Former Hewlett Packard chief executive John Young once said, “You can’t manage what you can’t measure”. Indeed, how can you know whether you’ve reached your business goals if you don’t measure your criteria for success? It’s our observation that not enough business owners measure outcomes to determine whether they’ve reached their goals. And those that do measure performance often attempt to measure too many outcomes, many of which are not linked to their strategies and goals.
Adopting a performance measurement system is not particularly complicated, but it requires business owners to decide what the measures will be and how they will be used in a meaningful way. Here are some guidelines.
State the Company’s Goals
Review the business’s strategic plan, if there is one, or list three to five high-level goals for the business’s major operations (e.g., sales, design, production, human resources, information systems, customer service). These goals should be quantifiable wherever possible. For example, your sales goals might be to increase revenues 20% per year and improve customer retention. Production goals might be to consistently deliver on time and to reduce scrap and rework by 50%. Marketing goals may be more subjective, such as improving your image among customers in a specific product category. Although this process may seem daunting, it can and should be kept simple. Whether you are brainstorming alone or with a group of colleagues, it won’t take long if you focus on what really matters to your company.
Review Existing Measures
Once you’ve identified the business’s goals, review your existing measures to see whether they fit your objectives. For example, do you create detailed overtime reports each month even though overtime is used to manage production fluctuations? Do you track total sales even when your primary objective is to boost sales for a particular product line? Determine where there are gaps between what is being measured and what should be measured. There may be too many measures, or current measurements may contradict your goals. Imagine the consequences of measuring growth, for example, without considering its effect on long-term profitability.
Establish New Measures
Based on your review, establish new measurements that gauge only what matters to the business. This may sound like a big job, but most companies are able to continue using 50% to 75% of their existing measures with only minor adjustments. If your sales goals are to increase revenues and improve customer retention, track sales revenue and customer turnover. To keep manufacturing on schedule and reduce scrap and rework, monitor on-time delivery percentages and track scrap and rework dollars as a percentage of production dollars.
Decide how the new measures will be used
If the company is falling short in a particular area, what will you do about it? How will you determine the cause of the problem How will you get back on track?
Design the New System
It is important to design a system in which critical measurements are performed with the needed frequency. Determine how the measurements will be reported and to whom the data will be distributed. What data must be collected to perform the measurements you need? How should it be collected? How often? Who should be responsible for doing so? Although it’s important to have specific guidelines, flexibility is also important in the early stages of implementation.
Implement the New System
When you and your team are comfortable with the new system and agree that it achieves its intended purpose, make it a permanent part of your management approach. Collecting data and measuring outcomes is a waste of time and money if the information is never acted upon. For the system to be effective, employees responsible for achieving the company’s goals must be accountable. Inform employees of performance measurement results and communicate your expectations for the next measurement period. As the company’s goals and strategies change over time, so will your measurement system. The most important goal in creating or modifying a system, today or 10 years from now, is to ensure that it is driven by the business’s strategic plan and is designed to motivate change in the direction the business wants to move.
If you would like help with how to measure performance within your business, then please contact us.