Effective Management Requires Good Metrics
“If you can’t measure it, you can’t improve it.”
Peter Drucker
11 Types You Need to Know by By Bruce Eckfeldt
1. Absolute number. This is the simplest of metrics. Use it when you only want to know the count. Some examples include number of widgets produced, total headcount, and total revenue.
2. Equivalence number. The best example of this is Full Time Equivalent or FTE. This number is helpful when you have lots of fractional or partial units and you want to know what they all add up to. Use this when you want to see the net impact or total effect.
3. Relative number. Often times, it's better to see things as a ratio or a proportion. For example, if you're growing quickly, I like using Accounts Receivable (AR) as a percentage of recent revenue to check to see if our AR is growing faster or slower than the overall business. Many times I've seen AR grow but the ratio decrease, which means that we're actually doing a better job of collecting.
4. Number per unit of time. If you want to track a rate or pace, you need to introduce a unit of time. Calls per day or visitors per hour will give insight into changes in activity and rates are better and more meaningful than simply looking at cumulative numbers.
5. Percent of target. If you have a clear number that you're trying to reach, try measuring results as a percentage. For example, if you're trying to hit $24,500 a day in website orders, showing $22,345 as 91.2 percent is easier to compare and interpret.
6. Percent of forecast. If your target is changing over time, set your percentage relative to the changing forecast. This is critical if your business has any seasonality or business cycles. If you're in retail and you use straight line monthly sales targets you'll be grossly misled. Instead, set monthly or weekly targets based on known peaks and valleys and report actual sales as a percent of those forecasts.
7. Rate of change. When a company is growing, we expect numbers to increase or decrease. So instead of looking at a straight percentage, also show the change in the percentage as a percentage. For example, page views might be going up, seeing that this week's increase was 34 percent lower than last week's increase will catch your eye.
8. Rolling average. If your data is highly variable, it can be difficult to see trends. In this case, take the average of the most recent few days or weeks to get a rolling average to smooth out the ups and downs so you can see the bigger picture.
9. Within limits. This comes up a lot when there is an acceptable tolerance in industries such as manufacturing and product distribution. Here you want set a target and then report on the absolute difference between the actual and the target.
10. Step functions. If things are a little more complicated, you might need to use a step function. This helps when you have measurements that require different levels. For example, if different resources are paid different amounts, if different processes have different costs, you'll need ranges.
11. Multivariate functions. If you have multiple variables that feed into a calculation, you need to create a function. Sophisticated sales forecasts take into account the size of the deal, the type of client, how long it's been in play, and the service being proposed in order to come up with a total pipeline value.
Regardless of the metrics you use, be sure to balance the complexity and cost of collecting and analyzing the data with the benefits you get once these metrics become management tools for your company.
Additional Reading
Metrics: How to Improve Key Business Results by Martin Klubeck
Measure What Matters by John E. Doerr
Points of Reflection
“In God we trust. All others must bring data.”
W. Edwards Deming
“It is a capital mistake to theorize before one has data.” Sherlock Holmes, “A Study in Scarlett”
Sir Arthur Conan Doyle