"If it can't be measured, it can't be managed." I vividly remember this quote posted on the wall of our main conference room over a decade ago. I was a young engineer at the time, loved numbers and enjoyed measuring everything so I found some validation in this quote. While the measurement of widgets is relatively straightforward, ensuring that you are measuring the right things and using these metrics to drive the right behavior and decision making can be much more complicated.
After deciding what strategic initiatives on which to focus your effort you now need to translate these concepts into actionable goals against which progress can be measured. This post will describe the process for accomplishing this and is the fifth post in an 11-part series describing the trajectorE Navigation System (tENS), a 10-step process for defining and executing strategic growth & improvement projects. If you missed the earlier posts, you can find them here.
While some business leaders prefer to manage by intuition and gut feel, this has become much less common with the proliferation of so many digital tools over the last 20 years. There is in fact a glut of metrics available, making it challenging to focus on the few most important metrics, also known as Key Performance Indicators (KPIs). There are many similarities between business KPIs and baseball’s transition from vanity metrics like batting average, homeruns and RBIs to more boring but win-correlated metrics like on-base and slugging percentages. This “Moneyball” approach has led to success for those teams that have adopted this new mindset, including the Red Sox and Cubs. Suffice to say that once you have determined what your organization’s priorities are, you need to measure the degree to which you are “winning” at those priorities.
The first step in this process is taking a strategic priority and writing it down in a SMART format. For the purposes of illustration, we’ll assume that an industrial shop wants to “make better use of under-utilized equipment”. They have invested capital in the purchase and installation of this equipment and now want to increase their return on investment by putting the equipment to use more often on customer orders. To help them be successful they need to state this in a form that is Specific, Measurable, Achievable, Relevant and Time-based (SMART). This may look something like: “Increase the utilization of the CNC machine from 30% to 60% by August 31st, 2017, where utilization = operating hours / total business hours.” We have now turned this into a SMART goal by:
- Specifying which equipment they want to increase the utilization of;
- Defining how we will Measure utilization and by how much they want to increase it;
- Making the goal Achievable (while reaching 100% utilization is desirable, it is highly unlikely);
- Ensuring the goal is Relevant to the strategic initiative defined; and
- Attaching a Timeframe to the achievement of the goal.
We now have a SMART goal... so we’re done right? The CEO may say: “Operations team, go implement this. Run the equipment 60% of the time.” That is a lot easier said than done. If you hand this task over to an Operations Manager and she will tell you that her team isn’t in complete control of this goal since it needs to be broken down into its contributing components to be properly implemented. First of all, the equipment needs to be available to operate, ie. the Maintenance team can’t have it down for maintenance 50% of the time if it is going to be operated 60% of the time, so availability is a contributor to utilization. This might lead to setting a target of the equipment being available for use 80% of the time. This becomes a KPI for the Maintenance team. On the other side, the Operations team isn’t going to operate the equipment unless there is a customer order to be filled so the Sales team needs to focus on increasing the volume of orders coming through the shop. If each order represents so many operating hours of the CNC machine then the Sales team can determine the % increase in volume they need to achieve. So, you can see the benefit of translating the corporate goal into a SMART format since it can then cascade down to KPIs that each part of the business can take responsibility for. While the business requirements will generally cascade from the top down, the action plan for each team to achieve their goals and meet their KPIs is best developed from the bottom up; more on this topic in future posts.
While most companies ultimately measure their performance on a financial basis, focusing only on this can drive short term thinking and puts the focus only on lagging indicators, instead of more controllable leading indicators. A way to mitigate this is to use a Balanced Scorecard approach, which is a structure that was first published by David Norton and Robert Kaplan in 1992. This scorecard structure organizes a business’ KPIs along the lines of Customers, Growth, Internal Business Processes and Financial performance. In the context of our industrial shop, the equipment availability KPI would fall under the Internal Business Processes category and the increase in sales volume would likely fall under the Growth category. These categories make sense for a company as a whole, however they may not make sense for a business unit within a larger organization where, for instance, marketing & sales is a centralized function and so growth isn’t as controllable for other business units. In this context, a balanced scorecard may contain the categories of Quality, Safety, People and Cost. The categories chosen will ensure that the organization maintains a balanced perspective that leads to more long term thinking as opposed to only short term financial results driving decision making.
While the organization’s strategic goals will largely be focused on outcomes aka lagging indicators, these aren’t generally directly controllable and so are difficult to manage. These types of indicators are generally the result of behavior and effort by the organization applied to a process that has a series of variables that are not fully controllable, which result in an outcome. If we take the increase in order volume that the Sales team above is trying to achieve as an example, this is a lagging indicator. The Sales team may increase their marketing efforts to bring more leads into the sales funnel, which could be measured by leading indicators (eg. # cold calls made per month and/or increased spend on digital and print advertising). The resulting sales volume increase is a lagging indicator since it is dependent on market conditions, competitors, potential customers’ demand, etc. This is the challenge of making strategic goals actionable: translating the desired outcomes into leading indicators that can drive the right behavior by employees. This is a challenge that many organizations face and it requires effort as well trial & error to measure the right things that will drive the desired behavior within the organization. In a survey conducted by Gartner, only 31% of respondents said that their team had metrics that contributed to strategic KPIs. This is staggeringly low.
Timeframe is another factor. As noted above, SMART goals need to be time-based and the longer the time horizon, the less predictable outcomes become. The timeframe alone makes multi-year strategic initiatives challenging to implement and so it is advisable to break these down into shorter, more manageable objectives for those that are tactically implementing them. The time horizon to employe is a function of the maturity of the organization and the market in which it is operating. If both the organization and the market are mature then most of that organization will likely be managing to annual goals, while a start-up organization in a growth market will want to manage to much shorter time horizons, particularly if they are implementing a version of the lean start-up methodology.
Achieving desired performance requires the right set of KPIs to drive the right behaviour. These result from the organization's SMART strategic goals, that serve as the basis for cascading KPIs to each team within the organization. This aligns behaviour and decision making interests, while increasing buy-in from everyone in the organization on the strategic priorities since they can link their contribution to overall company performance. Ensuring these KPIs follow a Balanced Scorecard structure will drive longer term thinking as opposed to a focus on short term financial results. With the measures for success defined, these goals now need to be communicated throughout the organization in a way that will engage all those who need to contribute to successfully achieving them. The process for doing this will be covered in the next post in this series.
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