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Some Common Reasons Not to Use Performance Metrics

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In the post titled “Performance Metrics – a CEO’s Best Friend”, I described some observations made as a participant in a peer to peer “think tank” about performance metrics, sponsored by SmartCEO. The main takeaway was that the smaller the business, the less likely a formal set of performance metrics were employed by management to help make business decisions.

So why is this the case? Why don’t smaller businesses invest in defining a set of metrics that reflects their strategy, and take the time to set up a process to collect data and track those key metrics? In my experience, the most common justifications are:

• The smaller the company, the closer the owner or CEO is to the action, and the more likely he or she sees what’s happening in most aspects of the business on a daily basis. That owner or CEO is also likely to have a personal version of performance metrics embedded in their thinking. They have experience and knowledge, and are comfortable in relying on their own ability to gather, assess and make business decisions based on their own personal expertise.
• The smaller the business the less budget is available to invest in a data generation and reporting system, and the less time is available to feed the data collection process. With limited resources, the emphasis is on generating revenue, and making an investment in performance metrics is not categorized as a revenue generating expenditure.
• The most valuable asset in any company is arguably its customer base. And the smaller the business, the less likely it has significant other assets under its control. For these reasons, smaller business thinking tends to be very customer centric, focused on customer satisfaction, or things needed to attract new customers. While all sizes of companies should monitor customer centric metrics, the smaller the business the more likely they see customer metrics as being all that is needed.

It’s not that smaller businesses do not use some form of performance metrics, they do. An owner or CEO’s knowledge and experience is a form of metric, as is a focus on revenue or customer relationships. But relying on these justifications for not developing and employing a broader, strategy centric set of performance metrics has inherent risks.

A singular on non-strategically aligned focus for management decision making, be it revenue, costs or customer relationships, can result in critical changes in the business or its marketplace being overlooked. And most barebones methods of monitoring performance are inherently short term in their focus, which is inconsistent with managing toward achieving longer term objectives, and in particular, growth targets.

Also, while a talented owner or CEO’s closeness to the action and innate decision making ability can be an effective substitute for metrics, some words of caution are needed. That individual has only so much capacity, and if growth is an objective, he or she will soon be far less directly involved in all aspects of the business, and metrics are critical to supporting organizational growth.

Even if growth is not an objective, he or she will not be with the business forever. And as an aside, that individual’s decisions about the here and now can be tainted by the natural tendency to support past decisions. A wise owner or CEO will hire people capable of assuming decision making authority, share or test his or her own decisions among this team, and invest in performance metrics. Any business that is reliant on one individual to succeed is assuming an unnecessary level of risk, and performance metrics provide a roadmap for sharing decision making within a management team.

In a final post on this topic, I will expand on the reasons why all businesses should make an investment in developing and monitoring a strategy centric set of performance metrics, particularly if the business wants to grow.

JCJCo provides outsourced CFO and business consulting services to entrepreneurial and high growth companies. We help our clients develop performance metric measurement and management systems that reflect the client’s strategy, and delivers essential information needed by the business owner or CEO to monitor performance, make business adjustments, and meet growth objectives.

Performance Metrics – A CEO’s Best Friend

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I recently attended a Think Tank here in NYC, sponsored by SmartCEO, where the topic was “Data Analytics – Determining Measurements That Drive Business Success”. The questions posed to the assembled group of small, below middle market business leaders were very good ones:
• how often do you measure metrics?
• are metrics shared within the company?
• are metrics compared to benchmarks?
• are metrics tied to strategy?
• what specific metrics are used?
• do metrics drive your business decisions?

Despite all participants being smaller sized companies, everyone did look at some form of metrics. But the participants varied in their habits when it came to tying metrics to a defined strategy, communicating performance metrics within the company, comparing metrics to external benchmarks, and formalizing the use of metrics in their management process. Not surprisingly, the most vivid takeaway was that the smaller the business, the less likely management paid attention to formal metrics beyond a customer centric thought process that emphasized revenue, or customer retention or customer acquisition.

Using performance metrics does not require reams of data, or tracking a wheelbarrow full of ratios. But it does require thinking though the business strategy, identifying the keys to success, selecting a few ratios or other metrics that reflect those keys, establishing a process to collect needed data, and comparing your selected metrics against a target or plan on a regular basis.

Also, as Robert Kaplan and David Norton have proposed in their writings about a “Balanced Scorecard”, the selected metrics should reflect key performance objectives from four perspectives:
• the owners/shareholders perspective (financial performance),
• an internal perspective (operational performance),
• an external perspective (customer’s view of performance), and
• a future perspective (improvement programs, innovation, fundamental market changes).

Are performance metrics any less important for smaller businesses? Perhaps, but even in smaller businesses, metrics can identify problems before they become disasters, and are essential to achieving growth. So why does a business not track and use performance metrics when making decisions? Why not create a formal set of strategy centric metrics that are regularly measured and shared throughout the organization?

In future posts, I’ll explore some typical reasons used by small businesses to justify not employing a broad, strategy based set of performance metrics. I’ll also expand on the reasons why any business, irrespective of size, should invest in developing and using metrics in their management process, particularly if it is a business that wants to grow.

JCJCo provides outsourced CFO and business consulting services to entrepreneurial and high growth companies. We help our clients develop performance metric measurement and management systems that reflect the client’s strategy, and delivers essential information needed by the business owner or CEO to monitor performance, make business adjustments, and meet growth objectives.

Do Middle Market and Smaller Businesses Need a Strategy?

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The vast majority of middle market and smaller businesses, even some with up to $20 million in sales, would say “I know who my customers are and what they want” or, “I know how to make a sale and manage my costs” so, “I don’t need a strategy.”

That’s what the owners of my local drug store said to themselves, and they were doing fine, until Rite Aid came to town.  And my graphics designer/printer did great work on a broad range of print jobs, using a ton of specialized equipment he had invested in over the years.  Then Vista Print, 99Designs and other low cost alternatives cut his legs out from under him.  These are smaller, acutely focused businesses that serve to simplify and highlight strategy challenges, but similar examples can be drawn from larger middle market companies in industries like cable and wire manufacturing, text book publishing, or automobile parts producers.

The question of business strategy is different for much larger companies like Kodak, Pitney Bowes and IBM. They have multiple products, compete in many different markets, and have the financial capacity to sustain challenges and invest in a plan that redirects resources to re-energize profits or growth.  And despite monumental changes in each of these three companies’ markets, secular changes that relegated super star products and services into “has been” remnants of the past, they continue to battle, constantly fighting to reinvent their businesses, some with more success than others.

By contrast, a middle market and smaller businesses have less flexibility, arguably limiting strategy choices.  But that reduced flexibility makes good strategic decision making even more critical.  My local drug store could have prepared for the risk of a Rite Aid opening down the street, refocusing on a high growth market like nutritional supplements.  Instead they chose to take Rite Aid on, believing in their long standing customer relationships, and were eventually forced into liquidation.  My printer could have proactively sold off his high cost specialized printing equipment, shifting focus to high margin design capabilities and outsourcing production to low cost printers.  Instead he kept production in house, running a wide range of low margin jobs.  He was eventually forced into change, initially cutting the large space he had acquired to house his equipment in half, then to a quarter, and eventually closed.

Challenges faced in business can be large, one time, secular shifts in supply or demand, such as those faced in these discrete small business examples.  But market changes can also be far more subtle or cyclical, like evolving consumer preferences, energy and interest cost swings, or demographic trends.  And whether the risk of change is secular or cyclical, sudden or subtle, the thought process and plan to deal with such changes is your strategy.

You may see a risk, and in response, plan to hunker down behind the strength of customer relationships, like the local drug store.  Or you might hesitate to change, or admit that prior decisions were wrong, and rationalize not selling off that high overhead equipment based on a preconceived notion about how owning it adds to your market strength.  Even though you are not taking overt action, just sticking to your guns, that is your strategy.

A “do nothing” strategy can be a valid approach, primarily when the challenges faced are cyclical.  You might simply cut costs to weather the storm, then plan to rebuild when the market improves.  But cutting cost can be dangerous, equating to cutting out your legs from under you.  And market risks can be misread, thought to be short term pressures rather than significant and permanent change.  A conservative and low cost “do nothing” or cost cutting strategy can be very risky in and of itself.

Larger companies constantly review and revise their strategy, employing a strategic planning process, and in many if not all cases, seeking out the opinions of experts from outside their business.  They realize that their own planning process can be tainted by natural resistance to change, or be flawed by the many ways internal decision makers can get “invested” in prior choices, rationalizing strategic decisions to protect and perpetuate bad decisions made in the past.  By involving third parties to develop and review information and facts, companies add an objective and trained resource to the team, gaining perspective that is not polluted by preconceived notions or defensive thinking.

The rationale for middle market and smaller businesses to consult with strategic thinkers from outside their business goes beyond those reasons used by larger companies.  The owners and managers of smaller, middle market companies can be, and usually are, consumed by the day to day demands of the business, putting our fires, trying to close that next sale.  They have little time to sit back and think about the bigger picture, or collect and analyze the information needed to make those decisions that will define their long term direction. Bringing a temporary, expert resource on board fills this gap and creates a focus on strategic, long term planning that is otherwise easily lost in the shuffle.

Middle market and smaller businesses have another common characteristic that makes strategic planning even more critical.  They tend to be owned by individuals or families that are reliant on that business for not just current income, but also as a storehouse of the individual’s or family’s wealth.  Quite commonly, the value of the business represents most if not all of that individual’s long term savings, intended to be tapped into for a child’s education costs, retirement income and many other personal financial needs.  In these cases, the business strategy is essential to personal financial health, and personal needs can and do have an impact on defining an appropriate business strategy.

JCJCo provides strategic plan development, strategy review and ongoing financial management services to middle market and smaller businesses.  We fill the role of your “outsourced CFO”, bringing institutional, corporate level expertise to the table at a cost that fits the size of your business.  We also have a team of specialists in personal financial planning and estate matters on call, enabling us to address your business and personal planning and strategy challenges in tandem.

Call today for a free consultation, and to learn how JCJCo can provide the information, experience and insights you need to make good decisions, support the long term success of your business, and protect the financial health of you and your family.

What Does the Name “Nicholas Schorsch” Mean to You?

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Here are two choices:

  1. A pioneer in high yield, non-traded REIT’s
  2. A crowdfunding entrepreneur

I’ll dispense with the suspense … the answer is both A. and B.

Mr. Schorsch’s impressive fortune building career (now 10 figures) hit the big leagues in 2002, not that long ago, when he teamed up with Lew Ranieri (of mortgage backed securities fame) to launch his first REIT.  And he certainly played a smart “product” card by subsequently specializing in non-traded, high yielding REITS that had an innovative twist … built in liquidity events to enable retail distribution.

With that pioneering change in non-traded REIT structure, this category of asset backed, alternative investment became very successful, in large part because of its comparative risk/return benefit and the increasingly low interest rate environment.  It also didn’t hurt that sales of non-traded REIT interests carried high fees, making it pretty easy to build retail distribution network relationships.  Mr. Schorsch’s company, RCS Capital, is now the industry leading wholesale broker-dealer in non-traded REIT investment products.

Fast forward to 2014 …. RCS Capital just launched “We R Crowdfunding”, a CF platform that includes an integration of investor relationship management software from Trupoly, which RCS acquired earlier this year.  Initially, the platform will be real estate focused, and they are “cutting their teeth” on placements of RCS Capital’s REIT investment product offerings.  Perhaps more importantly, it is a “curated” CF model, leveraging the research and origination capacity he has built (and is expanding) in his empire.

The Trupoly acquisition is only one of many completed at RCS Capital recently.  It has also purchased several independent broker-dealers that together house nearly 9,000 advisers/reps and over $200 Billion in assets under administration.  And they have acquired teams who originate or manage investments in other subcategories of the alternative asset class.  It is all part of Mr. Schorsch’s strategic objective, to become a retail broker-dealer power house that is integrated with a broad based alternative asset investment product pipeline.

So, how do you get from being the leading wholesale broker dealer of non-traded REIT’s to becoming a crowdfunding entrepreneur?  It’s an interesting tale of strategy development and execution.  RCS Capital has committed itself to growth through acquisition of firms in the alternative investment and advisory services vertical.   But it has also adopted a view on what role crowdfunding technology will play in the future of the primary focus of this strategy, retail advisory services.

The potential payoff is huge.  Look at LPL Financial’s growth and returns for a guide.  And one should not underestimate RCS Capital’s interest in crowdfunding.  The plan certainly includes using crowdfunding technology to differentiate themselves from the competition.  But true to Mr. Schorsch’s innovative past, the intent is to emphasize crowdfunding to such an extent that RCS Capital (according to President Michael Weil) “leads the crowdfunding revolution”.

For those who play in and around RCS Financial’s newly defined sweet spot, it would be wise to keep tabs on developments.  This has all the makings of a landscape changer.  And even for those with only peripheral interests, there is plenty of intrigue, not the least being what rising rates might do to the core, non-traded high yield REIT business.

A big thanks and credit to my new associate, Rob Klein of www.jesterfinancial.com for his contributions to these thoughts.  And as always, thoughtful comments to any post at www.JCJCo.net are invited and appreciated.

Crowdfunding at its Best!

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My very good friends at Zylie the Bear just launched a Kickstarter campaign! Check out https://www.kickstarter.com/projects/mattmccrty/kiki-the-koala-an-adorable-adventure-toy-that-unpl

They are definitely on to something big with their “inspiring kids to unplug play” marketing program too. You can see Mary Beth, this award winning toys founder, talk all about it at TEDxWilmington right here! https://www.youtube.com/watch?v=egziCEFpzBs