Business Metric

A surprisingly large number of company directors still struggle with the identification of real business metrics within their organisations. We frequently find in the early stages of our engagements with clients that with the best intentions they have defined a set of ‘metrics’ that are actually nothing of the sort. The most common mistake is to replace a metric with an objective because the objective contains a set of numbers (or more frequently percentages). For example: 10% growth in profitability. Where it cannot be argued that 10% growth in profitability is not a good thing, it is not a metric. In fact, none of the words in the statement are metrics either. This is one of the areas that can frustrate an inexperienced CEO and cause him or her to start moaning about ‘semantics’ and ‘bean-counters’. This of course has to be handled with care and a high degree of firmness.

10% growth in profitability is in fact an objective. It may be better expressed as “To achieve 10% growth in profitability in the financial year 2012-13”, but clarity in objective setting is a different subject! There are then a set of metrics required to achieve this objective that may almost certainly include ‘Profit’. Profit is a ‘lag’ metric, that is to say it can only be measured after the event and in that sense it cannot be influenced to help achieve the objective but only tell us if we are going in the right direction. There will also be a requirement to set some ‘lead’ metrics, those measurements that can be influenced ahead of time to help achieve the objective. In this case a lead metric may be ‘Number of staff trained in xyz’. In theory, trained staff work faster and cost less and therefore increase profitability. The level activity is determined and controlled by the organisation, not measured as a result of the activity. It is the lead/lag principle that makes it vitally important that we fully understand what a metric is and is not.

A popular definition of a business metric is “A business metric is any type of measurement used to gauge some quantifiable component of a company’s performance, such as return on investment (ROI), employee and customer churn rates, revenues, EBITDA, and so on” (searchCRM). We would go a little further than this and suggest two other conditions:

  • Timing: For a metric to be effective it needs to be measured on a regular basis. The timing will depend on the purpose of the metric. Typically operational governance and financial reporting occurs once a month. Strategic KPIs tend to be measured monthly or quarterly. Specific activities with high turnaround times, for example helpdesk responses, are often measured weekly or occasionally hourly.
  • Thresholds: Typical expressed as red/amber/green. In other words what is unacceptable as compared to a defined threshold, what is acceptable and what is expected. For a metric to have value it needs to be compared to thresholds in this way.

It is important to ensure that business metrics are valid metrics, that they can be measured, serve the purpose of quantifying performance, are measured on a regular basis and can be compared to what is good, bad or acceptable. It can take time to achieve this, but you will never know you are winning if you do not know the score.