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How should CEOs select business metrics?

Written by: Hemant Karandikar

Article Overview: Metrics or measurements used for reviewing and planning various aspects of business have a lot of bearing on the results because what is measured and inspected is considered important by people. Metrics can be classified as historical or forward looking. Bias for historical data and analysis needs to be overcome. Customers, employees, and cash flows can provide vital clues to CEOs aiming to establish more forward looking signals and metrics. One can derive actionable points from even historical metrics if root-cause analysis for coming up with pro-active actions is done. Will all this take CEO's attention away from vision, innovation, and inspiring people? No. The above methods provide a springboard for day to day innovation and path breaking ideas. They also support realizing the vision.

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How should CEOs select business metrics?

Successful leadership depends on soft aspects like vision, innovation, inspiration, values, and people skills. But if a leader has to build a strong, thriving, and sustainable business, there is much more to do. Metrics or measurements used for reviewing and planning various aspects of business have a lot of bearing on the results because what is measured and inspected is considered important by people. More importantly, well designed metrics can offer diagnostic value. CEOs can extract powerful yet practical action points if they examine their business metrics. Most companies have fixed measurement systems that define parameters, frequency of measurements, and benchmarks or budgets.

Rear view mirror or looking ahead

Management reports contain various kinds of information -financial, operational, market related etc.

Most reports -sales statements, market analysis, production data, expenses, P & L etc. -give historical information. Generally these metrics do not offer clues about what to do to improve things for tomorrow. It is natural for CEOs and their teams to be comfortable with analysis of past but not with forecasting and scenario building given their training and experience.

Metrics can be classified as historical or forward looking. Most standard financial statements and operations reports are historical in nature. Examples of forward looking indicators are: project announcements by customers (of B2B businesses), other demand drivers (government spending, festivals , tax changes.), interest rate movements, commodity price movements etc. But what really matters is how they are put to use. One can derive actionable points from even historical metrics if root-cause analysis for coming up with pro-active actions is done. Without a proper analysis, only some of many probable causes are found. Individual biases and comfort zones may influence this pre-selection of causes. One encounters pre-selection of causes in all areas of business. In such situations, it helps if the root cause analysis is done by cross-functional teams using formal techniques -e.g. Fish-bone diagrams. Such techniques encourage open thinking.

Overcoming historical bias

Bias for historical data and analysis needs to be overcome. Customers, employees, and cash flows can provide vital clues to CEOs aiming to establish more forward looking signals and metrics.

Customers send out signals through their conversations, emails, letters, and business decisions. In addition to dealing with customers' immediate needs, good leaders ensure that the signals related to changing preferences, being under-served or over-served, competition, other ways of meeting their needs etc. are captured and are used for extending the scope of metrics and later for altering market offerings or aligning customer touching processes.

Other area to watch out for is what your own people are saying about your company and your market offerings. Customer service or even operations people can provide very useful signals. Your people know your offerings well and are not taken in by what your communications say.

Cash flows, past and projected, can uncover a lot that is usually is not 'seen' by the leaders -e.g. faltering cash inflows from customers might be a precursor for worsening demand situation.

The problem with such signals is that they appear to be random and inconsequential. Inability to put numbers on them poses 'cultutral' challenge for most CEOs. But these signals can give important clues about what else needs to measured. Therefore they need to be investigated and followed through by more information gathering.

Developing and realizing vision

Successful leaders do a great job of seeing things as they are. Forward looking metrics, signals, and root cause analysis open up for them more aspects of reality. Will all this take CEO's attention away from vision, innovation, and inspiring people? No. The above methods provide a springboard for day to day innovation and path breaking ideas. They also support realizing the vision by helping implementation of strategy.

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Article Tags: benchmarks, biases, business metrics, ceos, commodity price, demand drivers, diagnostic value, government spending, historical information, interest rate movements, management reports, measurement systems, operations reports, pre selection, probable causes, project announcements, rear view mirror, root cause analysis, sustainable business, tax changes

About the Author: Hemant Karandikar
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Hemant Karandikar advises companies on business & brand strategy, on business transformation, and for achieving breakthroughs in business processes. He leverages this expertise in product creation projects for companies along with his design associates. He coaches business leaders and executives for developing leadership skills. Hemant founded Exponient Consulting and Learning Leadership. Previously, Hemant was Managing Director, GWT Global Weighing (now Sartorius Mechatronics) and held position of General Manager at Philips India. He is an alumnus of Indian Institute of Technology, Bombay, India.

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