The Profit Recipe

How Does Your Business Know if it’s On Track? on

How Does Your Business Know if it’s On Track?

If you condense an organization down to the ability to determine its operational performance based on objective numbers, you have an accurate and objective ability to state with assurance that you are moving towards or away from your vision.

No argument

I’d like to ask you to take a moment to consider the color red and the number five. The concepts themselves are easy enough to understand. One of them, however, is open to interpretation. There are thousands of shades of the color red. Some people are color-blind. They may be unable to even see red. Getting any group of people to agree on what is red might be rather difficult. Red is subjective.

The number five, on the other hand, is not open to any interpretation. It is an arithmetical value. It’s a quantity or amount that’s expressed by a word, a symbol, or a figure. There is never any debate. Five is five. Five is objective.

Objective vs subjective

When I help companies embrace the Entrepreneurial Operating System, one of their first tasks is to determine their Scorecard. A leadership team is made up of human beings, which means they each come with their own collection of personality traits, emotions, and ego.

And, let’s talk about ego for a moment—because it often gets a bad rep. Ego, in this case, means nothing more than a personal sense of self-measurement. Like the color red, it’s subjective. I have an ego. You have an ego. It’s time to remember what an ego is, rather than what it does.

Back to the data. If you condense an organization down to the ability to determine its operational performance based on objective numbers, you have an accurate and objective ability to state with assurance that you are moving towards or away from your vision.

This is where you want to get with your leadership team. Together, you must choose clear and objective measurements that can be revisited for five minutes each week, this will help to make sure your company as a whole is on track to achieve the vision. Separately, you can address the performance of each individual member of your leadership team in the measurable area they are accountable for.

These numbers cannot be open to interpretation. Red might be red, but it could also be more pink or mauve. Five is five under all circumstances—even if it’s expressed alternately as “5” or “V”.

What are those numbers for your business?  Key Performance Indicators (KPIs) will vary from business to business. They should measure how effectively your business is accomplishing its goals and objectives. If you want to increase sales, you may have KPIs that track your sales growth vs. your sales goal. There are several resources to determine which metric is right for your company – one of my favorites is KPILibrary – the important thing is to maintain a balance between lagging and leading indicators.

Lagging indicators measure your company’s outcomes, they allow you to understand if your company goals have been met. They tell you the outcomes of what happened in your business. For example, profits in the last quarter, the number of customers signed, or business expenses would all be considered lagging indicators because they provide concrete metrics around your performance.

Leading indicators, on the other hand, are predictive. They’re meant to help your business look to the future and identify what needs to be done in order to achieve the desired outcome. Leading indicators will depend on your company’s specific goals. For example, if you’re the goal is to increase sales, one of your leading indicators could be the number of new products offered to your customers.

While these metrics work best together, you should place more focus on your leading indicators, that way you are driving your efforts towards improvement and predicting future outcomes, rather than placing all your focus on the existing outputs. I find that it is best to apply a 2:1 ratio of leading: lagging.

Careful what you decide to measure

In your business, you may measure revenue or production numbers. What’s important is that it is an objective measurement not capable of influence by emotions, opinions, or personal feelings. Here’s an example to consider: Customer Satisfaction.

Your leadership team might choose to measure this as one of your data points. It’s definitely a way to determine operational performance, but does it really give you an objective ability to state with assurance that you are moving towards or away from your vision?

Satisfaction is open to interpretation. Each member of your leadership team may have a slightly different personal idea of what it stands for. Your customers certainly will have various conflicting concepts of what it means to them.

So, while you might be able to distill this to a measurable data point, you’re attempting to describe an objective characteristic to something that’s subjective. Does this mean you shouldn’t measure customer satisfaction as one of the data points that helps you put a finger on the pulse of your business?

Again, it’s a valid measurement of operational performance. It will be important for every member of your leadership team to agree upon and adopt a unified definition of what customer satisfaction stands for and the most accurate way for your company to measure it if you choose to use it as one of your data points

Operational scorecard

Your EOS-related objective for selecting the data to measure is to create a scorecard—and it’s crucial to understand that these measurements aren’t just financial reports. The data points your leadership group selects must be able to reflect in a measurable way, the current company performance. It’s a snapshot of your company that will let you see – within 5 minutes – if it’s on the right track.

Each number on your scorecard must be directly related and assigned to the member of your leadership team who is accountable for that part of the company’s operations. They must accept responsibility for its measurement and reporting. They also must accept accountability for troubleshooting and implement changes to meet the agreed-upon number that reflects healthy operation.

Flying by the numbers

Pilots turn to instrument landing when bad weather creates low visibility. They may not even be able to see the runway. The safety of everyone on board depends on following the guidance of objective numerical data provided by a combination of radio and light arrays to provide precision instructions for lateral and vertical progress.

Consider your EOS data to be just like flying by instrument. Your success and business health must be an objective effort. Accountabilities and changes in the course must be based on specific and measurable activities that are not open to interpretation.

One of the biggest benefits of approaching leadership management by a data scorecard is that it helps your team to move away from what often is the default behavior of using subjective measurements to measure performance. Those subjective measurements often end up as a reflection of the person responsible for that area of operation. If it’s broken, it doesn’t mean he or she is broken, too.

Maintaining objective measurement keeps everyone’s attention on what can be changed. There’s no argument. Your company’s health, performance, and future success are not open to interpretation. What is the data your leadership team can use to take the pulse of the company?

Empower your Leadership Team and improve efficiency, increase value, and foster collaboration to get better results. A professional Facilitator can ensure that all of your members are on the same page, so you can kick your business up a notch. Connect with The Profit Recipe to Achieve Traction.

Sign up!
Receive updates to our expert content series by dropping your email below.