term results. Everyone in your organisation needs to start thinking like an entrepreneur, which means taking full responsibility for serving their personal stakeholders outside and inside the business. Obsolete performance scorecard targets need to be replaced with peer reviews and stakeholder assessments.
Way back in the days before Uber, a car hire company used the catchphrase “the difference is in the delivery” to promise speedy delivery of their hire cars within one hour of client reservations. The company measured and rewarded just this one metric – compliance with the implied on-time delivery promise in the slogan. The entire staff in each branch was incentivised on this measure, proudly set out in their mission statement. Said the chief executive “What gets measured gets done – particularly when it’s rewarded as well.”
“The difference is in the delivery” is an example of a slogan – a few cleverly chosen words that sum up the mission and value proposition of a firm and makes it memorable. Good slogans can be useful in guiding you towards the right performance measures.
Emirates Airlines uses the slogans “Hello Tomorrow” to suggest the joy of waking up to a brand-new morning on an Emirates flight. How would you measure the performance of this slogan in positioning Emirates as one of the best airlines in the world?
Like most airlines, Emirates measures success in delivering on their slogans with hard and soft KPI’s – capacity utilisation, on-time departures, growth in passenger miles, number of first-time passengers, revenue per passenger, passenger complaints, passenger feedback.
A good slogan tells us about a company’s competitive strategy. Managers measure success in achieving the promise implied in a slogan. Audi’s famous slogan Advancement through technology (Vorsprung dur technik) is a case in point.
How has your company chosen to compete? How should you measure success? What is a good slogan for your business?
As a trainee accountant, I was fascinated by the idea of common sizing, the practice of reporting revenues and costs relative to a common unit measure.
Transport businesses use the key measure of cents per kilometre to control operating performance. Every kilometre driven by every vehicle each day is recorded, balanced and double checked to ensure accuracy. Revenues and each element of cost (fuel, driver wages, tyres, and maintenance) is reported in cents per kilometre as well as absolute dollars. Supervisors understand and plan for the impact of breakdowns, planned maintenance and seasonality on this crucial measure, which is also used for budgeting and forecasting. Performance against these relative targets is reported to staff at all levels.
Microsoft in its selling operations, uses relative and absolute common sizing measures by focusing on their main driver of revenue and cost growth, which is the number of employees. Microsoft’s revenue metrics are reported per relevant employee group.
- Total revenue per employee
- Professional services revenue per professional services employee
- Revenue and maintenance revenue per developer
- Consulting revenue per salesperson
- Software licence revenue per salesperson
Mines and extractive industries measure cost per ton of ore removed and cost per kg of refined product recovered. In banks the metric of staff costs per thousand transactions is closely monitored. Hospitals measure average cost and revenue per patient. Airlines measure costs per million passenger miles.
You can measure anything
Performance measurement systems are based on the idea that just about anything can be measured – even tricky service areas like human resources, accounting and information technology. Managers say that what you measure is what you get.
In the hospitality industry, the occupancy ratio – bed nights sold divided by bed nights available – is a common measure of capacity and a leading indicator of profitability. One hotelier translated the occupancy ratio into a slogan “I want more heads in our beds” she said, and made sure every staff member – cooks, porters, cleaners, front of house – understood their role in improving occupancies.
A shoe factory measures shop-floor supervisors on the daily productivity indicator of “pairs per worker per day” Finished pairs from the production lines are counted as they enter the finished goods store. The number of workers in attendance at the factory each day is obtained by totalling the clock cards on the racks at the factory gate. Simple, effective, low cost.
A local supermarket relies on two key measures known as the “feet” and the “basket”. The feet measure counts the number of customers visiting the store each day and is calculated electronically from the tills – each time the “total” button is pressed at the checkout counts as one customer. The basket measure is a count of the average number of items or units purchased by each customer each day. This measure is also calculated electronically from the tills – each item passed over the scanner counts as one unit. A sudden drop in customer count triggers an alert to managers.
Investors take non-financial measures into account when deciding to buy shares, so it’s a good idea to report improved measures to your shareholders and bankers. In the long term, improved non-financial metrics will influence your business’s value and share price. This could be a good time to think about the common performance indicators in your industry and develop your own internally unique measures and slogans.
- You can’t manage things you don’t understand.
- You won’t understand things unless you measure them.
- When you measure things, you can control them.
- People deliver things that are measured.
Accountant Robert McNamara absorbed the principles of 6-Sigma while working as a productivity analyst at the Ford Motor Company, and maintained his belief in the power of measurable outcomes when he was appointed as the United States Secretary of Defence.
He decided success in the Vietnam War could be measured by the number of dead bodies, and wanted to focus the war effort on enemy deaths measured by daily body counts. The US generals warned McNamara against this strategy, saying it would result in losing the support of the Vietnamese people. They were right.
As the body count mounted in the villages, the rural Vietnamese population turned against their former allies the American troops, and united into a total force for guerrilla warfare. McNamara’s body count strategy – for which he later expressed regret – directly contributed to the United States’ withdrawal from Vietnam. A clear case of what you measure is what you get.