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?
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.
5 Reasons why businesses don’t have performance measures
There are many reasons given by business owners for why they don’t have performance measures. In this post I have outlined five reasons
1. Already know – no need to measure it. Often when business owners don’t have KPI’s it because they believe they know what is going on This might be the case when the business is very small however it definitely not the case when the business expands. It is the little things that the KPI’s will reveal. Little things that added together will make a huge difference.
2. Got real work to do - There can be an attitude that having a few targeted metrics distracts people away from doing the real work. But, it is the business who is willing to spend the time to work out how to do things betters is the business who will succeed. Just because it seems like unproductive time it will lead to consistent improvements which will mean a better business, better profit and more enjoyable for all.
3 Bottom Line is good enough. There could actually be two reasons within this statement. Some business owners believe that it is possible to manage a business from the profit and loss statement. These statements are just history and by the time the information is in the P&L Statement it is too late. Also the other part of the statement is that if the profit of a business is growing it can make management complacent. This can then lead to the focus being put on the wrong things. Some key metrics will keep the focus of the business on what is important.
4. Don’t like or understand numbers. Unfortunately I have heard this one too often. But it is simply impossible to manage the business without knowing or understanding the numbers. But it does not need to be a list of complex numbers. Numbers can be graphically presented to make them easy to understand for everybody.
5. Don’t have the data. Whilst this may be the case it should not be used as an excuse not to redesign the systems so that data is available. Take the time and ensure the data can be collected so the metrics will be useful.
It is necessary to understand the key numbers of a business so correct management decisions can be made. 01
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
Are we measuring what matters with our online marketing and public relations
I heard an interview with David Meerman Scott recently in which he raised an interesting issue.
When we measure marketing and public relations we have been generally having measurement around leads -number of emails addresses or press hits we get. But to get our ideas to take off in the new media we need to have different measurement. We need to measure – how many bloggers are blogging about our ideas, how many people are downloading our stuff and ultimately how many people are buying our products and services. Measuring the lead will lead to failure – it is not a measure that matters.
These thoughts are provacative and i believe true. Those whose ideas have gone viral are those who made their ebook, article freely available without even email registration. This has then lead to further word or mouth which then leads to increase sales.
The point is measure what really matters not what we have always measured.
Pricing is a marketing strategy.
Too often in business, particularly service businesses, pricing is not seen as an important business tool to develop the business. Pricing is often seen as something that is set by the market. From accountants, engineers, financial planners to physiotherapists often the answer to the question of how you set your prices is usually one of two answers. The first option is have a look around at what everybody is charging. The second option is, work out my costs and add a margin that I want to achieve as profit. These two approaches are not a determined appropriate pricing strategy to ensure that the price being charged for the service is in any way reflective of the value being delivered. Unfortunately too many businesses do not look at price as an important element of their marketing strategy
So what do customers buy? We are all familiar with the old, they don’t buy the drill bit they buy the hole, they don’t buy the sausage they buy the sizzle. Theodore Levitt of Harvard Business School put it best when he said that customers buy expectations. They expect a certain result, a certain outcome, a certain problem be solved, pleasure to obtain or pain avoided and that is what they are buying. They are not buying time, they are not buying effort, they are not buying the cost structure of the business – they are buying an expectation, an expectation of a result. Being mindful of this fact, why on earth would any business therefore price its services on a time basis or some other anachronistic tool that is not focused on the value being delivered to the customer?
We need to ensure that as a business that we are meeting our customers expectations because that is what they are buying, that is what they are going to pay for.
In the United States it has become known amongst management literature an effect called the “Starbucks effect”. Approximately 12 to 13 years ago, 3% of coffee sold in the United States was premium. Today, more than 40% of coffee sold in the United States is premium. This is primarily due to the development of Starbucks. They selected a customer base, delivered an experience that that customer base wanted.
Who would have ever thought that we would be paying the money that we are for bottled water. Something that we can get for free, it is not scarce in reality There is a plentiful supply of drinking water in the western world yet we are buying bottled water. To make this even more of interest is to have a look at the company Evian who sell premium bottled water. They make an experience out of bottled water. Maybe it is not coincidental that Evian is naïve spelt backwards.
Evian, Starbucks – they have loyal delighted customers. This wasn’t done by charging a fair price or catering to discount shoppers. It was done by delivering an experience to a particular customer base that wants that experience and charging appropriate for it.
Pricing can assist in the development of a business in so many ways as it transmits so much information. Take a minute and look at the lead pencil that you may have on your desk. Think of all the businesses that have been involved in putting that pencil together from the tree – the logger, all the way through to the end salesman from which you purchased that pencil from. Every which point, a price was charged. A price that was transmitted value to the next stage. Even in the humble pencil, the price mechanism is at work.
So the question is – how is the price mechanism at work in your business and is it being looked at properly.
The first point in determining what is the price is to look at the value side. Customers are only going to deal with your business if they see some value from doing so.
You can’t measure everything
“In mid-18th century London a mathematical prodigy called Jedediah Buxton was taken to see David Garrick perform Shakespeare’s Richard III at the Drury Lane theatre. When asked whether he had enjoyed the play, his reply was that it contained 12,445 words. His analysis did seem to miss some significant things. ”
This is the opening paragraph of speech given in September 2006 at the Annual Conference of the Australian Institute of Judicial Administration by New South Wales Chief Justice James Spigelman.
He then goes on to say “The purpose of my address is not to deny the beauty of numbers. Nor their utility. My purpose is to emphasis, as Jedediah Buxtons’s reaction manifested, the inability of numbers to always identify what matters.”
As the Chief Justice so aptly put numbers are not everything. So many businesses measure everything. Many accountants continue this with numerous measures focusing on everything that they can put a measure around. This focus is usually the traditional accounting focus and particularly orientated towards costs. But often many of these measures just create unnecessarily administration and do nothing to get to what matters.
What should be measured?
The Chief Justice was railing against the use of numbers to find some “quality indicator” of the Justice System. Unfortunately many businesses fall in the trap of measuring everything in the pursuit of a quality indicator.
A significant problem with the measures being using in business is that they are based on the traditional accounting practices. The accounting standards were developed in the industrial age when everything was focused on the efficiency of the factory. The assets were the machines, equipment etc. However we moved from this to the information or knowledge age where the assets are the people and the information that they have in their heads. However in the profit and loss statements the money spent on people is an expense.
Whilst the financial statements are often misunderstood they serve a purpose. The purpose of these statements is not to manage the business. The profit and loss statement is best said to be a history statement. Any measures that are based on aspects of the profit and loss statement are looking at history.
There is a place for some measures orientated on the financial statements or costs because it is imperative that costs are kept under control. A business will not achieve true success with only these measures in place. Success is defined by the customer / client. It is necessary to measure that which the customers views as important. We need to find the drivers of the customer behavior and measure those.
But remember not everything can be measured. How can we measure the lawyer / accountants ability (or lack of ability) to communicate. A criticism made of lawyers and accountants is that don’t return calls quickly, not speaking in layman’s terms. How can the lawyers / accountants professionalism be measured. These are judged not measured.
Thus we need to focus on measuring what matters and have measures that matter. These are measures aimed at what is important to customers / clients. There is still a lot of work to be done on designing effective measures that are not just focused on various elements of the profit and loss or balance sheet. It is necessary to have a change of mindset from the industrial age to the knowledge age. Nowhere presently on the balance sheet is the huge asset that the loyal committed clients are. Nowhere in the financial statements is any information about customers found eg repurchase rate, referral rate etc
With the right approach it is possible to design a quality indicator that will reflect what is important to customers. There are difficulties and it will take a fresh approach to measures. Some businesses have already devised interesting measures aimed at getting to what customers see as important.
One of these is Fedex with the SQI (service quality index) which came from the hierarchy of horrors (a list of things that upset their customers). From this they assigned importance to each item on horror and from this they then created an index. This index thus showed how often or how little they were upsetting customers. Since implementing this quality index they have taken the taken the ontime delivery from 95% to 99.7%.
Another company is Enterprise Rent a Car (USA) and their ESQi which is similar to Fedex but is from a simple customer survey. There are other successful companies who do not rely solely on the traditional accounting measures but are focused on the customer.
Be careful though. I am not recommending the plethora of customer satisfaction surveys. These abound and usually are useless. In short these don’t work because they ask to many questions, the wrong people respond, are used for marketing purposes and probably the most importantly are not linked directly to what matters.
It is possible to develop a quality indicator but not using traditional accounting measures. A fresh look at the business is necessary. What the customer values in your product or service must be ascertained. Once this is understood then we need to devise a measure around this.
In conclusion what are you measuring? Measure what matters and have measures that matter. Remember not everything can be measured.
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