HOW TO MEASURE BUSINESS SUCCESS
Would you cut a board, when building a house, without measuring before you made the cut? Every single thing you do, when building a house, gets measured – in some cases, twice.
Running a business, by only looking at the revenue as your measure of success, is like measuring the square footage of a built house to determine if it was built correctly. No, we measure everything, when building a house, but we ignore so much in business.
I believe there is a big gap in understanding when it comes to measuring business success. This article will demystify some of this by explaining the relationship between KPIs, metrics, and measures; outlining the importance of ownership; and by detailing the concept of frequency when it comes to business measurement.
KPIs, METRICS, AND MEASURES
A key performance indicator (KPI) is just that, an indicator. This is a number that leads a business to know if they are doing well or not. However, this is not an effective number to manage or improve a business. Too often, business decisions are made by only looking at KPIs, like revenue. This is a terrible way to run a business.
Even when a business is looking at EBITDA, which is earnings before interest, taxes, depreciation, and amortization, it is an ineffective way to manage. Indicators help a business direct its attention and nothing more. Measuring business success means digging deeper.
This is where we turn our focus to metrics and measures. In many cases, metrics are like KPIs. They are just at a more granular level – typically found at the program level. For instance, if you are looking at EBITDA as a KPI, then that KPI might be made up of a series of metrics, like revenue and expenses. EBITDA is, in fact, a formula of several metrics.
Whereas measures are of a fundamental or unit-specific form of data collection. These are found at the process level. Measures are specific values that can be added together, averaged, and manipulated with graphical and statistical software, such as sales, leads, frequency, errors, etc. Specifically, a measure is a simple number, and a metric puts your measures in context. A KPI, on the other hand, leads you to focus on the metrics and eventually the measures that are not operating as expected.
One of the major problems in business is that business leaders only operate at the KPI level. When owning and running a business, you need to fully break down KPIs, metrics, and measures, to understand and measure the success of your business.
THE IMPORTANCE OF OWNERSHIP
Another challenge in business, when it comes to measuring your success, has to do with a lack of ownership. Ownership equals accountability, and many people do not want to be held accountable for the work that they do. It is too easy in business to point fingers and conduct blamestorming activities when something goes wrong.
This is why ownership is fundamental to measuring business success. Each and every KPI, metric, and measurements should be owned by one single person. If any one of these is owned jointly by more than one person, then there is no true ownership. So, if you hope to effectively measure business success, you need to assign ownership to every measurement used in the business.
This also applies to the processes and programs that operate within your business. These are the things that you will be measuring. If someone is in charge of, let us say, a specific measure, then they had best also be in charge of the process that creates that measure. If one person owns the process and another person owns the measure, then neither one of them has ultimate control over the situation.
Using a simple tool, such as a Microsoft Excel list, can identify who is responsible for what.
The third challenge that businesses face when trying to measure their success is the frequency with which they actually collect and analyze the information from their organization.
Consider this. We should always look for trends in our data. Officially, a trend is two or more data points. However, to be able to establish an effective trend, you should have at least six data points – more is better.
Now, if you need six data points, and you are looking at a KPI on a monthly basis, you would need to see six months minimum of a trend of that data. In reality, if you’re looking at something monthly, you really should be looking at the performance year-over-year to determine the cyclical performance of that KPI. This is because something like EBITDA might be affected by activities occurring at certain points of the year. As an example, this metric may always be low in January and February, but then spike up by March.
If you make a change to your business and you are only looking at data on a monthly basis, then it will take you six months to determine whether or not the change that you made was effective and improved your business. Thus, it is important – no, imperative – that you increase the frequency with which you look at data. If you are currently looking at something monthly, figure out a way to look at it weekly. If you are looking at something weekly, then figure out a way to look at it daily. If you are looking at something daily, figure out a way to look at it in real-time.
The faster that you can actually look at your KPIs, metrics, and measures, the faster you can make changes and see the impact. By speeding up your frequency of data collection and analysis, your company becomes more agile.
Measuring the success of business means that you have established a clear alignment of measures at the lowest process level to your metrics and then KPIs. It also means that every one of those processes and programs, which are measured, has clearly assigned ownership. And you are looking at the data associated with these processes and programs at the highest frequency possible.
This is what is meant by measuring business success.