Introduction

One of the keys to increasing business profitability is giving each employee specific information they need to make sound decisions, the ability to concentrate on the areas of the business that require their immediate attention and an environment that allows them to collaborate with others to address issues that span more then their individual areas of responsibility.  Binding all of these success factors is one key concept.  If any business wants to achieve true success, they must be proactive, not reactive.  This article will discuss how people can use Business Metrics to identify critical issues before they can have a significant negative impact on the organization.

Background

Most classic business management reports are at their core no more than a picture of an organization at a specific point in time.  As such these status reports do not help people make decisions and do not effectively contribute to income and profit growth.

While this type of reporting was acceptable in the past (particularly since it was all we really had), we now have the technical ability to measure even the smallest events that drive any business.  The question is how can we build a framework for success?

Proactive Business Metrics

I cringe every time I see bar charts and pie charts as representative of what information users can extract from an ERP system and display on their “dashboard”.  While these charts certainly look pleasant (particularly when displayed in color), in the end they are nothing more than status reports and as such do not (or should not) drive business decision making.  Why? Bar charts and pie charts do not (and never will) lead to any form of decision or action.  A pie chart that displays the percentage of revenue generated by a firm’s top ten customers tells you nothing.  There is no basis for comparison to tell whether this is good or bad.  It looks pretty, but it leads to nothing.

Truly effective business metrics give you a basis for comparison that either tells you where you are going and whether you are above or below expectations. 

Let’s use Inventory Turns as an example.  Measure Inventory Turns each month and plot the values in a line graph showing the value for the past 12 months (or any time frame that is sufficiently long that a pattern can be discerned.  The user can visualize immediately where Inventory Turns has been and where it might be going.  It’s a good start, but not perfect.

Now add a system generate trend line that is calculated from the raw data.  In many cases the individual data points are so chaotic that it is difficult to see any trend, but the trend is what’s critical, not the individual value each month.  The trend line should not be a straight line, but a curve that shows whether Inventory Turns is improving or not.  A manager viewing this chart might be able to see instantly that the trend is acceptable and nothing needs to be done.  Next chart please!

Now let’s take this analysis one step further.  While the trend line in the example above may seem to indicate that Inventory Turns is acceptable, you need to add one final element.  How does Inventory Turns compare against expectations (budget)? Actually you could choose to not display the raw data as the trend line and the budget line are the two critical elements.  Now you have the complete picture: the actual trend and the budgeted trend.

This type of charting is used in the securities industry every day.  Computers track a stock’s value each day.  They also calculate a confidence interval above and below the trend line.  If the trend breaks above the upper confidence interval, a buy signal is generated.  Similarly, if the trend line breaks below the confidence interval, a sell signal is generated.  That is precisely what could be done to assist manager track inventory turns or any other defined success factor.

Business Metrics Delivery

Assuming that you have identified the Business Metrics that drive your business, how do you effectively deliver this information to named users?

1. Identify specific Business Metrics that drive an organization’s success and that lend themselves to a budget/actual comparison. 
2. Give users the ability to display any chart full-screen.
3. Give users the ability to drill down to the independent variables that drive the data displayed.  As an example, Inventory Turns is driven by sales, purchasing activities and receipts.
4. Give users the ability to view the actual data in table form.
5. Do not display information that is of no concern.  If the values in the chart are acceptable, give users the ability to either not have these charts displayed or display them at the bottom of their dashboard.
6. Give users the ability to request that a chart be included in their display list the following month.  In this example, Inventory Turns might fall within an acceptable range next month, but the user may want to “see” for themselves.
7. Utilize a red light / green light summary whereby users can view a list of their personal Business Metrics.  Actually all you would have to display is the name of the metric and a red/green light indicator.  This would be particularly useful if a person was tracking a significant number of charts.  If the information is acceptable, the green light will be displayed.  Obviously if the information is not acceptable, the red light would be displayed.  The user can then hyperlink to the metric of greatest interest.
8. Give users the ability to view the charts of those people reporting to him/her.  While we should assume that people will be attentive to their areas of responsibility, some managers might want to review the status of information tracked by people on their team.  Alternately, the system could be set up to track individual metrics as well as team metrics.

Summary

The real key to business success isn’t trend line charts.  It’s the recognition and subsequent tracking of what’s important to the business.  Before you can succeed in business, you have to understand what drives your business.  Then you concentrate on these basic or lowest common denominator success factors.  If you get them right, then your Income Statement will take care if itself.