Managing By Metrics
This article illustrates how metrics can be used proactively to manage all levels of a given company or organization. Metrics offer a perspective from an executive level of how a business is performing by gathering these measurements. This is similar to judging a baseball player’s performance by batting average, home runs, and runs batted in (RBI’s). Like business measures, these statistics are metrics which illustrate a player’s effectiveness. In addition, a company’s lower level tasks and “shop floor level” activities can also be managed by metrics. This is facilitated by determining the distinction between two different types of metrics: performance metrics and functional metrics.
Performance Metrics and Functional Metrics
This differentiation revolves around distinguishing between performance metrics and functional metrics. Performance metrics is how a company is doing according to key areas or indicators. They flag key indicators such as ROI, market share, inventory turns, production costs, sales, cash flow, etc. These types of metrics tend to be higher level, “big picture” measurements. Functional metrics is what a company is doing according to its certain staff and operational processes. These types of metrics can be applied to line areas, tactical production functions, and strategic staff areas. They are a key set which identify indicators of what your resources are doing and how they are being utilized. A major ideal of this article is that performance metrics and functional metrics are inherently linked.
Lead and Effect Metrics
These metrics are connected by the fact that for every business dilemma or personal issue that one of these variables is the “lead” or “front” metric and one is the “effect” metric. The lead metric is the measurement which needs to be controlled or changed, and the effect metric is altered as a result of trying to move the front metric. The lead metric is the primary focus, while the effect metrics are the “under-pinning” factors which cause the front metric to shift and, or trend positively or negatively. Based on areas, scope, situations, and goals of a company, person, or organization, performance metrics and functional metrics can be interchanged between front and effect metrics.
Metrics and Sales & Marketing
The utilization of metrics in the area of sales & marketing is especially vital to the overall health of gross sales, revenue generation, and market share. The performance metrics for this area tends to focus on the “big picture”, macro-level categories that dictate items such as sales revenue performance and product positioning issues. Key performance metrics are equally as important to smaller companies as they are to larger companies. These key measures and issues must be addressed at the executive level and by sales & marketing managers. Key sales & marketing performance metrics include targeting segments, product positioning, advertising budget, advertising mix, channel selection, competitive products market share, and product(s) market share.
The functional metrics for sales & marketing are lower level tasks and indicators which are also applicable for small and large businesses. These metrics are addressed by the sales force and marketing staffers. These functional metrics include advertising response rates, tracking the sales & marketing budget, sales forecasting, customer segment penetration rates, pricing elasticity, conducting customer surveys, gathering sales force feedback intelligence, and database management. The intelligence, data gathering, and analyzation on the functional level drives the decision-making of the higher level performance metrics. The macro-level criteria are inherently linked to the functional task of the sales force and marketing staffers.
The Two Major Modules
Managing with metrics impacts the overall profitability of a company in various ways. Major benefits include higher productivity, enhanced quality, increased sales revenue, increased market share, and greater inventory turns. These benefits directly result from the two major tools used by this methodology.
1) Metrics Mapping
2) Performance Metrics Scorecard
Metrics Mapping is the heart of managing by metrics. It maps the “lead” metric to the “effect” metric(s). The lead metric is the measurement which needs to be controlled or changed, and the effect metric is changed resulting in the altering of the lead metric. The lead metric is then linked or mapped to one or more lower level elements which have a direct effect on this higher-level entity. The performance metric should be used as the lead metric for the following situations (See diagram 1):
1) Executive and high level decisions
2) Indicator of external macro occurrences
3) One-to-many relationships
– One performance metric linked to many functional metrics
The functional metric should be used as the lead metric for the following situations (See diagram 2):
1) Plants and lower operational areas
2) Directly linked to a larger performance metric
3) One-to-one relationship
– One functional metric linked to one performance metric
4) Many-to-one relationship
– Many functional metrics linked to one performance metric
This linkage typically spans various levels throughout an organization, and clearly identifies how components within a company are tied together from top to bottom or bottom to top. As a result, executives can better manage their organizations from top-down with control and supervisors can impact higher level goals through effecting lower level elements. This leads to closer and quicker identification of the elements effecting problem areas and leads to the tighter overall management of all areas of a company. This results in bottom line costs reduction and top line revenue enhancement leading to substantial increased profitability.
Performance Metrics Scorecard
The Performance Metrics Scorecard is an invaluable diagnostic tool which can be used to chart out-of-bounds components and track strategic & process goals. The performance metrics scorecard has a column for the following areas:
- Component – the performance metric being measured
- Importance – based upon the severity of the operational or business priority
- In-Control – whether or not the value of the component is in range
- Amount Number – the value of the component being measured
- Process Owner – the manager, executive, or supervisor responsible for the component or process
- Functional Metrics – measurable items, sub-components or functional metrics
- Comments – data or relevant information about the component
It is a flexible offensive and defensive tool which can chart revenue enhancement activities as well as costly out-of-control components or processes. As a defensive tool, it can directly reduce costs by immediately alerting the owner of an area that a given component is out of operational range by having excessive downtime, too much waste, quality defects, or lacking an appropriate amount of productivity. As an offensive tool, the Performance Metrics Scorecard can chart growth in targeted areas such as product line sales or production throughput. It is a critical module which provides management with a key hands-on tool to strategically manage and track all the key components of a company or organization from both a macro view and a tactical perspective.
Strategic Diagnostic Solutions
Metrics Mapping and Performance Metrics Scorecard are diagnostic tools which quickly and effectively locate problem areas and the essential components that are at the heart of dilemmas. By illustrating lucidly the elements of a problem area, the solutions utilize common-sense business remedies. An executive, manager, or supervisor should use effective business and economic practices which are applied to the targeted problem area to solve faulty elements. By isolating what the “real” problem is in an area within a company through our modules, advanced solution steps based on up-to-date business practices and remedies can be applied. These are not “cookie-cutter” solutions but rather thoughtful application of business and economic theory such as competitive strategies, process improvement, time-based competition, and quick response.