In last week’s blog, one of the key elements for success was titled “Numbers, Numbers, Numbers”. As Deming is reported as saying, “In God we trust, all others must bring data.” But, all data is not created equal. There is good data and bad data. Like the idea “garbage in, garbage out”, not all numbers are the same. The key, of course, is to find your business’s key leading indicators and SMART numbers.
- Leading vs. Lagging
Many business use key performance indicators, or KPIs, throughout their organization. KPIs can be both leading and lagging indicators. Both are necessary, but most organizations focus on lagging since they are easier to obtain and more generic (e.g., Revenue, Gross Margin, Net Income, ROI). While every indicator gives some glimpse into the future, most lagging indicators give 20/20 hindsight. No one has 20/20 foresight, but leading indicators often prove clues that performance or quality is falling off, with implications for the future. For example, SouthWest Airlines famously uses On-Time Departure Percentages as a leading indicator and they monitor it very closely. If On-Time departures drop, remedial action is taken. For similar reasons, sales departments will measure sales funnel activities, such as emails, phone calls, visits, proposals, etc. Neither a drop in the On-Time departures nor sales phone calls has an immediate effect, but they are harbingers of negative things to come – a business canary in the competitive coal mine as it were. Observant and careful business managers pay particular attention to leading indicators.
- Finding the Haystack’s Needle
The struggle is to find the right numbers which drives improved performance. Using the same metrics as everyone else might be necessary but rarely gives a competitive edge. It is important to search for the uncovered analytic. In his classic book, Money Ball, Michael Lewis explained how the creative Oakland A’s manager Billy Beane understood that on-base and slugging percentages were better indicators of offensive success, and usually less expensive to obtain, than other traditional factors, such as speed and generic batting average. The Catch-22, of course, is that Billy Beane had to shift through a lot of other possible factors before finding these key performance indicators. As evidenced by his A’s performance, it was worth the time and effort to shift through mountains of data to get the two or three most important KPIs. Once found, you can put less emphasis on almost everything else.
- Dashboard Data
In complex organizations, there can more data points than stars in the skies. Tracking too many numbers is like trying to memorize Pi to the 1000th digit. While possible, why bother? It costs time, money and energy to collect, analyze and act upon numbers and metrics. Too much information is as disastrous as a tsunami; yet, too little is a desert and economic starvation. Admittedly, to find critical indicators, reams of data must be shifted, but thereafter, it is less important. To balance these competing interests, the MBA think tanks first developed the corporate dashboard back in the 1970s; with the internet came a host of online dashboard providers, from generic offerings like Domo to industry specific like Digitial Cockpit (e.g., aviation spare parts). As the dashboard name suggests, the dashboard gives enough signals to alert business owners and managers that something might be amiss, or (in contrast) on track, or improving. If a warning signal is given, there usually isn’t enough detail to resolve the problem, but certainly enough to encourage further investigation.
- Benchmark Data and the 4-minute mile
While finding that key, important needle is critical, and using the Dashboard efficient, it is also helpful to benchmark your business against competitors. No one believed a 4-minute mile was possible until medical student Roger Bannister did it; according to some sources, within a few years, another 24 runners had similarly beaten the 4 minute barrier. Once Bannister’s feat went viral (which in 1954 was incredible), the other runners knew it could be done: they had benchmark data: so they too trained themselves into crossing sub-4-minutes. Similarly, by looking at best-in-class performers and their data, you know it can be done. Since no company is best in class across every dimension, it always pays to keep bench-marking new areas. There are numerous industry associations, trade publications and online sites to provide industry, sector and company operational and financial benchmarks. For example, I have also found the annual Almanac of Business and Industrial Financial Ratios (CCH, Leo Troy) a compelling source of benchmark data.
Surprisingly, many companies either do not gather sufficient data or the right data, or, like one of my recent clients, misunderstand the data they do collect. Thinking you know what the data means and actually knowing are two different things. Thus, be sure you understand the source and relevance of your data. Finding leading indicators which are critical to your business, then benchmark those indicators against others inside and outside your industry. Numbers don’t lie, but they can mislead.
Brett R. Keenan is a CFO/General Counsel for Small Businesses, Business and Executive Coach, and author of “Small Business 101: From Start-up to Success”. Based in Chicago IL, BRKeenan & Associates has helped numerous large and small companies succeed, focusing on Finance, Law, Strategy and Operations since 1999.
©BRKeenan & Associates, LLC. January 2015