There are many meaningful metrics that can be used to assess your business: return on investment (ROI), employee and customer churn rates, revenues, EBITDA, and so on. The difficulty is determining which metrics provide the greatest insight. After all, the objective of your metrics should be to minimize any perspective blinds spots in your business.
Metrics are used to drive improvements and help businesses focus their people and resources on what’s important.
An important factor to the successful use of key performance indicators (KPIs) is having the ability to take a step back and determine what makes sense for your business. It is also critical to understand that the significance of certain KPIs may change over time. When establishing metrics, always take time to think about the factors that make a difference to your decision making.
Every metric provides a certain perspective on your business. Some metrics tell you there is a problem today. Others metrics give you a heads up that there will be a problem down the road. Metrics can also have very different scopes. For example, total services revenue indicates how the overall business is doing, but provides little insight on individual performance. Individual utilization metrics provide insight on individual performance but do not necessarily convey the overall health of the business.
To determine if your metrics make sense, you should apply these five simple tests.
1. Are they Actionable? The purpose of every metric is to convey relevant information about your business. In order to be useful, that information must be actionable. There is no purpose in tracking a metric that cannot be acted upon. Always evaluate your metrics by asking this fundamental question: can I make a business decision based on the metric?
2. Are they Understandable? Defining a metric is similar to telling a joke – if you have to spend too much time explaining it, then it will not work. Do not fall into the trap of establishing over-complicated metrics. Your focus should be on tracking metrics that can be understood, not only by you but by your employees as well. Employees need to understand the metrics in order to know how they can influence them and what is expected of them.
3. Do they have a Functional Impact? Every metric should help you evaluate at least one business function in your organization. Be sure your metrics are focused on the sales organization, the operations team, the marketing group, etc.
4. Do they have an Economic Impact? Almost every internal company initiative has one of two objectives: improve operational efficiency or create future revenue. Your metrics should track improvements along one of these paths. If your metrics don’t provide information about operational efficiency or generating economic value, then they should be abandoned.
5. Do you Understand the Time-frame? You should understand if your metrics are leading or lagging indicators of how the business is performing. Does a metric indicate you currently have a problem or does it warn that soon you will have a problem if the current trend continues? Be sure and understand the timeframe factor related to your metrics.