Lord Kelvin in 1883 said “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of Science , whatever the matter may be.”
Bill Hewlett, co-founder of Hewlett-Packard, once stated, “You cannot manage what you cannot measure. And what gets measured gets done.”
Michael Dell of Dell Computers is reputed to have said: “Anything that can be measured can be improved.”
It is essential for a business to succeed that it has the capability to assess itself against measures that have previously been defined as being important.
Measures come in multiple forms dependent on when they are applied and whether they are fixed or variable.
Financial outcomes, such as a Profit and Loss Statement, provide “lagging” indicators of organisational performance. They report past results that cannot be changed. They include such things as revenue, expenses, cash flow, profit, return on investment, and other measures. These numbers associated with indicators reveal both strengths and weaknesses, performance trends, break-even points, and other intelligence for decision making and problem solving.
Lagging indicators provide a view of historical data proving a scorecard of overall business performance.
These are the measures of the internal systems and processes that lead to such things such as corporate financial results. They occur in real-time, and can be altered as the environment changes. Examples of Leading Indicators might include the number of sales leads generated by marketing campaigns, the number of orders processed or services performed in a given time period.
Having an established set of Leading Indicators defined provides an important mechanism through which early detection of problems or diminished performance, can result in remedial action being applied.
Examples of Business Measures:
Here are four types of business measures that may be regarded as important to a generic business. Not all of these will be relevant and they only scratch the surface of what may be useful.
- How many person-hours does it take to produce a product? How long is the lead-time between receipt of an order and the required product or service being delivered?
- How many deliveries do you make in a day, week, month or year?
- How many new customers do you get per advertising dollars spent?
- What is the rate of returned goods sold or help-desk calls?
- How many defects are there per total items produced?
- What is the average cost to service your product warranties?
Customer Satisfaction Measures:
- How many new customers do you add per week?
- What is the frequency of repeat orders, complaints, or referrals?
- What do satisfaction survey results tell you?
Employee Skills and Satisfaction Measures:
- How many hours of employee training are performed per month?
- What percent of employees have professional certifications?
- What is your rate of absenteeism, or employee turnover?
More specifically, measures should be defined across the whole business that captures information that will assist in making faster and better decisions about what business activity should be undertaken. More examples are as follows:
- Sales or Revenue
- Sales growth
- Gross Margin or Profit
- Contribution Margin
- Profit Margin
- Profit or revenue per employee
- Return on Investment (ROI)
- Cash flow
- Debt to Equity
Measures should also have assigned targets or goals associated with them so that the desired behavioural characteristics of the business can be assessed.
- Days in Accounts Receivable (e.g., average of 45 days for invoice collection)
- Days Held in Inventory (e.g., 10 days of stock on-hand)
- Inventory Turnover Rate (e.g., inventory to turnover 6 times per year)
- Customer satisfaction
- Customer retention/loyalty/referrals
- Customer complaints/customers lost
- Return rates
- Response time per customer request
- Customer lifetime value
- Customer acquisition rate
- Number of customers
- Annual sales per customer/Re-order rate
- Average purchase per customer
- Win rate (sales closed/contracts signed)
- Marketing cost as a percentage of sales
- Number of ads placed/response rate/proposals made
- Sales volume/per channel/per square foot of space
- Frequency of sales transactions/mean time between sales
- Average customer size
- Customers per employee
- Customer service expense per customer
- Average cost per transaction
- On-time delivery/response time to customer requests
- Average lead-time
- Inventory turnover
- Labour utilisation rates
- Defect percentage/Rework
- Break-even point
- Cycle time
- Warranty claims
- Waste reduction
- Space utilisation
- Frequency of returned purchases
- Employees with advanced degrees/participation in professional or trade associations
- Training investment per employee
- Average years of service
- Number of cross-trained employees
- Turnover rate
- Employee satisfaction
- Reportable accidents/Lost time accidents
- Employee productivity
- Training hours/certifications/leadership development
- Personal goal achievement
- Timely completion of performance appraisals
A meaningful set of measures should be defined that capture information that is important to the decision making process. The set should not be set in concrete and should expand and contract in response to the value that they give and as consequence of lessons learned from past behaviour.