Saturday, April 16, 2011

You Are What You Measure

Over the years, I've been fascinated with how the personality of firms is shaped by the metrics they choose (or don't choose) to apply to their business. Some firms stress growth. Others profitability. Still others seem to care little about financial performance as long as they can pay the bills. There are distinct corporate cultures associated with each. Indeed, there is a growing body of evidence indicating that firms become what they measure.

Why is this so? In large part because the metrics a firm prioritizes drive which employee behaviors are reinforced. Recognition and advancement are typically tied to those measures that matter most. Those who excel in achieving the favored metrics are promoted into key management roles, which further entrenches those metrics as defining characteristics of the firm. Core metrics, not core values, are what managers seem to stress most.

This means that choosing the right metrics is crucial, not only to your firm's identity, but to its success. So is your firm measuring the right things? Misguided or overemphasized metrics can draw limited corporate resources and attention away from your firm's real priorities. Here are a few suggestions for selecting and applying the optimum metrics:

Align your metrics with your values and priorities. Most firms claim to place great stress on satisfying their clients, for example. But how many of them actually measure client satisfaction? Perhaps one in four. These same firms will probably say they place high value on satisfied employees. But most don't survey their employees to gauge their satisfaction either.

You should also consider how over-emphasizing certain metrics can conflict with your firm's values and priorities. Take utilization, for example. Firms that constantly beat the drum about utilization may unwittingly encourage employees to stretch out tasks or charge hours they didn't actually work--actions that obviously run counter to a commitment to serve clients well. This can also impede productivity, lowering your net multiplier and perhaps nullifying the benefit of a little higher utilization on profitability.

Don't confuse the metrics you monitor with those you manage by. Everybody tracks measures like revenue growth, profitability, overhead rate, sales, etc. But how much these metrics influence corporate behavior varies widely. Your managers and other employees readily recognize which metrics really matter. They're the metrics that are repeatedly talked about, that drive decision making, that managers are held accountable to meet. All other measures may be interesting, but they don't really impact performance. Are you reinforcing the metrics that are most important to your firm, or simply giving them lip service?

If it matters, then don't be afraid to hold people accountable. The reluctance of managers to demand certain levels of performance is widespread in our profession. Many managers are afraid that holding people accountable for meeting performance goals leads to an impersonal, numbers-driven culture that drives employees away. While that can certainly happen, my experience indicates that more employees leave due to a lack of accountability than because of it.

Studies have found that one of the most negative workplace influences is managers failing to deal with underperformers. Most employees want to work for firms committed to success. They want to set high standards, to compete with the best, to strive for ambitious goals. When a firm establishes metrics that it isn't serious about meeting, that actually works against the goal of creating an attractive workplace.

There are obviously right ways and wrong ways to manage by the numbers and hold people accountable. Don't assume that taking difficult management actions to meet established metrics, such as cutting staff or closing an office, will automatically discourage your staff. On the contrary, employee morale often improves after such actions. In general, the strongest company cultures that I've seen are in firms that have the will to manage to their metrics, even though this involves taking tough actions at times.

Benchmark against the best. Most firms define metrics in part based on what other firms in their business are doing. This is highly recommended, but too often goals are based on industry averages rather than on what the top performers are achieving. The common reason for doing this is that the firm hasn't yet met even the median for the industry. So it seems appropriate to select the median as the goal, rather than striving for the top 10 to 25 percent. But I'd recommend that you choose at least a few important metrics where you want to be among the better performers. The median may suffice as a temporary goal, but reach higher where you can. It's hard to expect your employees' best performance if the company's targets are only average!

Use both leading and trailing indicators to measure performance. Companies typically use trailing indicators like profit margin, incurred costs, and turnover rate. These certainly have value in managing the business, but they amount to looking in the rearview mirror to see where you've been. I encourage you to also establish some leading indicators, which usually involves tracking actions (i.e., behaviors) that the firm has targeted to improve performance. Examples are completing project management plans, benchmarking service expectations, conducting third-party project reviews, implementing key account plan actions.

Leading indicators provide a proactive measure of performance by confirming that you're doing the things that you believe will lead to improvement. Used in combination with the more common trailing metrics, you can both (1) have a more accurate sense of progress and (2) reinforce the behaviors that lead to better performance.

Every firm uses metrics, but many fail to use them in an effective manner. Let me urge you to revisit your metrics. Ask these questions:
  • What are the things that matter most to our firm?
  • Are we measuring our performance in these areas?
  • Do we give appropriate emphasis to the metrics that we value most?
  • Do we overemphasize other metrics?
  • Do we hold people accountable in the areas that we say are priorities?
  • How can we make better use of leading indicators?

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