Coming up with and tracking a bunch of metrics related to your business is not the same as developing a scorecard to drive strategic outcomes within your business. There are so many things that we could track that we can easily get distracted from the few things that matter.
Effective scorecards assess business performance from perspectives that influence the ultimate success of the business; Customer, Operations, Financial. Assess market perspectives is not directly within your control but is a useful add to the scorecard to ensure you don’t get blindsided by market movement that forces you into a reactive mode. So, what’s the one thing your Customers care about the most? What Operational metric most controls your success or failure with customers? And, what one financial metric determines your ability to succeed and continue business operations? These are what I call Tier 1 metrics.
Tier 1 metrics are your business outcomes but, not where you manage your business. For example, most business leaders tell me their Tier 1 Financial metric is profit. That makes complete sense but, can you, from the rise or fall in this metric identify the appropriate and accurate action to take to move profit in the right direction. The short answer is No. If you profit falls, you may immediately drive to slash costs without realizing that the driver had more to do with market pricing and customer switching due to satisfaction and rarely have I seen cost reductions that create better customer satisfaction (except in the digital space).
Tier 2 metrics are where you, as the leader manage your business. These are the direct controllable factors of your business. Tier 2 metrics become leading indicators of success against Tier 1 metrics. For example, perhaps you run a local service business and customer satisfaction is a Tier 1 metric for your business and you’ve learned over time that waiting times influence customers’ assessment of your service. Waiting time, then, is a solid Tier 2 metric but, it may not be the only one.
Tier 3 metrics are where your leaders manage their shops and represent individual levers to shifting performance of Tier 2 measures.
Let’s use the example of a small manufacturing company selling business to business. Their metrics may look like this:
Take the time to understand the metrics that are really driving your business and I promise you will learn something. Even in situations where you’ve built the business with your own two hands, you may learn there are underlying factors undermining your success that you just haven’t been keeping an eye on. If you don’t learn anything, your managers and employees sure will. The benefit of a clear and concise scorecard is that it aligns your entire organization around the key measures of your business. If designed properly, it ensures that your employees’ actions are driving successful business outcomes. Too often, employees manage their own desk without a clear connection to the overall success measures of the organization and while they maximize their results, they may be taking away from the performance of the business as a whole.
If you or your organization would like assistance in building your strategic plan, facilitating the leadership planning discussion, mining the metrics for the business or just want to see if you are on the right track, reach out to me at email@example.com.