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Posted by Tom Cheesewright on

Measuring business metrics that matter

Every day’s a school day. It’s no different if you’re the ‘expert’ in the room.

I recently ran a workshop for leaders at a large global corporation, walking them through the Intersections foresight process and introducing Stratification, our framework for agile organisations.

We’re quite upfront that neither of these processes are a ‘magic bullet’ solution. They are simply different ways of examining, and potentially solving, a common problem: How do you build a sustainably successful business in an accelerated age?

How to find metrics that matter to your business

One component of the Stratification framework is a Unit Template, designed to help people understand the inputs, outputs, and key metrics of each business function. I built it as an attempt to segment out the functions of an organisation in a format that could be simply understood as a set of building blocks that — when assembled together — create value.

What I had never had to articulate – before a series of smart questions at the workshop – was where this set of functional metrics sat in the overall corporate hierarchy ,  a space often rich with different objectives and KPIs (key performance indicators).

This is in part the result of how our toolkit is developed: not through academic enquiry but through experience.

In two consecutive consulting projects it was clear that the leadership didn’t yet have a clear definition of the business metrics that matter. While the sales team can be measured by revenue, how do you measure procurement, finance or HR? Even marketing can be tricky: how do you measure business success across departments?

How do you measure business success?

We decided this was an important question to ask. Each of these functions contribute to the sustainable success of the organisation, but putting simple measures on their day-to-day activity to monitor performance is hard.

Sometimes people do it, and do it well.

Sometimes people create KPIs, but these measures aren’t always well thought-out or aligned to the corporate goals, let alone to each other.

For example, manufacturing might have a target for a minimum batch size, because that is what is most economic to produce. But logistics may be optimised around much smaller batches, based on what the customer wants.

Often though, people just don’t create these metrics at all. They provide individuals with a set of objectives, against which they can be measured. And they have a corporate set of KPIs to which everyone — notionally — contributes. But in the middle? There is an Objective Gap.

When all the numbers are going in the right direction, this is fine. Individuals might get pulled up for failing to hit their targets, but as long as the corporation keeps on a profitable growth track, no-one questions function-level performance.

Dealing with business inefficiencies

When things start to go bad though, problems become visible. Disconnects and inefficiencies become clear. Issues that should have been identified earlier if functions were properly targeted and measured. The objective gap widens.

Sometimes these issues are internal. Like the issue between manufacturing and logistics.

Sometimes they have an external effect, like the conflict between working capital and service benchmarks — another common issue. If a customer wants products quickly, you typically hold more stock of them to ensure they’re available on demand. But this requires more working capital, as well as storage space. Measure the right things at the right level and you can strike a balance, or perhaps identify the need for a more sophisticated solution. Measure just one, and you will operate to the detriment of the customer or the business.

Small world and big world problems

So, how can you begin to identify the business metrics that matter? You can begin by defining problems.

Small world problems

Corporation tax is what I would term a ‘small world problem’. Over the last few hundred years we have shrunk the world. Transport and communications technologies have brought us closer together. They have allowed companies to operate internationally, and migrate those operations to wherever conditions were most favourable.

Because of this, local action is pretty ineffective. Some countries have brought in ‘digital taxes’. But these have limited effect when companies can move their profits elsewhere.

The only answer is for everyone in the small world to work together.

Big world problems

Big world problems come about when power is too centralised. Because we can move information so fast now, we’re tempted to hold power a long way from where it is exercised.

Brexit is a big world problem. Not because power was unfairly hoarded in Brussels, though that was the perception. But because it was hoarded in Westminster. Many of us felt, and still feel, that we were disconnected from power. That we had little influence over it.

You can see this in the way people talk about politicians: “They’re all the same.” It’s hard to see the difference when they are so far away.

The only answer here, I believe, is to bring more power closer to people. Make its holders more visible and accountable.

Office politics

These aren’t the only examples of big and small world problems. And they don’t only exist in politics. We can find them in our own organisations.

Poor customer service is often a big world problem. Power and control are too far from the customer. The responses are slow and impersonal. As the customer, we feel disconnected from the brand.

On the other hand, slow strategic decision making is a small world problem. In a world that expects fast action, it is increasingly exposed.

Characterising big and small world problems

How can we characterise big and small world problems?

Small world problems are created or exacerbated by the mobility of people, goods, and particularly information. Their solutions require visibility of the whole and co-ordination from the centre.

Big world problems exist where the mobility of goods, people, or information are insufficient to overcome a sense of distance. Solutions require a speed of response and a sense of direct connection, usually only available through some level of proximity.

Can you see big world and small world problems in your organisation? And how will you go about solving them? It begins with measuring the business metrics that matter to you.

Tom Cheesewright