It is extremely common nowadays to talk about the importance of having indicators and goals defined for an area or company. But it is not always a simple task to define which are the most suitable indicators, how to break them down and how to set targets for each one. The purpose of this post is to help you think in a practical way about which indicators you can use for your business and define your goals.
How to define Indicators
As the name says, indicators "indicate" something, they serve to signal if the company or area is on the right path. Without metrics it is impossible to know what we need to do to improve and too many metrics can confuse and distract from what is really important. For this reason, it is essential that we only measure what will help us to make relevant decisions for the improvement and growth of the business.
As we commented in other posts, in which we talked about two major management methodologies, the PDCA method and the Balanced Scorecard, all organizations aim to meet the needs of their stakeholders (interested parties): shareholders, customers, employees and society. Therefore, it is essential that every company has indicators that signal the satisfaction of each one. Some examples of indicators are:
Shareholders: EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization) and Revenue Growth;
Clients: NPS (Net Promoter Score) and Churn;
Collaborators: eNPS (Employee Net Promoter Score) and Turnover;
Society: Amount of CO2 emitted in the production process.
In addition to this framework, we can use the Balanced Scorecard, a methodology developed in the 1990s by Harvard professors Robert Kaplan and David Norton used to define objectives and goals that are really relevant to the business. It uses four perspectives that seek to resolve the following questions:
Customers: How do customers see us?
Internal Processes: What do we need to excel at?
Innovation and learning: Can we keep improving and creating value?
Financial: How do shareholders see us?
As you can see, Balanced Scorecard perspectives are tied to stakeholders, but they also take into account very important factors such as the clarity of which processes the organization needs to benchmark against its competitors and how it can continue to innovate and learn . For each of these perspectives, objectives and goals are defined, as described in this post.
These are some of the ways you can define your more general business metrics, now we need to break them down into smaller areas of the organization and, if possible, down to the employee level. In this way, everyone in the company will have interconnected indicators that together impact the main indicators of the company as a whole.
It is important to be clear about the main objective and deliverables of each area so that we can think about the indicators. For the sales area it is clearly the sales volume and total monthly revenue. We can break down the revenue indicator as follows.
As much as the equation is making sense, we have the opportunity to further expand this indicator:
Realize the importance of unfolding this indicator. If we hadn't done that, at the end of the month we could see that the average sales volume per seller was below expectations, but we wouldn't know if it was due to the low volume of customers served, which is related to marketing efficiency in the acquisition of potential customers and the speed of service of the sellers, or the low conversion rate in sales, related to the efficiency of the sellers.
In addition to measuring indicators that mathematically form the result, it is very important to think about those that are most related to the process, that is, that even though they do not mathematically form the result, they have an influence on it. For example, the sales conversion rate is an indicator that depends on several factors such as:
Sales pitch;
Stage of the shopping journey that the customer is;
Average customer waiting time to be served;
Average sales cycle time.
Although it is a little more difficult to quantify how adherent the sales team is running the pitch, the other metrics mentioned can be quantified more easily. The Step of the customer's purchasing journey, which actually means the customer's propensity to buy in the current situation, can be measured using Lead Scoring, and would be the responsibility of the marketing team.
Therefore, we must always remember to define indicators that measure stakeholder satisfaction and those that represent the main objectives and deliverables of each area. Each of these result indicators must be broken down mathematically and later on without thinking about the process indicators, which can also indirectly impact the result indicators.
How to set goals
After defining the indicators, we must define a goal, which is composed of an objective, a value and a deadline, as shown in the example:
Example: Increase EBITDA by 5% in 1 year.
Objective: Increase EBITDA
Value: in 5%
Term: in 1 year
However, to define a value, and later a deadline, we must compare our results with something benchmarking, basically there are two ways to do this:
Internal Benchmarking: Historical data from the company's own results are used for comparison. The advantage of using this analysis is the ease of accessing information, but it has the disadvantage of companies with a small track record, either for having a short time of existence or not having correctly registered the metrics for a significant period.
External Benchmarking: Competitor results data are used for comparison. It has the advantage that we are comparing the results with those we have a clear need to overcome, but the disadvantage is that it is not always simple to get certain information.
The difference between the company's result and benchmarking is the opportunity for improvement, the goal can be the total value of the opportunity as a portion of it.
In addition to the opportunity, to define the value of the goal and deadline, the company's situation must be taken into account, in some cases there is an urgent need for improvements to ensure the organization's survival. Another care is to ensure that the goal is realistic to be reached, one of the main objectives of setting goals is to motivate the team, if the team does not believe it can achieve it, it can have a negative effect on results.