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.

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.