Posts tagged "fairness"

5 Key Non-Financial Metrics

“Companies that establish clear lines of sight to the metrics that matter and then make sure that employee behavior is aligned with those metrics can create enormous value growth.” Tony Siesfeld and John-Paul Pape

Over the past two weeks I have been discussing both financial and non financial metrics. They both have their place in helping manage businesses better. I find non-financial metrics fascinating and am inclined to look at them for guidance in comparison to financial metrics. Unlike financial metrics which are purely numbers performing in different segments, non-financial metrics provide much deeper insights into the inner workings of the business. They help understand why certain financial metrics turn out the way they are and what changes can be brought about to improve them. Some however find safety in numbers and are less inclined to rely on these relatively intangible measures. As entrepreneurs we have to look after the business on multiple fronts. We must have the ability to quickly assess several key components on a regular basis. Outlined below are five relatively generic key non-financial metrics. They can be applied to all sorts of business models to help you gauge the level of progress being made from a dashboard view.

1. Customer Satisfaction: Acquiring a customer is only the first step, providing value and satisfying the customer is where the actual work begins. It is a well known fact that acquiring a new customer is between 5-10 times more expensive than retaining your current customer base. To measure customer satisfaction comprehensively we need to take into account all major touch points where the customer will be interacting with our business. Subsequently we will need to choose several sub metrics such as perceived quality & value, trust and loyalty to accurately gauge their satisfaction levels. These can be measured through a variety of tools such as surveys, focus groups and observations. To learn more please click here.

2. Employee Loyalty: Employee loyalty has been directly linked to the customer’s loyalty and corporate profitability. Whether you are a new start up or an established one, this measure needs to be continuously monitored. From the very beginning employees must be told what to expect when they join the firm. They need to be made part of the inner circle to avoid alienating them. Growth and development opportunities must be presented to keep their motivation levels high and lastly they need to be compensated fairly for the work they are doing. Each one of these sub measures needs to be monitored along with several other key indicators such as burnout thresholds. To learn more please click here.

3. Innovative Index: Innovation is measured very differently in various organizations. I believe innovation relates to the ability of an organization to continuously improve on its existing product/service ranges as well as to develop complementary assets around them which will enhance their core products. This will help create multiple lines of business and will keep the business afloat when a core product faces strong competition or a recessionary pressures. To learn more about this metric please click here.

4. Market Share: There is substantial evidence which states that market share is directly related to ROI. With an increase in market share a business can expect to benefit from economies of scale that ultimately lead to better operating margins. A business therefore becomes stronger by gaining market influencing powers and equipping itself with quality management teams. To measure a business’ market, one needs to first understand the industry, competitors, customers and other market factors which have a direct impact on it. Through the understanding of these measures we can calculate how much the total market is worth and then determine our share. Accordingly we can then measure how we grow market share over a period of time. To learn more about this metric please click here.

5. Execution of Corporate Strategy: Business all comes down to execution. Without this critical component we can make all the plans we want and prepare for every possible scenario and achieve very little. As business owners we set ourselves targets and construct strategies to reach them. The next step requires one to implement strategies through a set of tactics. This is the step that separates the talkers from the doers. Don’t get me wrong, careful planning, thoughtful preparation and taking calculated risks is very important. However it should not restrict someone from taking action. To learn more about this metric please click here.

Listed above are a set of non-financial metrics which I believe can be applied to most business models. Apart from these metrics, a business needs to be careful of other measures which are critical to their particular business model. In the end these metrics should not be the end all and be all of the organization. Their purpose is to primarily provide management with the ability to look at several key segments of the business and get an idea about their performance. I believe the correct use of these metrics helps us not only to become better leaders but also impacts positively and dramatically on the business. I would really like to know what non-financial metrics you are using and which industry you are in. Feedback and comments on the metrics provided above will be greatly appreciated.

Non-Financial Metric #5: Execution of Corporate Strategy

“There is value in careful planning and thoughtful preparation. However, until there is execution, no plan is flawed; no preparation inadequate. Execution spotlights all.” Chip R. Bell

Business all comes down to execution. Without this critical component we could make all the plans we want and prepare for every possible scenario, but achieve very little. As business owners we set ourselves targets and construct strategies to reach them. The next step requires one to implement these strategies through a set of tactics. This is the step that separates the talkers from the doers. Don’t get me wrong, careful planning, thoughtful preparation and taking calculated risks is very important. However it should not restrict someone from taking action. When it comes to measuring how effective an ability to execute has been, we have to look closely at the following:

1. Goals: As mentioned many times on this blog, to be able to reach our goals they need to be specific, measurable, attainable, realistic and time specific (SMART). Many times when I have been unable to reach my target goals it has been due to the fact that I left one of these important components out. When this happens there is a complete break down in the execution process as the strategies we select will be flawed and thus will result in the use of inappropriate tactics. Therefore be very clear with the goals and targets which one creates.

2. Strategies: Good strategies comprise of objectives, scope and competitive advantages. Through goals we can establish what the business wants to achieve. For example say, our business wants to increase traffic on our website by 10% over the next quarter. The strategy for such an objective could be something like “increase traffic on our website by 10% over the next quarter by tapping into the the 18-25 demographic in Europe through leveraged relationships with our European affiliates.” If we were to leave the statement at tapping into Europe we would still be missing the “how?”.

3. Tactics: In the last statement we mentioned we would leverage our relationships with our European affiliates. Tactics need to translate this into reality by chalking out ways on how this can be achieved. For example, we could participate in some seminars next quarter in Europe, we could equip our affiliates with additional marketing material or we could even provide greater financial incentive to reach targets. What is important is that our tactics are aligned with our strategies which are aligned with our goals.

At the end if we were not able to reach goals then we need to go back and re-evaluate where we went wrong. This review process needs to take place on a weekly, monthly, quarterly and yearly basis. As a startup it is imperative that we continually evaluate how effectively we are executing and where we are facing the biggest impediments. When such a culture of accountability and execution is developed it turns into a huge competitive advantage.

Non-Financial Metric #4: Market Share

“Failure to gain market share even with superior costs is failure to compete. This failure is also a failure to achieve even lower costs.” Bruce D. Henderson

There is substantial evidence which states that market share is directly related to ROI. With an increase in market share, a business can expect to benefit from economies of scale that ultimately lead to better operating margins. Therefore a business becomes stronger by gaining market influencing powers and equipping itself with quality management teams. Keeping track of market share is an important indicator in evaluating how business stacks up against the competition and how it progresses over time. In the early stages of starting out, a venture market research is a critical component of developing a business plan. This is usually a challenging exercise, because information regarding industries and markets is often not readily available. Listed below are some steps I use to evaluate the market and set market share targets accordingly:

1. The Industry: One needs complete information regarding growth rates of a particular industry. What are it’s historic trends? What were the revenue figures for the segment? Have any major technological innovations taken place in it recently? Is the industry very segmented? These are some preliminary questions of interest and importance when looking at an opportunity in a particular industry.

2. Competitors: This is an important segment, one in which you need to document as many direct and indirect competitors in the market place as possible. Look at their teams, products/services, pricing and any other marketing collateral which you can find. Remain constantly vigilant about your competitors, this is a must for any company regardless of size. Create document files which can be referenced easily, this will come in handy during later sections, when you are positioning and promoting your product as well.

3. Customers: Evaluate the target demographic that is going to be targeted. Is the segment growing? What are the current options that they are using in place of the product/service you will provide? How are they currently purchasing the product/service?

4. Market Factors: Are there any external factors which have a deep impact on your target market? These can be government policies, market consolidation and volatile raw material costs. The presence of these factors can have a substantial impact on your target market and must be taken into account.

Ultimately approximate size of market will be gauged. The most common metrics used for broad approximations are, sales by revenue & sales by volumes. Once we know an approximate size of the market we can set targets for ourselves. This metric can then be tracked periodically to ensure that we stay on course and alert to any fundamental market changes.

Non-Financial Metric #3: Innovativeness Index

“Innovation is ultimately not an act of intellect but of will.” Joseph Schumpeter

How do we measure innovation? Unfortunately there is no one framework which is used universally to measure innovation. Innovation according to Wikipedia means “a new way of doing something. It may refer to incremental, radical, and revolutionary changes in thinking, products, processes, or organizations. A distinction is typically made between Invention, an idea made manifest, and innovation, ideas applied successfully.” The stress is on the actual application of the idea. Without taking action we could talk about theoretical models and concept all we want, but without tangible output, innovation does not take place.

I believe Google is an innovative enterprise. Successful products such as gmail, chrome and orkut were all created in the 15% innovation time that all employees are given. They are all motivated to put their ideas into action, and then see the response it receives. Much of the time these initial attempts will be inferior to products which may be in the market. In this case Hotmail, FireFox and Friendster were all established players in the industries they were targeting. Nonetheless, they put their products out there and continued to improve on them. There were several products which did not achieve any critical mass and they were discontinued. The important thing is that a shot was taken. As an entrepreneur we have to take calculated risks and continue pushing our products/services out of their comfort zone.

Some useful sub metrics I use to measure an organization’s innovative index are:

1. Incremental Changes: How a business continues to improve its product/service is an important component of innovation. Once again, if you take Gmail for example, they continue to add new features which may have been requested by users or deemed necessary to enhance the user experience. Recently they integrated the ability to use video within the service, canned messages to enable faster replies and new themes to make the interface look unique. Set benchmarks for your products/services and then track what those changes do in terms of traffic, sales and profitability.

2. New Products/Services: I am a big fan of creating complementary assets around core business units which are performing well. Not only does this provide further advantages to continue using the core product but it opens up the ability to leverage on the successful product/service to launch others. Also one can measure how many new products/enhancements are in the pipeline and when they are expected to be released.

Depending on the type of organization that you are part of, one will need to come up with relevant sub metrics to calculate the innovative index. While I was searching for models I came across a great article written by the author of Freakonomics Stephen J Dubner called “How can we measure innovation?“. The article includes answers from many well known authors and industry leaders. I strongly recommend reading the entire article. It provides a point of view from individuals with very different backgrounds and can help you find the right metrics for your business model.

Related Posts:

Assessing innovation metrics: McKinsey Global Survey Results

Non-Financial Metric #2: Employee Loyalty

“I believe the real difference between success and failure in a corporation is how well the organization brings out the great energies and talents of its people.” Thomas Watson Jr.

Volumes of books and years of study materials have been developed to enable managers to attract better talent and retain them. From an entrepreneur’s point of view there are several structural differences compared to those faced in larger organizations. First off, much of the time a new start up will have an untested product/service with a small team which may or may not have the relevant experience needed. What they do have is an intense passion for what they want to do, that is probably the only way they can attract quality talent. Even though they are convinced and on board, things do not become easier. Salaries are usually minimal, stress levels are very high and burnout thresholds are reached much earlier. Losing a critical member of a team for a start up can signal the end of the road. Therefore this metric has to be given due importance to ensure that goals are met. Listed below are a couple of steps that have helped me keep the employee loyalty index high at businesses I have been part of :

1. Full Disclosure of Position: When recruiting someone for your start up team, one needs to ensure that you communicate clearly what role they will have to play. We all know that at smaller start ups many different hats need to be worn during the course of the day. The individual needs to be comfortable with this and willing to put in the long hours which will be required. Salaries, equity stakes, confidentiality agreements and all other formalities should be openly discussed and negotiated before hand. If these factors are left to be discussed at a later date, there is bound to be trouble and the situation becomes sticky.

2. Open Communication & Fairness: Take for example,  two founders who want to add a new marketing individual to the team. Whether this individual comes in with a substantial equity stake or on a salary it is important for the founding team to keep communication channels as open as possible. I have noticed that when groups are formed or information withheld, it leads to a drastic decrease in loyalty as the feeling of being ‘part of the team’ is not there. Have regular feedback sessions to understand the sentiments of the team. Trust has got to be earned and the only way this can get done is by communicating and getting to know the individual better.

3. Development Opportunities: Do your best to give everyone the opportunity to showcase their skill sets as well as learn new ones. I have been pleasantly surprised many a time when I found that a technical team member had some pretty extraordinary presenting skills or marketing insights. At a start up there needs to be strong focus on getting your team members to open up and move out of their comfort zones. If they don’t feel like they are growing and getting experience, which they would not have received in large organizations, chances of them defecting increase dramatically.

4. Fair Compensation & Reward: As hard as we attempt to get people to work for as little as possible in lieu of a big pay day, down the line, chances are they are going to react at some point in time. First off, compensation and rewards need to be discussed before adding the individual to the team. They should have a good idea what to expect to make, as well as how they will be compensated with non cash benefits. There will be times when cash flows are thin and payroll expenses may not be met. This is a time for open communication and ways of compensating them differently, greater equity or the ability to work part time needs to be offered.

Employee loyalty is directly linked to customer loyalty and corporate profitability. Whether you are a new start up or an established one, this measure needs to be continuously monitored. Sub indicators such as burnout thresholds are critical to ensure that you know when to apply the brakes. It is undoubtedly a challenging juggling act and becomes harder as the team begins to expand. By monitoring this metric from the beginning a start up has a substantial advantage and can use it to develop a sustainable competitive advantage.