Performance Measures for Your Business: How to find and use the performance measures that really count

According to an article in CFO Magazine, “companies constantly lament that they collect far more data than they can analyze.”1 So how do you cut through the clutter to focus on the truly important performance measures for your business?

You need to create and track a short list of key performance indicators specific to your enterprise. The challenge is that there are several different approaches to build this short list.

A good solution is to build a custom list of metrics for your business using existing frameworks (preferably specifi c to your industry) and best practices. You can organize these metrics into categories and subcategories in an outline form that will allow you to see the range of performance measures and spot any gaps. Once your measures have been defined, you can create a scorecard to monitor your performance.

Which approach is best? All have merits, and it’s likely that the one best suited to you will use metrics from more than one approach.

For each of the five approaches below, let’s look at the basic categories covered and some plusses (+) and minuses (-).

Financial Reporting approach uses financial and managerial accounting reports for performance measurement

Category	sample metric
Income Statement	gross profit %
Balance Sheet	asset growth %
Cash Flows	cash balance

+ easy to get the data from your accounting system
- too narrow; may not address the underlying profit drivers; may not capture future opportunities or forward-looking indicators

Executive Summary approach uses the data assembled as part of the“board book” or executive briefings

Category	sample metric
Financial Overview	debt to capital ratio
New Business Pipeline	bids outstanding
Operational Results	% production yield

+ a comfortable and familiar approach that is probably already in use
- may contain legacy “we’ve always done it this way” measures that don’t link directly to higher perfomance; profit drivers may not be grouped or categorized meaningfully

Balanced Scorecard approach uses four main areas of focus to present a well-rounded view of your performance

Category	sample subcategory -> sample metric
Finance	cost management -> revenue per employee
Customer	customer satisfaction -> number of complaints
Internal Processes	build process -> number of defects
Learning & Growth	motivation & alignment -> suggestions received

+ presents a wide-angle view of your business; attempts to identify underlying causal relationships between metrics and performance
- over-emphasis on developing well-rounded perspective may run counter to corporate objectives, strategic focus areas, or organization strengths

Multidimensional approach uses a “data cube” framework supplied by a software vendor or technology consultant

 

 

Category	sample subcategory -> sample metric
Finance	profit drill down -> sales plan variance
Sales	sales pipeline -> sales calls made
Marketing	tactical marketing analysis -> % campaign response
Purchasing	supplier scorecard -> average lead time
Production	cause of poor quality -> defects by reason
Distribution	carrier scorecard -> % on-time
Customer Service	complaints, returns, claims -> number of returns
HR/IT	core competence inventory -> skill level gap

+ can be thorough if the metrics provided do indeed apply to your industry
- may be tied to an expensive software package or implementation methodology; may be too generic and not directly applicable to your specific situation

 

Industry-specific Profit Drivers approach uses a list of profit-focused metrics tailored to your specific industry

 

 

Category	sample subcategory -> sample metric
Increase Revenue	opportunities with current customers -> profitability by customer type business acquisition methods -> sales channels used by best customers
Lower Costs	labor -> staff retention rate operational efficiency -> productivity by employee
Strengthen Core Values	% production yieldproduct/service quality -> on-time delivery performance customer satisfaction -> complaints received

+ can save time since nuances of your industry or business model may already be addressed
- may need to be supplemented or cross-checked with other approaches for completeness

A blend of the above approaches, with an emphasis on industry-specific profit drivers, can create a solid foundation for building a thorough, performance-focused scorecard.