How well do you know your metrics? Chances are you know the current values of them (if you don’t, that’s an issue). But, do you really understand what that number is telling you? Here are three simple questions that you should be able to answer for any metric:
- In plain language, what does this metric tell you?
- What’s its equation?
- Is it better for the metric’s value to be a high number or a low number?
In plain language, what does this metric tell you?
Can a company that has always been profitable and continues to be profitable go bankrupt (assuming business remains consistent and there are no unexpected surprises or disasters)? About 80-90% of the leaders to whom I ask this question get it wrong. They say “No, if they are making money they shouldn’t go bankrupt.” As many small businesses learn very quickly, profitability doesn’t mean that you have cash. It just means that the revenues on your books exceed the costs. Cash flow is a measure of how much money is coming into (and going out of) your organization. It is important to understand what a metric is (and is not) telling you.
Sometimes we make assumptions based on the name of the metric. For example, one organization had a “customer satisfaction” metric. Despite its name, it didn’t directly measure customer satisfaction. It measured the organization’s percentile ranking on customer satisfaction. Percentile rankings are relative. If every other organization is great and their organization was good, their percentile ranking would be low. If, on the other hand, every organization was horrible and their organization was just bad, the percentile would have been high. Because they were missing their target, many leaders said that their customer satisfaction wasn’t good. However, they struggled to reconcile this with their actual interactions with customers as many seemed quite pleased. The problem was that they were in a highly customer-centric industry and competition was high.
This metric didn’t measure satisfaction. It measured the number of better choices that customers had when determining where to take their business.
If you can’t explain your metrics in plain, simple language, you might not really understand them. Plain, simple language means that you can explain them without just rehashing their formula. You should be able to tell someone what the metric means to you and your business.
What’s the equation?
Can you write out and explain the formula for your metrics? Do you understand each component? Do you know if the numbers used in the calculation (or the output) are actual values, projected values, planned values, or annualized values? That makes a big difference as well.
Do you know the range of possible values that your metric can take? For example, some organizations like to re-scale survey scores in order to widen the results. One company multiplied satisfaction scores by twenty to convert them from a five point scale to a one hundred-point scale. About 80% of the leaders with whom I spoke though that the final scale was zero to one hundred. That was incorrect – it was twenty to one hundred (since the survey started at one not zero). That makes big difference when your scores are in the 60-80 range.
Most leaders also overstated the impact of changes to that new score. A five-point difference in the final score sounded good until it was converted back to original scale.
Do you understand why the formula is written in a certain way? For example, profitability can be computed using either subtraction or division. But division provides more information as it helps you understand the rate of profitability as opposed to just the absolute amount.
Finally, do you know if your metric is a relative or absolute number? More importantly, if it’s relative, do you know what the metric might NOT be telling you? In the earlier example, the relative customer satisfaction metric masked the actual level of customer satisfaction.
Is it better for the metric’s value to be a high number or a low number?
This one might sound obvious, but some metrics are tricky, especially when they are mixed on a scorecard. I’ve seen cases a metric was lower than its associated targets. The leaders interpreted this as missing the target (since all of their other metrics were designed so that higher numbers were better). Their corrective actions continued to lower the value of the metric. They couldn’t figure out why they weren’t “fixing” the problem (when in reality they were over-fixing it). They wasted a lot of unnecessary resources over-optimizing the metric.
Do you understand what levers you can pull to make influence the metric? Do you understand the relationship between positive or negative changes to one of the metric’s components and the metric itself (e.g., if a component goes down, which way does the metric go?)
Every day, leaders use metrics to make decisions and drive actions. However, they often “fly blind” when it comes to actually understanding the metric. If you can’t answer all of these questions for the metrics you use, there is a good chance that you aren’t making the best decisions.
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Brad Kolar is the President of Kolar Associates, a leadership consulting and workforce productivity consulting firm. He can be reached at brad.kolar@kolarassociates.com.
