How Metrics Drive Strategic Growth & Profit
Let’s start with a critical question: How well do your company’s metrics (or KPIs – key performance indicators) help employees stay focused on delivering your company’s unique customer value?
The strategy map below shows the relationships between strategy (Product Leaders / Efficient Operations / Customer Intimate), Focus areas for Metrics (Financial / Customer / Processes / People, Knowledge), and the types of initiatives that support each strategy (i.e. Improve QC / Improve Distribution / Understand Customers / Develop Talent). As we look at this map, we can see examples from an organization in which the infrastructure is well aligned with the business strategy.
Most businesses use metrics to monitor performance across the company on a regular basis. How were your metrics chosen? Often-times, companies establish metrics based on the following:
- Best Practices
- Past Practices
Experience has shown that the best metrics positively impact the business results short and long term because they align with and therefore support the business strategy. Keeping people focused daily on delivering your competitive differentiation to customers is fundamental in driving growth.
For example, I once worked with a small, privately owned machine shop in Worcester, MA. They were growing, and had about 35 employees when I worked with them. The 2 co-owners had a very clear strategy of Customer Intimacy. They traveled to see customers, knew their key customers well, and tailored their competitive differentiation to give customers what they wanted: top quality and quick turn-around. They repaired, reconditioned and replaced engine components for the aerospace and automotive industries. Their people and all of their processes and policies were aligned to deliver top quality craftsmanship that met all standards, fast. Customers could count on getting outstanding craftsmanship and receiving their parts within hours or days, dramatically minimizing down-time due to waiting for parts. Customers were willing to pay a premium for quick turn-around.
The business in the story above was very successful and, eventually, when the owners were ready to exit the business buyers came eagerly to the table.
What do you see as the implications of basing metrics on Best Practices, Past Practices and Financials versus basing them on the business strategy?
As we think about this, we recognize that using metrics based on these can result in shifting people’s focus away from the business strategy. Using such metrics can distract focus and result in activities that hinder executing the business strategy; or, even worse, misalignment of metrics and the business strategy can create obstacles preventing strategy execution.
What might be some unplanned consequences of this misalignment, for people and the business? A few that come to my mind are confusion, conflict between functions, and lackluster performance. What, based on your experience and observations, might you add?
Developing effective Metrics is key to strategy execution. Metrics should be aligned with the business strategy and metrics should be “balanced” – that is, there should be both lagging and leading measures.
Lagging measures are Financial, looking back on performance that has already occurred. Leading measures are forward-looking, proactive measures that provide visibility (into problems) that can prompt root cause analysis and problem resolution early enough to mitigate impact.
We can use leading indicators to identify problems and develop solutions early. For example, increased Scrap created in production can lead to a number of outcomes — operating costs will likely increase due to additional labor and materials if people don’t act quickly to find the root cause and implement an effective solution. Another example of a leading indicator is an increase in unplanned Employee Turnover; turnover in key areas could cause certain goals to be missed without special, early intervention.
A good explanation of leading and lagging indicators is available from the Business Intelligence Blog.
Balanced metrics need to be communicated, measured and discussed often enough to keep everyone focused and to allow time for proactive action using the leading indicators. Discussions must be held using terms, stories and examples relating to the work all of your people do, to have meaning for everyone. Providing a 1- page visual “map” as a basis for discussions can help employees to understand and more fully utilize the information.
I believe the best source of information about developing and using a Balanced Scorecard is the book by Robert S. Kaplan and David P. Norton, “The Balanced Scorecard”.
Using the right metrics can help your people to move your company to great in its strategic performance.
This article is the fourth in our series, The 5 Keys To Strategy Execution.
The 5 Keys are:
- Strategic Understanding
- Activities and Structure
- Balanced Metrics aka Strategy Map
- Human Capital
Together with Market Discipline, these comprise the recipe for successful strategic performance.
Our next article will focus on the 5th Key: Human Capital along and will discuss Market discipline, the cornerstone for strategy alignment and execution.
- How do your metrics relate to your company’s value proposition?
- How well do they guide and focus people on delivering your company’s unique customer value — every day?
- Is there an effective blend of lagging and leading indicators?
- What changes need to be made?
Please share your insights and opinions in comments!
Rosanna Nadeau is the Principal/Consultant with Prism Perspectives Group, LLC. Focusing on improving organization performance, PPG delivers results through uncommon tools and consulting approaches, as a partner with leaders from initial consultation through solution implementation and measurement. PPG provides employee and management development programs (see TrainingForImpact.com) and H.R. Management services (see HRBoutique.net). To receive the free monthly newsletter or obtain more information visit www.PrismPerspectivesGroup.com or send email to Rosanna@PrismPerspectivesGroup.com.