In the early stages of growing your startup company, signs of growth can be apparent everywhere you look: more customers, enhanced products, additional resources and a bigger team. As the company continues to grow, long-term success will depend on your ability to gauge and track progress based on identifying and measuring the right metrics. Unfortunately, as some organizations evolve they may fall into the trap of focusing on metrics that give the impression that the company is on a growth trajectory when in fact the reality may be very different.
Your management team must critically evaluate the list of metrics being measured and refresh it on an on-going basis. The goal is to track those metrics that are key to your company’s success and remove those that are not. Metrics must be tracked, and actioned upon, on a regular basis based on real time results, as well as by evaluating the trending results over time.
Some key metrics that must be included in your master list are what I call “table stakes”; topline growth, profit/loss, gross margin, customer churn rate, customer acquisition momentum, cost of customer acquisition, number of monthly active users and revenue per employee. These metrics are all quantifiable and provide a timely snapshot of your company’s health. An on-going understanding of these metrics will enable your management team to take action based on hard facts… or what most of us refer to as “results”. Some metrics however may appear to provide the perception of success but, in reality, they can be misleading.
One item that is often misinterpreted as a key metric to demonstrate growth is “effort” rather than looking at the tangible results. It is important to understand that “effort” and “results” are not interchangeable. The tracking of the number of meetings with a customer represents more effort than results and therefore is not the best metric to track. Consider the following sentence: “I went fishing for 3 hours versus I caught 3 fish today”. In both cases the same activity of fishing was carried out except the former activity yielded no output (except the joy of fishing), whereas the latter activity resulted in a quantifiable accomplishment.
In another example, one might think that as the number of employees increase, the company itself is growing too. But, is it really a sign of growth, or a symptom of the increased need for customer support and/or engineering effort to build and maintain and the product? In order to properly evaluate a metric, it needs to be reviewed in conjunction with the context at the time of examination.
Below are a few principles that I urge you to consider when evaluating the metrics you plan to use to measure your company’s ongoing health and long term success:
- “Even a broken clock tells the correct time twice a day” – This expression exemplifies how easy it is to misjudge a set of results when they are being evaluated out of context.
- Not everything that can be counted counts and not everything that counts can be counted” – This quote is attributed to William Bruce Cameron,who in 1963 published a book titled “Informal Sociology: A Casual Introduction to Sociological Thinking”. He identifies in the book that, “it would be nice if all of the data which sociologists require could be enumerated because then we could run them through IBM machines and draw charts as the economists do. However, not everything that can be counted counts and not everything that counts can be counted”.
At times, there can be a blur between quantitative and qualitative data/trends/information. However, I caution that ignoring the value that can be derived from qualitative data may be to the detriment of your company’s well-being.
- “Vanity metrics are dangerous” – This quote is attributed to Eric Ries the author of “the Lean Startup” who identifies two types of metrics: vanity and actionable. Both metrics types are based on the analysis of data and numbers. Whereas, vanity metrics may or may not lead to making a wrong conclusion/direction, actionable metrics have direct cause/effect relationship. As a matter of fact there is a strong correlation between the data and the corresponding actions that are taken in response to the analysis of the numbers. Make sure you carefully evaluate all of the metrics you wish to measure and focus your management’s energy strictly on actionable metrics.
- The “80-20 rule” (Pareto Principle) – Named after the Italian economist Vilfredo Pareto, this rule states that about 80% of the effects are attributed to 20% of the causes. For example, 80% of the sales in the supermarket are generated by 20% of the products. It is prudent to review and identify the real drivers impacting your company’s performance and focus on them first, rather than giving equal attention to all items. Make sure to focus first on key customers and key products rather than all customers and all products across the board.
Company success does not happen by accident. It requires hard work, a great team, excellent products, and outstanding customer support. As an integral part of achieving success, it is necessary to have a list of metrics that are measured regularly. But the buck doesn’t stop there, after analysis there must be action. Be ready to take action to ensure that your company remains on the right path to reach its goals and objectives.
Read this weeks Biz Rules “When Was The Last Time You Sharpened Your Pencil?” to further expand your Biz Knowledge.
