Defining Winning: Just One Metric

April 28, 2015 — Leave a comment

By Bill Fotsch

At many companies, you find that most employees have no idea whether their company is winning.

Instead you hear talk about goals. Employees have their key performance indicators (KPIs). Managers have their sales goals or production goals or budget goals. It’s like a basketball team where one player focuses on his free-throw percentage while another is worrying about the number of rebounds he gets—and nobody’s paying attention to the score. 

But wait! (I hear you say). Business isn’t sports. In business there are always multiple objectives—increasing market share, improving quality, boosting revenue, maintaining margins, raising employee retention rates, and so on. Look at the Balanced Scorecard, developed at Harvard Business School. That’s one way of incorporating many different measures into one overall dashboard.

Right. I actually graduated from Harvard Business School. But where the Balanced Scorecard is concerned, I’m reminded of what a lot of people think of socialism. Might be a nice idea in principle, but it doesn’t work in practice.

The trouble with multiple success metrics arises when someone has to make a decision that involves trading off one goal for another. Do we want to improve market share by lowering our prices—or do we want to maintain our prices to protect our profitability? Higher market share is good. Profitability is good. But when you must make a decision on pricing, you may have to trade off one versus the other. So what’s the right decision?

A simple definition of winning—one single metric, with a clearly defined target—solves that problem. It makes things simple and straightforward for everyone. You can make the appropriate tradeoffs because you know what the company’s priority is right now.

And that’s the key: the definition of winning can and should change from one year to the next, reflecting a company’s changing business situation.

If a company is highly in debt and has a shaky cash flow, its focus has to be on generating cash. Improved market share is fine so long as it doesn’t interfere with generating cash. If a company is well funded and looking to grow, by contrast, higher market share may be more important that near-term profits or even cash flow. This company’s definition of winning might be a certain goal for revenue growth. 

To be sure, some companies find that they have two competing priorities in the near term, so coming up with a single “winning” metric is hard. Take an application software business. The money it makes in the current year comes from sales of upgrades and features developed in the previous year. So if you ask the software company which is more important, development of new upgrades and features vs. sales and profits from last year’s developments, you’ll stump them.

But there’s usually a solution to this kind of dilemma. One software company I worked with, for instance, decided to focus everyone on current-year sales and profits, but with a budget for development of next year’s products. Even though it wasn’t spending the development money right away, it still deducted the budget from profits.

The result? The team had no incentive to underinvest in development. But if it spent more than it had budgeted, the difference came out of profit. So everyone knew what it meant to win.

If you’re not sure how to come up with one metric for your business, check out next week’s blog, which will be on that subject. Better yet, get in touch with me directly. I’d be glad to talk it over with you and come up with a solution together.

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