Quantitative and Qualitative Measures
Quantitative data never tells the whole story. Quantitative data is easier to collect and analyse and thus we tend to give it a far greater importance in our business. The accounting industry makes it easy for us to get a raft of quantitative data on the performance of the business.
Qualitative data though completes the story. But collecting and analysing qualitative data is a much harder process, and thus often is neglected in the management of the business.
For example to make a good product decision we need to know what is being sold, to whom, at what margin, this is the quantitative data. But we also need to know why some products are selling more than others. This question of answering the why takes a qualitative analysis of our customer’s decision, and often this involves judgment calls. But it is this qualitative data that will complete the story about the reason why a product or service is selling more than another.
The quantitative information may imply, a pricing or a market need, but the qualitative data, ie. actually asking the customer, may indicate that there’s something altogether different that is going on.
We need to have both qualitative and quantitative measures in a business. We need to have the judgment calls as much as we need to have the cold hard factual financial analysis. The blend of qualitative and quantitative data will give us the tools to lead and manage a business.
Photo:- by digitalART2
“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.
KPI’s are not just financial measures.
To be effective KPI’s can not just be composed of financial metrics. Metrics derived from the financial statements have a place but they need to be complemented with other measures that are derived from a true understanding of what is important to the customer.
The financial statements are records of history. Thus financial metrics also reflect what has happened. They are not in any way predictive of what is to come. Financial measures have important uses including cashflow management, efficiency, productive use of resources. But financial measure must not dominate the KPI’s as the focus will be distracted from delivering value to the customers.
We need to focus on what is success in the eye of the customer not just past profitability.
The first step in this process is to have a complete understanding of the customer and what they value. A business must invest the time and effort to be armed with the facts and data on the customer. From this the business needs to ask the customer and to observe their behaviour to get the understanding of what is important to the customer. Once this information is to hand then indicators that measure this value delivery can be designed and implemented.
The key measure of this post is not just have financial metrics as KPI’s.
5 Reasons why businesses end up with poor KPI’s
Unfortunately performance measures or KPI’s can get a bad impression because the prevalence of some terrible KPI’s in many businesses. The phrase “what you can measure you can manage” which came originally out of a McKinsey strategy has been belittled by many. I am not saying that you can measure everything (that is for another post). The failure of KPI’s and perception that has been generated I believe has come about from poor implementation of performance measurement.
The reasons that business have poor KPI’s include:-
- They do not exactly know what is success in the eye of the customer. We must start with the customer to know what we should be focusing on measuring and tracking.
- Lack of a complete understanding of the operational drivers of the business success.
- Having KPI’s that are at odds with each other. For instance if there is a KPI on customer value delivered and then a KPI on employee productivity then there can be a tension as to which one is the most important.
- Too many KPI’s. Some businesses I have encountered have had more than 50 KPI’s at senior management level. This just means that none of them will be focused on.
- The design of the KPI has been delegated a low level person in the finance department. The KPI’s are too important not to designed by CFO or senior management.
I am sure that there are many other reasons why inappropriate performance measures end up being designed and implemented however these are five I have seen to0 often.
Your thoughts please.
The problem with benchmarking.
Often I here businesses saying that they are better or worse (not often they admit to worse) than the industry. But there is a problem here.
If a business compares its data to even best practice within their industry I believe are missing the point.
The business that succeeds in an industry don’t just compare themselves to others but rather they change the game. They look for ideas from outside their industry and innovate. Innovation does not happen by just comparing to other like companies.
It is important to have the correct key performance indicators and to regularly monitor these but to get ahead of the curve it is necessary to have measures focused on what is important to customers.
KPI’s and the financial data used to compare to industry show only the result they do not necessarily show the systems operating in a business. This is where the innovation will come. By looking at what the customers really want and value and then working a way to deliver this effectively.
Three measures of profit a business needs to know.
Often we have a measure of overall gross profit and net profit of the business but there are three profit measures we need to pay more attention to.
These are :-
- Profit that each product or service contributes to the business
- Profit that each customer contributes
- Profit that each job,task or sale contributes
Overall profit of a business could hide a lot of things. There could be products / services, customers or jobs that are unprofitable. If we armed with the information then we can make decisions.
Some years ago I was involved in a project for a business where the profit per product was measured for the first time. There was 242 products and the project found that only 72 of these were actually profitable. There were another 45 that were marginal which meant that maybe with some improvements these may become profitable but the rest were unprofitable. This business had been providing a large number of products which were costing the business even though overall the business was profitable.
All customers are not good customers. A good customer is one who is profitable and a great customer is one who also refers people to our business. But the business needs to know the contribution of the customer to the revenue and profit. Businesses need to get rid of the unprofitable customers so that focus can be given to the great customers to build that relationship.
Lastly there may be jobs or tasks within a product line offering that are not profitable. With this information we can then determine how to make this more efficient or to make changes to the product / service offering.
All businesses need to know these three measures of profit.
What are your thoughts?
A key ingredient for performance reviews
An area that always creates discussion is that of performance reviews for the team. Now if you want detailed templates and systems I would strongly recommend that you visit Heart Harmony where Ingrid Cliff has a very good Performance Review manual. This post is about an important element of performance reviews that I believe is handled poorly.
For there to be a true review of performance at some future point then both parties need to know exactly what is expected. How can there be a true review of performance if both parties have different ideas of what was expected.
It is a must that there are Key Performance Indicators in place from the outset that both sides clearly understand. There does not need to be a lot of KPI’s but just a few KPI’s that match the employee or team effort to the desired customer outcome. Without correct measures then it is purely a subjective performance review which usually means that the staff member will feel upset.
Importantly these KPI’s need to be directly related to what is important in the customers eyes. Don’t just use KPI’s that the employee cant influence or are just taken from the accounting data.
The team needs to understand what the management defines as success and what will be rewarded.
A Report a business must do each week (or even more regularly)
We all know Cash is King so why is so many business are not keeping a very close eye on it?
Where is the cash.
It is important to understand the exact cash position of the business every week if not every day. Additionally we need to understand what is affecting the cash position of the business.
So to understand the cash position I recommend that the financial accountant / controller/ bookkeeper of the business prepare a Cash Flow report.
This report would detail the following :-
- Opening Cash Balance last week
- Cash inflows received this week
- Bills / expenses paid this week
- Current Cash balance
- Expected cash inflows in the coming week
- Required expenses to be paid in the coming week
- Expected cash balance next week.
This simple report explains what happened last week and what is expected to happen next week. Also you can add to this report by comparing last week report to this weeks to see how close the prediction was and if there was any lessons to be learnt from this. The report can then be used to make decisions and take actions. You can’t do anything about improving cashflow if you don’t know what it is it now.
My question to you is how are you measuring your cashflow and would this report help you?
Image credit: mindluge
What we measure is what we get
Oftentimes in business, the owners or management have an expectation as to what the team should be delivering. Also, the owners and the managers usually believe that the team should be aware of issues that pertain directly to the customer. Finally the management then get frustrated when either the production is not met or the service quality standard is not achieved.
The question that has to be asked is this – what are the owners/managers measuring? Or, if they don’t have a specific scorecard to tell everybody how the business is going, what are they reacting to?
So, for instance, in their staff meetings or individual meetings with team members, what are they talking to their staff about? If they are concerned about the quality but then all they react to is whether there has been adequate production, the staff will soon become aware that “what matters around here” is production, not quality. Behind the scenes, the management might be getting frustrated with the quality, but all they are reacting to in their team meetings is another issue.
So whether it is by way of a relevant, accurate, timely scorecard, or whether it is just by way of management actions, what we measure is what we get.
This point has been illustrated to me recently in a company that I have been working with, where we are in the process of implementing production targets. There was an expectation that the team could only produce 1000 units per day, and there had been some days when production was as low as 800 and not many days when the production was in excess of 1000. So implementing a production target of 1000 per day to start with, with a goal that within 4 weeks we would be able to increase that to 1100 per day, had a remarkable impact. Within 1 week, the team was exceeding 1100 and nearing 1200. Five weeks later, they were at 1400 per day.
Nothing else has changed, other than there is a scorecard, and there are positive consequences happening through reward and recognition from management of achievement of the team. The team has beeen able to together, without input of management, learn how to improve processes that have enabled increased production. Prior to this scorecard, management thought they were doing well when 1000 units per day were produced.
Measures (KPI’s) drive behaviours. Now we can’t measure everything but we need to carefully measure what is important because they can influence the actions of the team.
What we measure is what we get. What are you measuring? Do you have a scorecard? If you don’t have a scorecard, what are you reacting to? There is no doubt that measures can change behaviours. It doesn’t mean that we should measure everything that moves in a business. We only must be measuring what matters, either to the end customer or to the efficiency within the business. There is not doubt that what management views as important by their actions is what they will get.
So again I ask – what are you measuring in your business?
Are you making enough from your business – a way to measure this
A ratio that can be used to determine whether you are getting an adequate return from your business is Return on Capital Employed (ROCE).
ROCE is calculated as follows :
Let me ezplain further. EBIT means the net profit of a business before interest and taxes. The capital employed can have a number of different meanings however it is the capital necessary to make the business perform. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.
Now before I go onto an example with every ratio it is not perfect. The assets figures in the financial statements are usually represented at cost or even depreicated. This means if the business is using assets purchased many years ago then the ROCE would be better than a business using assets purchased recently everything else being the same. Thus we need to be careful with this number but it is still very useful. We can make adjustments by valuing the assets at their current value to get a better idea of the true ROCE.
So lets look at an example:
|
|
ABC Pty Ltd |
XYZ Pty Ltd |
|
Operating Profit |
100,000 |
150,000 |
|
Total Assets |
500,000 |
1,200,000 |
|
Current Liabilities |
150,000 |
150,000 |
|
Capital Employed |
350,000 |
1,050,000 |
|
ROCE |
28.57% |
14.28 |
The return of both companies is above what could be obtained from investing the proceeds in shares etc but don’t get caught by a larger profit must be better. ABC has a small profit but is using the assets more effectively and thus is a better managed business.
What is the ROCE of your business? Is it sufficient? If not what are you going to do to look at ways to improve it?
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