The 5 Characteristics of an Effective Business Metric
In successful organizations, employees are held to high standards. They understand how their individual jobs lead to the organization’s success. This motivates them to attain their goals. How do their leaders achieve this? It’s all about setting the right metrics.
Leaders create high-performance cultures by linking all goals to metrics that help predict business success. Then they measure performance regularly. Here are the five characteristics of an ideal metric and how to apply them.
The 5 Characteristics of a Good Metric
- Easily measurable: A good metric should be relatively simple to measure. If you have to build a new system or implement a complicated process just to measure the metric, it’s probably not worth measuring in the first place.
- Directly correlated to business performance: The metric should be tied to business-oriented goals you establish for the department, group, or company. The right metric will tell you if you are successfully executing the fundamentals.
- Predictive of future business performance: The best metrics do not tell you just how well you’ve done (your financials tell you that); they tell you how well you’re going to do – in the next month, quarter, or year.
- Isolated to factors controlled by the group it is measuring: It’s difficult to do, but identifying those fundamentals pertaining to a particular team will tell you much more about their strengths and performance.
- Comparable to competitors’ metrics: It’s helpful to track your progress against competitors. This will help you judge how well you’re building or maintaining an operational advantage, holding on to top talent, and retaining top customers.
The Ideal Metric in Action
Let’s say you are trying to come up with a good metric for your sales organization. Contrary to popular belief, total revenue is often NOT the most important metric for sales. First, while revenue is fairly easily measurable and correlated with positive business performance, it’s not predictive of future revenue.
Most metrics reflect past performance. This is particularly true of financials. For instance, revenue tells you how many deals your sales team closed – last quarter. It doesn’t tell you anything about what might happen in the coming quarter.
Second, revenue is not totally isolated to the performance of the sales group. Sales teams are often impacted by conditions outside of their control, such as the quality of product, economic conditions, etc. If the product performs poorly, even the best salesperson might not be able to sell much. Conversely, a great product might rack up huge revenue even with a mediocre sales group. Because low revenue doesn’t necessarily correlate to a bad team or poor effort, it’s not a great sales metric.
In my experience the best metric for sales is the accuracy of revenue forecasts. As any good salesperson knows, making a sale is a process. The better you understand the process, the better you will be at maximizing the revenue possible within the given market conditions.
Therefore, the ability to predict revenue measures how good a sales team is at understanding the sales process. For example, at one of my former companies we expected the final sales numbers to be within five percent of the forecast at the beginning of the quarter, and we almost always hit that target. Building excellent forecasting into the company’s sales culture gave us a strong competitive advantage.
Strive for as Many Criteria as Possible
Ultimately, the only way to understand if you are achieving the right level of performance is by consistently measuring your progress on goals using relevant metrics. Not many metrics fit all five of these characteristics, but they should meet as many as possible.
The first conversation you have with every new manager should revolve around this question: “What three to five metrics can we come up with that tell me whether or not you are doing a good job?” Often it takes some trial and error to find metrics that are as ideal as possible, but the effort required will pay off in the long run.
First appeared on Inc.com