How to Find the Right Metrics (#234)
/In this podcast episode, we discuss how to find the right metrics for your business. Key points made are noted below.
The Need to Change Your Metrics
Metrics tend to be quite stale. There’s usually a traditional list of items, such as the ending cash balance, the amount of available debt left on the line of credit, or maybe a trend line of sales or profits. And then there are usually a few measurements that crept in because there were problems in the past, so the president wanted to start keeping an eye on them. For example, there might be a measurement for the number of customer returns, or maybe a measurement for the number of customer orders that won’t be delivered on time.
This existing set of measurements is not all that useful, for a couple of reasons. First, they tend to be focused mostly on financial measurements, which are too highly aggregated to be of much use. Just because sales have dropped by 4% doesn’t mean that anyone is going to take action. It’s usually not an overly large change, so it’s ignored.
A second problem is that they focus on the problems that the company used to have. Getting back to my earlier example, the number of customer returns is being reported, because it used to be the problem. It may not be a problem anymore.
A third problem is that the existing measurements are old, steady, and reliable. When managers focus only on these measurements, there’s a built-in assumption that there aren’t any other problems that need to be measured, so they never go looking for them.
The Controller’s Responsibility
And that last point is the real issue. When adding measurements to the financial statements, the controller has two responsibilities – one is to report them properly, which is what 99% of all controllers focus on. The other responsibility – which nearly everyone ignores – is whether the right measurements are being reported. Usually, the controller keeps shoveling the same measurements into the financial reporting package, maybe for years, without considering even once whether there might be some other issues out there that are flying under the radar.
Why don’t more controllers make an effort to find the right measurements? Or, for that matter, how come nobody seems to do it? The problem is that just about everyone is in a nice comfort zone. For example, the controller has to deal with the month-end close, the sales manager has to prep for a meeting with her sales staff, and the production manager needs to monitor the release of new jobs to the production floor. These are all administrative issues, and managers are usually quite competent at dealing with these kinds of things. None of these items need to be measured, unless the objective is to show how successful you already are.
How to Identify the Right Metrics
The real issue lies elsewhere. It involves digging around the company, and maybe outside of it, to figure out where the next problems are coming from. The controller is not going to hear about these issues at the next executive committee meeting, since the other managers probably have no idea that there’s an issue. Instead, you usually have to dig around in the roots of the organization, way below the other managers, to learn about the real problems. For example, Steve Jobs at Apple used to handle customer service calls every now and then, just to see what actual customers were saying.
Or, if you don’t want to go quite that far, how about digging through the customer service database – if there is one – to get a more aggregated view of customer problems. Or, talk to the people in the returns department to figure out which products are being returned, and why. Or, if the company submits bids to customers and loses a bid, how about calling the customer to find out what the winner had that you didn’t have? Or, how about talking to the purchasing staff to see if there’re any issues with receiving raw materials on time from certain suppliers? Or, how about talking to the people at the receiving dock to see if any suppliers screw up their deliveries? Maybe deliveries show up late, or they send incomplete orders, or they send the wrong parts. And here’s another one. What about tagging along on a field service call to repair a product in a customer’s home?
You could find out about whether the customer has to wait a long time for the service tech to show up, and what it is about the product that keeps breaking. And you have a great opportunity to chat up the customer and see if there’re any other problems.
Now, it could seem like this is going way beyond the normal job description of a controller. You’re snooping around in the areas of responsibility of the other department managers, which can create conflict. But consider that the controller has sort of a free pass to talk to anyone in the company. This is because you’re seen as being responsible for the financial health of the entire business, so you have not only a right, but an obligation to talk to everyone.
Another concern is that you may not like what you hear. This can be a bit of a problem, because, as I said earlier, most managers are administrators who are good at dealing with the current situation. They don’t go looking for trouble. And controllers are just like other managers. They don’t like to do this. And they really don’t like being the person who brings up these uncomfortable issues with the rest of the management team. Nonetheless, this is part of the job.
And a good way of looking at the situation is that going out and actively looking for trouble is exactly what sets apart the great controller from the average controller. It shows that this is the one manager who’s taking an active role in improving the business.
The Need to Dump Old Metrics
And a final thought is that the controller is also responsible for getting rid of any metrics that are no longer needed. It can be fun to do this and see how long it takes before anyone notices. Which could be another metric.