Metrics: Measurement for Operational Excellence

Effective management of profitable revenue growth and overall value creation requires a relentless focus on operating and service metrics so that management can act with speed and proper direction to allocate talent and resources to correct operational issues before they become problems. Executive teams who spend the time to establish and regularly re-evaluate the correct metrics, and then put in place the processes for acting upon the data are those who can build and maintain operational excellence in high growth, challenging and/or rapidly changing environments.

According to Peter Bloom, our Managing Director responsible for technology assessment: “The philosophical underpinning for what we see in excellent companies is an obsessive focus on creating and measuring internal service levels as they are experienced by customers and partners. In some cases, CEO’s actually put a real-time display on the wall of their office so that customers and employees understand and are exposed to the service level metrics that are important to the CEO. It’s a surprisingly powerful tool that reinforces the management axiom – you get what you measure.”

The most relevant metrics are company and industry specific and they must be correlated to the overall strategic direction of the company. As one of our portfolio company CEOs stated, you must look to the future, determine what you want to be and then work backward to establish the metrics that will get you there. Company specific metrics must be established in the context of the competitive environment and need to include careful monitoring of performance statistics available for competitors (i.e. best in class measures, pricing, market share, financial performance, etc.) and customers (i.e. satisfaction measures, referrals or ‘net promoter scores’, returns, etc.).

Metrics must relate directly to major value creation opportunities, such as global expansion, m&a, major technology initiatives and major strategic relationships, among others. Most CEOs are finely attuned to the key factors driving performance within their companies, but fail to recognize the need to measure disruptive activities that could either enhance or impair value in the context of external factors. Creating “canaries in the coal mine” by using digital tripwires will draw rapid action to issues of significant value or impact.

Operational dashboards are essential and developing them requires four important considerations:

1. Understand, define and establish the ‘right metrics’ – Determine what is meaningful to the business and what you are trying to achieve. Dig deep to get the most relevant information and make sure it directly correlates to overall value creation. Include external data or benchmarks as standards.

2. Measure, track and disseminate accurate information to the ‘right audience’ – Systems have to be in place to measure and to measure accurately. Erroneous or incomplete data will lead to the wrong conclusions. The right information must reach the right audience so that appropriate action can be taken. In some cases, management will want to alert the entire company to heighten everyone’s attention to major initiatives and operational issues such as branding or m&a. In other instances, key data should reach those who can rapidly act on opportunity development or corrective measures.

3. Diagnose and act – It is critical to ask - what does the data mean and what problem, issue or inconsistency is it pointing to? Only then can you determine the appropriate actions. Information must be understood in context but information without action is useless. Acceptable ranges must be established and performance outside of those ranges must be immediate alerts to appropriate action.

4. Hold people accountable for performance to metrics – Consequences are critical both in terms of action and non-action. Issues can occur in any business and immediate action can be corrective, but there have to be consequences. Unless you complete this final step, the entire process is ineffective.

Monthly sales data, pipeline analysis, turnover statistics, margins, average contract values and several other statistics are generally part of an overall financial accounting and control system. However, while monthly financial reporting is necessary, this information is backward looking and may not be as predictive as needed. In product businesses, there are several metrics that provide valuable data including market share, competitive pricing, sales pipeline analysis, etc. In service businesses, other measurements reveal operational performance such as service uptimes, number of outages and duration of outages over time, time to restoring services, count of unresolved customer requests, etc. These operating metrics are more prognostic than a monthly financial report.

Clear identification and appropriate communication of the right operating metrics are especially important for public companies since analysts and investors develop projections and opinions based on key metrics. Metrics take on even greater importance for mergers & acquisitions, particularly since m&a can contribute significantly to value creation and it is essential to create consistency of focus with potentially disparate entities.

A measurement system is both a risk management tool as well as an opportunity beacon. Metrics can also highlight areas of opportunity in rapidly changing markets allowing informed strategic planning and execution. For further discussion of developing and re-evaluating metrics for operational excellence, please contact your GA team.