Measuring for Business Success
Tip for June 2008 - Volume 3
Performance Change Monitoring
If you own or manage a business, one of your worst fears is that you wake up one day and find that your business has gone into a steep decline. You find out too late that there was a brewing problem in one of your products, departments or units. The problem has grown so big you can't fix it without a major, painful, and expensive correction.
Take the subprime mortgage crisis, for example. Some of the largest financial institutions were caught with huge portfolios of the wrong type of loans. The problem was in just one area of their operations, but it eventually grew big enough to threaten the whole company. Overlooking that "detail" until it generated huge losses caused the CEOs of Citigroup and Merill Lynch their jobs. Had they monitored the performance of those "small parts" of their business more thoroughly, both the CEOs and the companies would have been far healthier.
Failure to detect a problem early on is not limited to the largest organizations. Monitoring performance of all parts of a business to detect changes as early as possible can be a difficult or impossible task, without the right systems and processes in place.
It's true that very small businesses with a handful of employees and just one business location usually have a very good feel for the performance of all aspects of the business, even without a system. You can "drive" such small businesses using "gut feel" because you can observe every transaction.
But once a business has grown to have multiple locations, multiple products, or multiple departments, the owners and managers can lose sight of the operations of the more remote parts of the organization. Problems in those areas can grow unnoticed.
Here are key actions you can take to reduce the risk that you will be the next owner/manager whose business failed because of a change in performance that went unnoticed for too long.
-
Identify "key performance indicators" (sales, profits, late payments, absenteeism, etc.) down to the smallest organizational level that you can isolate. If you only look at total sales and profits for the entire company, you are setting yourself up for unpleasant surprises.
-
Make the responsible staff aware that you are monitoring those indicators, and make the data available to them as well. Make sure you don't punish them for bringing a brewing problem to your attention early. If you "kill the messenger" who brings you bad news, they will hide the facts from you as long as they can.
-
Set up a system that shows you trends of your indicators at both the overall and the detail levels. Single measurements at a single point in time don't reveal a real or "growing" problem. After all, you can't see "growth" from a single measurement (you need at least 2, more likely 5 data points to see a growth trend). Changes in the underlying trends are the warning signs that a problem may be growing.
-
Make sure you have a system that provides a chart-intensive "dashboard" where you and your staff can quickly see how you are doing. But don't get hung up on "real-time" data. "Real-time" systems show a lot of random variance, because business transactions have some inherent randomness. If you take drastic action for every zig and zag in your indicators, your business will be paralyzed by the overreaction. You should be more concerned with the underlying trends of your key performance indicators over time, rather than with rapidly changing real-time data.
-
Demand a system that allows you to drill-down so you can see the overall performance, then quickly identify the problem areas at lower levels of detail. The system should also allow you to view the data from various angles or "dimensions" of your business. For example, you should be able to see breakdowns by location, by product line, by department, etc. You need to see both the whole and the parts.
Failing to pay attention to changes in performance may suddenly and permanently damage your career and your company. Set up the systems and processes you need, in order to identify the changes as early as possible. It will help you sleep better at night.
