A company’s performance directly relates to how it defines and measures success. Measuring success in business by acquisitions and revenue growth alone overlooks underlying issues in processes, which, eventually, can result in margin erosion and reduced financial performance.
Your company may measure performance already, but do your performance metrics tell the whole story?
Many organizations measure success by results: assets gained, revenue earned, customers satisfied. However, such performance metrics neglect to consider how you achieved these results and who these results affect.
Business Performance Metrics That Tell the Whole Story
Imagine a delivery company that distributes packages to customers across the country. While the company certainly generates revenue from its deliveries, its package tracking system is glitchy and unreliable, leading to many lost packages and dissatisfied customers. Additionally, the company doesn’t have a standard organization method for packages at its distribution center, which creates longer processing times and increases the number of packages it loses.
If the delivery company’s executives measured their business’s success by generated revenue alone, they would consider it successful. But if they zoomed out to consider their entire operation, the executives would discover that their business’ flawed processes prevent it from reaching its full potential.
Results don’t appear out of thin air. They derive from processes and the people who implement them. Therefore, inefficient processes, ineffective communication or low motivation can compromise your business’s success, despite result-driven metrics that indicate otherwise.
How Operational Excellence Helps
By contrast, operational excellence uses a holistic approach to measure success in business. Driven by continuous improvement, the mindset that an organization can always improve its workplace experience, business processes and outcomes, operational excellence always considers two “P”s: people and processes.
The foundation of operational excellence is process excellence – routinely inspecting core processes to ensure they are efficient, effective and align with the organization’s goals. Within a process excellence framework, organizational leaders understand what you consider success and how you measure it affects employee decision making.
Business performance metrics, then, should build an alliance across many teams in your organization, from sales to marketing to finance, and empower individuals on every team to make decisions that improve their colleague’s work environment and optimize their processes.
Generating Buy-In to Holistic Performance Metrics
Many organizations struggle to see the value of performance metrics because it takes more effort to examine every facet of an organization than to assess what it produces. Additionally, measuring success in business with performance metrics requires an organization’s leadership to reflect on difficult topics:
- How do we currently define and measure success?
- How do we make decisions based on our definitions?
- Are our decisions driving the wrong behaviors in our employees?
However, reflecting on these questions to identify areas for improvement can push your organization to the next level. Often, improving your processes requires linking your performance metrics to your overall corporate strategy. Aligning processes to organizational goals instills high-level understanding that empowers your business and drives performance.
Once you make changes to your processes and performance metrics, it is critical to nurture them with consistent feedback and analysis. It simplifies processes, improves quality, streamlines decision making, and motivates your employees to do the right thing for your customers and each other. The results of process excellence speak for themselves.
Applying a Process Excellence Framework to Business Performance Metrics
Assess Your Current Situation with a Performance Measurement Checklist
Before you adapt your processes and redesign your performance metrics, you must assess your current situation. Ask yourself these questions, which are all rooted in process excellence:
- How do you currently measure business success?
- Does this measurement align with your corporate mission, vision and strategies?
- Do you have a govenrnace to review performance to ensure you achieve your desired results?
- Do you have governance to review initiatives expected to drive performance improvement? If so, how often do you take advantage of your review process?
- Does every project fit within your performance measurement plan?
- How would you react to your performance metrics based on what information you would measure today?
- Does every employee know how their work ties into your overall business strategy?
- How does measuring business performance change the actions or behavior of your colleagues? And, does it drive the right behaviors?
By evaluating your responses to this checklist, you have established a nuanced understanding of the current state of your business. Perhaps you’ve already identified areas for growth. Now, you can plan to improve.
Identify Your Organization’s Mission
Establishing a performance metrics framework that stands the test of time is critical, and it’s one of the most poorly executed aspects of business today. The right framework for performance measurement is one that aligns with your organization’s mission. But how can you create performance metrics that not only reflect your organization’s goals but also are mindful of fast-changing economies and ever-evolving culture?
Applying Mission-Oriented Metrics to Today’s Environment: H&M
H&M’s mission is to provide “fashion and quality at the best price.” Their vision statement centers around their target consumer base, individuals who are mindful of how much they spend on clothing but don‘t want to skimp on style. Promising affordable, on-trend clothing for men and women, H&M prioritizes customer satisfaction as a performance metric.
However, customer satisfaction, along with other more traditional metrics like shareholder return, are influenced by current social issues. Today’s consumers have a growing concern for the environment, including the impact of fast fashion, meaning the quality of the item on the rack is not always as important as the quality of the process that created it.
Responding to both drops in revenue and customer concern, H&M has pledged to lower its greenhouse gas emissions and use 100 percent recycled or sustainable materials by 2030. H&M retained its mission to produce economical, high-quality fashion, but it has expanded its performance metrics to reflect its new holistic approach to quality.
Takeaways
Your company’s mission, core values and culture should not change. How you interpret the needs of your customers, how you respond to market demands, and how you execute strategies, however, should continue to evolve.
Measure All Aspects of Your Organization
Once you establish the mission, vision and strategy of your company, you can then translate these into business performance metrics. These metrics must consider all facets of your organization and prioritize balance to accurately define its overall health.
According to Robert Kaplan and David Norton, a balanced scorecard considers four quadrants:
1. Internal (Employees)
Often neglected or even forgotten, employees are essential. Without them, there is no company. Metrics that assess employee experience and performance include:
- Company surveys and Glassdoor posts: Listen to your employee’s voices. Assess their general mood, primary motivators, and relationship to their day-to-day tasks.
- Learning and development: Execute training programs, mentorship opportunities, and other resources to assess and develop employees’ knowledge, skills, and capabilities in their respective roles.
- Turnover rates: Determine the rate at which employees leave your company, and identify strategies to reduce that number.
2. External (Customers)
Customer loyalty is indispensable to your company’s success. To measure customer satisfaction, consider these metrics:
- Customer feedback: Use surveys, interviews or online reviews to gather customer feedback. Additionally, monitor social media, where you can witness customer voices firsthand.
- Customer service: Monitor conversations on customer service phone calls and chatbot platforms to gauge customer satisfaction and observe how well your employees and services address customer concerns.
- Net promoter scores (NPS): Assess a customer’s willingness to recommend your company’s product or service to others. Through NPS, you can determine the rate at which your customer base expands while evaluating your current customers’ satisfaction.
- Customer segmentation: Divide your customer base into distinct groups based on either characterizations or behaviors. Then, target marketing strategies to these distinct groups to create a more personalized experience for your customers.
3. Forward (Process)
Establish key performance indicators (KPIs) for your processes. Do not consider averages alone. Look beyond the mean to the range and variation of the employee experience of working with these processes and the customer experience of receiving the results of these processes:
- Production defects for manufacturing: Determine the number or percentage of faulty or defective products made during the manufacturing process, so you can judge the efficiency and quality of manufacturing operations.
- Coding defects for software companies: Identify the number of errors of bugs in software code to gauge the reliability of your software development and maintenance processes.
- Turn-around time (TAT): Track the duration of a project from initiation to completion. Compare lead times, the time between request and initiation of a project, and touch times, the time spent actively working on a project, to determine a process’s efficiency and employees’ responsiveness to certain projects.
- Service level agreements (SLAs): Establish specific metrics, such as response and resolution time, within contracts to define the expected level of service and performance between a service provider and a customer.
4. Rearward (Financials)
Every company considers financials, but few do fully. It is crucial not only to collect financial metrics, but also to use them to understand previous decisions and feedback and to make improvement-driven decisions:
- Revenue: Analyze sales and revenue to determine your financial ability to generate income and sustain operations.
- Costs: Assess expenses to ascertain whether you are spending unnecessary money on inefficient operational processes.
- Margins: Calculate the difference between the selling price of a product or service and the cost of production and delivery to determine the profitability of each unit you sell.
- Inventory levels: Assess the frequency at which inventory is sold or used within a particular period to examine operational efficiency and cash flow.
- Projected savings: Use popular metrics, such as return on investment (ROI), net present value (NPV), or payback periods to assess the financial benefits and returns from a given process.
- On-time delivery: Determine the time it takes to deliver products or services to customers to uncover operational efficiency and reveal its influence on customer satisfaction.
- Fulfillment rates: Identify the percentage of customer orders and requests that are filled successfully to determine the efficacy of your order process and delivery systems.
“Scorecarding” is not a one-time event. Your performance metrics must continuously assess your company’s strengths, weaknesses, opportunities, and threats, so you can embody operational excellence.