Which Metric Really Drives Your Business?

Everybody has a favorite business metric.  Read any best selling how-to manual and somebody will try to sell you an abstract parameter that will surely make you successful.  All you have to do is tweak up that metric and your bonus will break the stratosphere.

My favorite metric is profit.  Profit is a business’s most critical measure.  Without profit, everything else is irrelevant.  You can have the best compliance record in the business and you will soon be out of business.  You can have the best customer satisfaction ratings in the business and you will soon be out of business.

The problem is that profit is a trailing indicator.  You don’t know if you’re going to get it until you have it; or you don’t.  Your job as a manager is to figure out what the leading indicators are for your business that cause profits to rise.

Once you do that, the rest is simple.  Manipulate the leading indicators, then sit back and watch the money flood in.  There’s only one problem.  You don’t know what they are.

Chances are that you know some concurrent indicators.  They can tell you quickly how your business is doing right now.  If something goes wrong, you’ll see it here first.  My favorite concurrent indicator is First Pass Quality Yield.  This is the percentage of units produced, or services rendered, that meet all specifications the first time; with no scrap or rework.  In FDA regulated industries we include the paperwork in specifications.  In other words, a batch of product whose records have missing or incorrect information would be considered non-passing.

Another good concurrent indicator is percentage of CAPAs verified as effective.  In FDA regulated industries, errors need to be investigated through a process called Corrective And Preventive Action.  These actions need to be verified for effectiveness.  Good management dictates that the success of these CAPAs be tracked.

If you react immediately when a concurrent indicator goes south, you can make some changes and possibly save the business.  But truth be known, you’re guessing.  You don’t really know if those changes are going to work.

The reason is that most of those indicators, trailing, concurrent, and even some of the leading indicators, that seem to correlate with high profits, are not causative.  Correlation does not mean causation. 

How do you, as a manager, know what constitutes a causative indicator?  If you’re a manager with a typical level of self esteem, you’ll be disappointed to hear that you can’t know.  Not only that, but you don’t want to know; at least, that is, until your employees tell you.

Why don’t you want to know?

• You don’t have time to know.  The deep, causative indicators that can drive profits happen at the hands-on level.  If you have the time to peer into the daily activities of all your employees, you do not have time to perform your real job, which is to establish the conditions that allow your employees to make the business work.
• If your employees find those causative leading indicators themselves, they will be motivated to act on them, because they will own them.  Those leading indicators are their leading indicators.

Help your employees to find causative indicators by training them how to identify them and then by giving them the resources to do something about them.  For instance, what kind of tasks end up being done right the second or third time in your department?  Have you asked your employees to list them, proritize them, and send them to you?

Your job is not to know and control every last detail in your business.  Your job is make sure that your employees have the problem solving skills to determine those leading indicators, and can work together to improve them.  This is not a new concept.  It has been done before with great success.

Once you have that system in place, then your bonus will break the stratosphere.