Simple rules for establishing performance metrics for small businesses
Simple rules for establishing performance metrics for small businesses
Much has been made of performance metrics right from the balanced scorecard approach to complex metrics that shine accountability without linkage to action. Actually, a simple approach to establishing performance metrics is a huge first step for any business and it's much easier to do that is generally thought.
Let's start with what performance metrics are in their simplest form, they are measures that businesses use to track their performance, sometimes along several key dimensions. When done right, businesses can use metrics to diagnose where they might have issues, measure the progress of key initiatives, make a case for investment in important areas, drive employee ownership and place accountability. Any business with metrics will also demonstrate to key stakeholders, such as investors, and customers, that they are serious about making progress and accountability. For example, if employees know they are being measured on customer satisfaction, they are more likely to take that extra step to satisfy the customer and thus demonstrate the importance of service to the customer.
Once a business has determined the need to establish metrics, where should they begin? There are many web related resources to help different industries, but a good place to start is with the customer. Getting customer feedback on their satisfaction with products and services is key to future growth, so beginning with a simple customer engagement metric is a great start. Percentage of satisfied customers, or another customer metric, such as propensity to use your product again, are simple, easy to understand metrics that both employees and stakeholders can readily relate to. Once that is in place, additional metrics relating to key areas of the business should be added. These would include one or more revenue, expense, employee engagement, and control metrics. Developing these metrics, both the right one to use and the target measure for the metric, is key to success. These should be developed with a clear understanding of what drives each element. For example, number of products sold or expense to revenue ratios are simple and easy to correlate to revenue and expense, respectively.
While developing these metrics, a few simple rules should be kept in mind:
- Make it simple. Make sure your metric can be easily understood and does not involve complex calculations. These will increase acceptance as well as use of the measures
- Establish a target for each metric having a measure of something is important, but to relate it to the business, it must be compared to a target. That can be a budget, in the case of expense, or a business goal, such as raising customer satisfaction to xx% this year.
- Develop a way to integrate metrics into the business. There are numerous instances of organizations that establish metrics and then never use them for anything, which fosters a sense of "flavor of the month" usage. One way to do this, is to amend monthly reports, such as budgets with a few performance metrics so that the regular discussion of budgets begin to include metrics as well.
- Establish clear accountability. Even though employees can share accountability for metrics, final responsibility for the number should be clearly defined with a single person or position. This will ensure that the right level of attention is paid to improving and managing the metric.
Now that metrics have been established, how should they be used? Ideally, metrics or some subset of metrics should be linked to employee performance for maximum impact. For example, if all top tier management of an organization has some portion of compensation (variable or base) linked to a certain level of customer engagement, customer engagement will be a priority. There is no clearer form of accountability and ownership than linkage to pay and/or performance, although there is likely to be some initial resistance to that approach. A "phased-in" approach to metrics can be used to prepare employees in advance, tracking the metrics for some period of time without performance linkage, and establishing the expectation that at a certain point, linkage will follow.
Metrics can be used for a multitude of purposes, including grants, tracking progress, measuring employee performance, rallying employees towards common goals and benchmarking to improve organization performance. However, one important and lesser used use is to celebrate progress, both individually and for the entire organization. Once employees see that metrics can be used to appreciate and reward their hard work, acceptance will be easier as well.
With the right approach, performance metrics can be both easy to establish and be seen as a positive step for the organization.
Simple rules for establishing performance metrics for small businesses
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