The Three most important things to measure in any business.
“The three most important things to measure in any business are customer satisfaction, employee satisfaction and cash-flow” Jack Welch former ceo of GE.
I don’t agree with all that Jack says or did in his tenure at GE however on this point I am in total agreement.
Customers who are not happy will buy elsewhere. Employees who don’t enjoy working for your business will move on and work for your competitors and the replacement employee will be costly to replace. Lastly if a business does not completely understand its cashflow and is totally in control of it then the business growth can suffer.
Measuring customer satisfaction is more than just a quick survey from a call centre. We need to understand whether the customer is truly satifised with the complete experience in dealing with the business. We need to ask the right questions in the right manner. Customer surveys can work if carefully desgined. However there may be other ways to measure customer satisfaction eg in a professional service firm it would be appropriate to measure the number of referrals. A customer will only refer if they are happy. Singapore Airlines measure the number of complaints to the number of compliments ratio to address this issue. Whatever the measure everybody needs to understand it and then it must be tracked consistently.
Employee satisfaction can also be measured by a carefully executed survey. Unfortunately many of these surveys are not properly designed or carefully executed. Also there are other measurements that can be useful eg staff turnover rate (this needs to be tailored for each level of the organisation). Again whatever the final tool, everybody must understand the metric and then it must be consistently measured and reviewed.
Lastly a business must understand the cash-flow cycle. There are a number of operational and capital impacts on cashflow. To manage a business it is necessary that this is understood. Accounts receivable, accounts payable, new equipment, new loans, repaying loans and other finance obligations, owners drawings and contributions are only part of the equation. The complete cashflow of the business must be managed at a minimum each week if not daily.
Also some of the component parts need constant measurement eg debtors and creditors days. Recently in a business they had not previously being measuring debtors days. When I started it was 43 days. Purely because they started measuring it and the accounts staff and the owner were suddenly aware they took action and now the debtors days stand at 29. This has lead to a significant improvement in cash-flow.
What systems to you have to measure customer satisfaction, employee satisfaction and cash-flow?
“Differentiation is the custodian of profits”
On Monday night I was at an Australia Institute of Company Directors dinner where Don Meij CEO of Dominos Pizza was the presenter.Don impressed me with his passion and enthusiam for the business. Also he knew the numbers. They put a lot of work into knowing what the consumer is likely to be eating next year and five years out. Through this investigation and knowing the numbers they are striving to make decisions with the best facts on hand. A great example of evidence based leadership rather than just relying on gut feel.
One of his slides was titled “Differentiation is the custodian of profits”. This is a great statement. Whilst we have heard this before in different contexts or way it is something that is often forgotten or neglected in business. Domino’s are the market leader in Australia and still they are after differentiation. For any business who is not the market leader in their sector it is even more paramount.
If people are given nothing else to compare you on then they will compare you on price. How does your product or service differentiate you from your competitors. Remember the point of difference often is the little things that surround the core product or service.
Another interesting fact was that the internet is driving 28% of their business. Eighteen months ago it was under 5%. Within that internet business though sales from the IPhone are responsible for 14%. Dominos have an IPhone app which has only been out a short while and is driving this much business to them.
We need to be more even more conscious of how the internet is affecting our business. Also not just the internet on a desktop or laptop computer but the mobile market. If the IPhone is responsible for that level of business to Dominos at the moment where it grow to you. Having these facts in front of you enables you to consider the future direction of the business.
For instance coffee shops, takeaway stores need to get onto the internet and also look at the IPhone application for their business. There are lots of other businesses that need to be mindful of this as well.
In all a great presentation and thought provoking. How do you differentiate yourself? Have you the facts on where your market is going in the next 12 months or 5 years.
Unintended consequences of how sales people are paid.
Recently Ingrid Cliff of Heart Harmony (a great copywriter) wrote of her experience in buying a car on her blog. She had narrowed the choice down to types - Mazda 6 and Toyota Camry. However upon going to the Mazda dealership she had the following experience -
“He was selling beautifully till he sat us down. We told him we wanted to buy in the next week, we would be paying cash and wanted his best price so we could make a decision which way to go – Camry or Mazda. He wandered off to see the boss, came back and told us that he wouldn’t give us a price now as we were not serious, but when we were serious next week to come back and see him. He gave us a rough ballpark figure on the new car with the options we were looking for (after being pressed for the info).”
A number of years I had a similiar experience. As you can guess Ingrid did not buy from that dealership and I did not buy from the dealership were I had a similiar experience.
Why do some car dealers adopt this approach?
Now there are likely to be a number of reasons, one of which is a complete lack of understanding of customer service and also their belief of how to force a sale. However I believe that a significant contributing problem is how sales people at dealerships are paid.
The industry standard is for the majority of their package to be commission based. The logic of this is that the sales people will highly motivated to close the sale which will deliver results to the dealership. The dealership do not want their sales people standing around or wasting their time so the incentive system is used to show what is important and to motivate them. The trouble is the sales person that Ingrid met was doing exactly what the incentive system told him to do. The sales person did not waste time with a potential customer who was not going generate commission immediately.
But the dealership having spent money on advertising and marketing to get people into the showroom I am sure they would want to build a relationship with all customers so as to do with business over the long term. The management probably did not have the attitude of making the sale immediately. The commission based pay structure used to motivate the team is causing a business result which does not lead to loyal long term customers.
Another issue that the commission pay structure undoubtly has an impact on, is who is attracted to become a car salesperson. I have seen dealerships advertising sales positions highlighting the fact that a successful person can earn significant income. This will attract a certain personality to the business but is that the personality the business should have. If the business wants to deliver a great standard of customer service and build loyal customers then the incentive system will recruit people who are after the sale now.
Whats the point? The point is that pay structures with financial incentives can have unintended consequences. It will create certain behaviour but it is not necessarily behaviour which the organisation may want. Be careful about designing commission and other financial incentives as part of employee renumeration. If the car dealer want’s more loyal clients then it could be radical and remove this commission structure. There are car dealers who are going down this path. We need to carefully design our metrics and compensation systems to ensure it matches the strategic objectives of the business.
Remember be careful what you ask for as you may just get it.
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“Not everything that you can count, actually counts’
Einstein is credited with this quote. He as usual was completely correct.
In the 1750’s Jedediah Buxton was taken to see Shakespeares Richard III performed by David Garrick at the Drury Lane Theatre. At the conclusion upon being asked his opinions he answer that there were 12445 words. He missed the point though his word count was accurate.
This is very applicable to business. I was just reading of person who said in the organisation she worked for she had the responsibility for 137 Key performance indicators. She went onto to say that she only concentrated on 7 but those 7 may not necessarily be what her management focused on. 137 KPI’s show an organisation that is counting everything they can count.
It seems that business can lose sight of what the role of metrics in an organisation is.
These metrics are are known as KEY performance indicators. Something is key when it is of fundamental importance to the business. It is key if it is a make or break, the difference between success or failure. There is no way that the 137 KPI’s are all key to the businesses success.
The success that needs to be considered is that which is important in the eye’s of the customer. We need to define success the way the customer does. This means that we need to completely understand the customer. What is it that they like and hate about your organisation? Often the core product or service is not what the customers sees as the value from dealing with your organisation. It is usually a number of little items that surround the delivery of the core product or service.
The next aspect is PERFORMANCE. It is the items that the organisation is performing and whether they are delivering on this promise. Performance is around those things / processes that the organisation can control. For instance an agricultural company is significantly affected by the weather but it can not influence or control this.
The last word in the trio is INDICATOR. Indicator means it is providing information on future performance. Because it is easy to measure history ie balance sheet we spend too much time and effort on these. We need to spend the time on developing indicators that give us information that we can make decisions about the future on.
Lastly another significant problem of counting everything eg the 137 KPI’s is that nobody focuses on them. The person I relate was only concentrating on 7 but her manager may be focusing on a different set. A lot of time and effort was being spent to collect this information but it was wasted. A key purpose of implementing KPI’s is to provide focus for the organisation to achieve its KPI’s. With some people focusing on some KPI’s and others concentrating on a different set you automatically set up a situation for tension.
Focus on what the customer defines success and implement KEY PERFORMANCE INDICATORS around this.
Rules of Thumb - Are they good or bad?
Often in business there are industry rules of thumbs for profits, costs and valuation. There are many examples of these however to illustrate professional service firms often use the one third rule which is 33% wages, 33% operating expenses and 33% profit. Commercial cleaning business try to only have wages as 55% of income. There are plenty of examples but are these useful.
My belief is that these rules of thumbs can be useful if they are used as a guide only. If we rely on them to make significant decisions they we can be led astray. The rules of thumbs can trap you into certain assumptions about the industry. These assumptions may become self limiting. To take the business to the next level it is important to think about business lessons from outside the industry that could significantly accelerate the business.
Before Fedex came into the delivery business it was considered normal to have a delivery rate of 95%. Fedex changed this. They were not happy with the industry norm. Now the delivery rate of Fedex and also the other companies is 99.95%. This does not sound a lot until you realise the number of parcels that are freighted each year. This difference has meant that millions more parcels are getting to where it is meant to.
In Australia financial planning firms have an industry rule of valuation of about 3 times recurring revenue. Financial planning firms are still being sold for these figures. This is despite the fact that there is significant regulatory changes coming to the industry which may significantly affect the recurring revenue. Also this is despite that this method of valuation gives no regard to what the business is actually earning. So the rule of thumb could be a starting guide but then we need to consider the hard facts.
The next area of rules of thumbs is those that a business creates over time for internally use. I have seen businesses where they have determined rules of thumbs for when they are pricing a quote. Again these rules are useful but we need to be constantly reviewing these rules against the hard facts. So for example when the quote is accepted we need then to examine the resulting job profitability and determine whether that pricing rules are still relevant.
So I see rules of thumbs like fire. In its place fire can be extremely useful but if it gets out of control it can destroy all. Use rules of thumbs as a guide but always check the hard facts on a regular basis.
How Ritz Carlton Measures Success
There was a recent article in Forbes where the CEO of Ritz Carlton was interviewed. The Ritz Carlton is and unparalleled luxury brand. It has done this my rigorously adhering to its own standards. Its unique culture starts with the motto “We are ladies and gentlemen serving ladies and gentlemen”. It has 38000 employees throughout 73 properties in 24 countries. To learn more of the success of the Ritz Carlton I refer you to and excellent book by Dr Joseph Michelli - The New Gold Standard.
In this article in Forbes the CEO was asked “How do you measure success?. His answer was interesting and there are lessons for many businesses in it.
They measure success from the customer side and from the employee side.
With respect to the customer side they employee Gallup do to phone interview, asking two types of questions :- functional and emotional. On the function side they ask : How was the meal, Was the foot hot?, How was your room service?, Was your room clean. Through careful analysis they have determine and indicator question - that is a question that if answered 5 out of 5 then all the other questions will be answered positively. The functional indicator is “The room was clean”. On the emotional side the indicator is “I had a sense of well being”. They know that they have to pass the functional question before the guest will focus on the emotional question.
So what functional and emotional questions are you asking your clients / customers? What is the indicator question that will reveal the customers opinions?
In respect to the employees the most important metric they measure is “voluntary turnover”. This is an indicator of talent acquisition and training. They have very precise standards in who they hire and then spend a significant effort on training of the people.
Ritz Carlton realise that it is only with enthusiatic team that you will have loyal committed clients. Therefore they are measuring success from both aspect. Also they are measuring the emotional responses as well.
How do you measure success in your business?
How EBITDA Can Mislead
During the dot-com boom, EBITDA became a popular way to measure how healthy a business was. EBITDA scores became the talk of Silicon Valley cocktail parties, where party goers would ask each other, “How soon will you be EBITDA positive?”
Today EBITDA remains a valuable, if controversial, number for evaluating a company’s earnings. After all, the WorldCom meltdown was facilitated by financial fraud related to EBITDA.
Before we examine why EBITDA is favored by some and scorned by others, we need to consider EBIT (Earnings Before Interest and Taxes). As you might know, EBIT is synonymous with Operating Income, and is the profit or loss that is generated by operations of a business before interest expenses and taxes. In essence, it’s the number that tells you how much profit or loss your operation is generating.
EBITDA is a form of EBIT. Actually, Joe likes to say it’s an obvious form of EBIT — EBIT “DUH” (sorry…it’s hard to make jokes about EBITDA). It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Depreciation and amortization are unique expenses. First, they are non-cash expenses — they are expenses related to assets that have already been purchased, so no cash is changing hands. Second, they are expenses that are subject to judgment or estimates — the charges are based on how long the underlying assets are projected to last, and are adjusted based on experience, projections, or, as some would argue, fraud.
EBITDA is a number often used in the financial industry as a loan covenant. Borrowing limits for businesses often are set as percentages of EBITDA. One of the most common methods to value small businesses being acquired is by using multiples of EBITDA. For example if you own a business that generated $1 million dollars of EBITDA last year and companies in your industry typically sell for 7 times EBITDA, then the sale price of your business will probably be in the $7 million dollar range.
Bankers like EBITDA because it will eventually represent operating cash flow (since the non-cash expenses are added back in). That helps to explains why bankers like the ratio in loan covenants. If EBITDA is good, the thinking is, operating cash flow will not be far behind.
EBITDA can also be misused. In the mid-nineties when Waste Management was struggling with earnings, they changed their depreciation schedule on their thousands of garbage trucks from 5 years to 8 years. This made profit jump in the current period because less depreciation was charged in the current period. Another example is the airline industry, where depreciation schedules were extended on the 737 to make profits appear better. When WorldCom started trending toward negative EBITDA, they began to change regular period expenses to assets so they could depreciate them. This removed the expense and increased depreciation, which inflated their EBITDA. This kept the bankers happy and protected WorldCom’s stock.
Because EBITDA can be manipulated like this, some analysts argue that a it doesn’t truly reflect what is happening in companies. Most now realize that EBITDA must be compared to cash flow to insure that EBITDA does actually convert to cash as expected.
In our Financial Intelligence Test one of the questions people miss most often involves EBITDA (even senior finance people missed the EBITDA-based question). Many of us can define what the term EBITDA means, but we also should know why it’s important and how it is should be used.
Does your company measure EBITDA? How helpful have you found it to be?
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Eliminating Sales Quotas may boost profits
A recent study done a team at Stanford Graduate School of Business has found that eliminating sales quotes may boost profits.
In one case, the new sales compensation plan without quotas resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month.
Many business pay bonuses for meeting certain sales quotes but this new research suggests that quotas may undercut profits. quotas, sales went up $1 million per month.
“The fundamental problem is that managers never know exactly how much time and effort their salespeople are putting into their work,” says Harikesh Nair, an associate professor of marketing and one of the authors. “In the absence of such knowledge, they can only base payment on agents’ output, not their input.” Commissions, quotas, and bonuses based on performance are thus the typical staples of sales force compensation. Quotas, in particular, are believed to generate strong incentives by serving as targets or goals that encourage sales agents to work hard.
While commissions may spur effort, the quota carrot can sometimes result in people striving to game the system. So when they have meet the quote for this month they will then try to push the sales into the next month to help next months quota. There is a high incentive to try to manage the system rather than just get all sales possible.
This is a case of a bonus system and metric being implement without enough consideration being given to the dynamics of the situation. We need to understand the behaviour of the people to whom the metric affects and then consider the ramifications to the metric. This research highlights the fact that in designing a key indicator or a bonus system we must understand how people will react.
Leadership Isn’t About You
This week’s question for Ask the Coach:
I am having a difficult time leading my team. The team members will not follow my instructions, which I am sure would make our project much more successful. What am I doing wrong?
What you’re doing wrong is very simple: you have simply forgotten that your team is more critical to the success of your project than you are.
Over the years, I have worked with many great leaders as an executive educator and coach. One client, Charlie (not his real name), in particular is still one of my favorites. He is the one who showed the most improvement — and he is the one who I spent the least amount of time with.
Charlie was president of a division with more than 50,000 employees. His CEO recognized his talents and asked me to help Charlie expand his role, provide more leadership, and build synergy across the organization. Charlie eagerly involved his team in this project. Each person took responsibility for creating positive synergy with cross-organizational colleagues. They regularly reported their efforts, learned from their colleagues, and shared what they learned. They thanked people for ideas and suggestions and followed up to ensure effective implementation.
What I find interesting is that of all the clients I have every coached, Charlie is the client I spent the least amount of time with. This inverse relationship between our spending time together and he and his team getting better was very humbling. At the end of our project, I told Charlie about this observation. “I think that I spent less time with you and your team than any team I have ever coached, yet you and your team produced the most dramatic, positive results. What should I learn from my experience?”
Charlie thought about my question. “As a coach,” he said, “you should realize that success with your clients isn’t all about you. It’s about the people who choose to work with you.” He chuckled; then he continued: “In a way, I am the same. The success of my organization isn’t about me. It’s all about the great people who are working with me.”
What an insight! This isn’t what most of the conventional wisdom of leadership dictates. Most leadership literature exaggerates, even glamorizes, the leader’s contribution. The implication being that everything begins with the leader, that she is responsible for your improvement, she guides you to victory, without the leader there is no navigator.
This isn’t true. An oft-quoted proverb says: “The best leader, the people do not notice. When the best leader’s work is done, the people say, ‘We did it ourselves.’”
Truly great leaders, like Charlie, recognize how silly it is to believe that a coach or a leader is the key to an organization’s success. The best leaders understand that long-term results are created by all of the great people doing the work — not just the one person who has the privilege of being at the top.
Readers: Please share your stories about teamwork and leadership. How do you lead your teams successfully? Is it about you or them?
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