How to Develop a Company Culture Centered on Metric Based Decisions
Instilling a Penchant for Metrics Among Your Team
In a recent article we touched on metrics 101, so you already know metrics are a huge part of Simple Startup’s daily focus (as it should be – we’re an accounting firm)! But the question for many founders who care deeply about their businesses is, “How do you get your team to also care deeply about company metrics?” and then, “How do you get them to use that information to drive their decision making processes?” With our four steps for encouraging metric based decisions in your organization, which include data driven leadership, formal infrastructure, open book management and understanding uncertainty, you can drive this best practice within your own company.
Track What’s Truly Important!
Before we can define (and can make) a metric based decision, it’s important to first understand what metrics are truly important to your business, so you don’t get lost in the ocean of too many metrics and eventually find yourself beached on an island far away from anything of actual import.
By choosing relevant, easy to track, easy to understand, and generally accepted metrics for your company you will be able to magnify what’s important and what KPIs you need to monitor that can ultimately give you a revelatory gauge on the state of your business. With these absolutely functional metrics in mind you will be able to make decisions that can move the needle in your business and affect your bottom line more effectively!
What is a Metric Based Decision?
Getting back to the real question of definition, a metric based decision is a choice or conclusion that is based on the core needs of your business. Gosh, that sounds beautifully, simple! Unfortunately, it can be a little more complex than that. Patrick Lencioni, the author of many great books on business management once said, “If everything is important, then nothing is.” So, remember when we mentioned earlier about finding yourself beached on an island in the ocean of too many metrics? That’s what we’re talking about, tracking too many metrics, and referencing too many KPIs can muddy the waters of really great metric based decision making.
One Critical Number to Rule Them All
Let’s take our metric-based definition a step further with a reference to the holy grail of metrics, the critical number. Can you imagine one number, that if it moves in the right direction will signify to you that every other number and business indicator is going well, thus business is good? That’s your critical number!
It can be easy to get overwhelmed by over-tracking metrics, therefore the path you’re trying to follow is to distill your numbers down to a critical number, which will allow you to optimize metrics (and your business), cut through the noise, and focus purely and succinctly on one critical number that everything else flows from. This is why metric based decisions are important, because if you’re not making decisions based on the core needs of your company then you’re flying blind and you can’t grow effectively (or even fruitfully solve issues).
The Process for Metric Based Management
A metric on its own is just that – a metric. But a metric coupled with its history (i.e. a tracking dashboard) is paramount because it allows you to see trends in that metric’s trajectory to determine how operational inputs are affecting your business and thus how when you change those inputs, what you can expect to see happen. When looking at your metric tracker you should be asking questions like, are the indicators heading in a positive direction? Or what is the pattern of the trajectory? Is it aggressively positive, negative, or is it becoming flat?
As an example, a very simple profitability metric every organization should monitor closely is its gross margin. This can be reviewed at the business level, division level, customer, product or service level. When reviewing this metric consider if the gross margin is remaining steady and consider whether you think it will continue to be this way?
If it is steady, then that is an indicator that the business can sustain its margins. If the gross margin trend is declining, or even increasing for that matter, you need to investigate and understand why. Seeing a trend and not fully understanding the “why” can be the equivalent of you signing a death warrant for your business (queue open-mouth scream).
So ask yourself the following questions when looking for the “why” behind your metrics and don’t forget to compare what you are seeing to your greater industry:
- Is our accounting and basis for the numbers accurate? Has someone made an unintentional error or did a supplier simply not send us their invoice on time?
- Have we changed any of our prices?
- Have we added any new products or services and as a result, altered the sales mix? Are we now selling more lower (or perhaps higher) margin items?
- Is our trade spend increasing or decreasing (promotions, charge backs etc.)? If so, what can we learn about this or, more importantly, what should we do about this?
- Is our average cost of sale (product or service) increasing / decreasing? Has our supplier or freight costs increased? Has labor increased? What is the cause of this and, again more importantly, what should we do about this.
- Has the cost to maintain our customer success teams or maintain our software platform increased? Is this indicating a product concern (product bugs) or an increase in labor costs or third party software costs?
This list of questions is by no means exhaustive, but I do imagine you are beginning to see how using metrics to determine next steps is very advantageous in a business.
Quick Segway on Business Growth Tactics
Let’s bring another wise business mind to our discussion, Jay Abraham. Jay Abraham, came to the conclusion, to which we’re in agreement, that there are only three ways to grow a business.
- Increase your number of paying customers
- Increase the average size of transaction
- Increase the frequency of customer purchases
With all growth opportunities fitting into the above three categories, choosing the right KPIs, the right metrics, and ultimately one critical number will help you ask the right questions to determine how you can affect change in your business becomes much more clear.
How Do You Encourage a Culture of Metric Based Decisions?
It’s simple to see why focusing on the numbers is beneficial to growing a healthy business, but what does a culture built on organizational measurement look like? And how do you encourage this culture? Following are four tips for pushing your business towards better decision making practices.
Number One: Data Driven Leadership
The obvious place to begin is by leading by example. As a leader you must use data to enliven your narrative. Each time you share an analysis or new insight, use your metrics to fill out the story. Not only will this help your team fully understand your guidance, but it will encourage them to think critically and consider a hypothesis followed by a test based model for taking action.
Don’t forget to celebrate the successful experiments and more importantly the failed experiments – that is a large part of the culture too – not being afraid to experiment and fail as this can shape future actions.
Number Two: Formal Information Infrastructure
In order to properly implement a good metric tracking program which can thus facilitate a culture of metric based decisions, there has to be an organized and formal infrastructure for tracking that data. This means a few things:
- Staff will need access to accurate and up-to-date data for making decisions (your metric tracking dashboards and raw data sources)
- There must be open and consistent communication about metric initiatives (management should be on the same page and share consistent messaging)
- Team member’s expected involvement in the tracking should be communicated clearly
- A normal range for each metric should be defined, as well as exceptional and unacceptable ranges
In addition to understanding the above “rules of the game,” if your team does not understand how their roles and responsibilities fit into the larger organizational goals, it will be near impossible for them to act cohesively with your company and use their division’s metrics to make good decisions. So don’t be afraid to discuss, and discuss again the rules of your metric program – it will go a long way in keeping everyone on the same page.
Number Three: Utilize Open Book Management
In a prior discussion on our company culture, we mention the use of open book management. Originally coined by John Case, from Inc. Magazine, open book management was further developed by Jack Stack, Founder of the Great Game of Business, to encompass,
The business practice of creating transparency by sharing financial information with employees. This includes financial education for your employees and showing them how their production influences the finances…The idea behind this concept is that when employees gain a better understanding of how the organization is run, they become empowered by this knowledge and it gives them “skin in the game,”… This is because people will fight for that which they have helped create, and because they want to understand how their contributions correlate to success.
Adding open book management to your company culture links operational goals to strategic goals allowing your employees to see the full company vision, putting them in a position of ownership, providing accountability, and building a culture based on targets and rewards.
The Simple Startup Example
For Simple Startup, we utilize weekly KPI huddles where the team presents the metrics they’re accountable for and whether they are on track or off track. Our team also participates in a monthly meeting to review all of Simple Startup’s key reports. During this meeting there is an expectation that each team member contributes three observations, which creates a culture of not just knowing numbers but also understanding what they mean. These observations might include the average revenue per account is up (YAY!), or operational expenses are rising but sales are not (not yay). Once the discussion of KPIs becomes more natural for an organization, employees will begin to share their own opinion on what metrics matter and might say things like, “X KPI would actually be more telling to track, since our goal is Y.”
Number Four: Understand Your Uncertainties
There is always going to be a level of uncertainty to decision making, and the sooner you accept this the quicker you can get to addressing this deficit. Help your team dig into their decision process by quantifying their level of uncertainty. This will help employees identify potential sources of uncertainty early on in the decision making process, gain a deeper understanding of what their decision model is based on, and will further instill in them experimentation using the hypothesis and test method (experimentation leads to innovation!).
The Main Objective
The objective behind basing decision making on a metrics program is to create a culture where employees see metrics as a tool for good, a tool that they can rely on to cultivate a deeper understanding of their company and use directly to extrapolate actionable strategies for moving forward as well as how they can contribute to organizational success!
Implementing cultural change within a business doesn’t happen overnight. If you’re struggling to give your employees the tools to make their best metric based decisions, you may find it helpful to discuss this with someone who has been in your shoes. We look at metrics as part of our services and use tools, like financial models and metric trackers, to track data and empower our team to make great metric based decisions. Hop on a call with us today for more insight on how to become a data driven leader for your organization.