Business leaders understand that what you measure is what you get and that poorly-set targets can result in disastrous outcomes through the behaviour they cause. High performance is only achieved by monitoring and guiding the right aspects of a business.
Active Knowledge Question:
Are you currently monitoring the right variables to support and lead your business to its highest levels of performance?
Be Careful What You Ask For
‘What you measure is what you get’ is an established business maxim, which has one important overriding condition worth noting. I will come to it in a moment.
If leadership is measuring for a certain result then everyone in the business will know this and adapt their behaviour to deliver that result – even if it also delivers a distorted and undesired outcome. The simple example is the CEO who demands increased sales, sets targets and monitors these daily. But forgot about gross margins and, therefore, the sales team drive those margins down, and profitability with it, to achieve the desired sales figure.
The lesson is quite simple. This being that the setting of targets – but, more importantly, the areas of activity you measure in a business – must be done with care and a lot of forethought and wisdom. There exist complex interdependencies within any business, all of which must work in unison to deliver high performance. A focus on one area will impact all other areas, you must seek to understand this impact and take account of it.
Most business leaders and boards follow a standard pattern in the information they seek in monitoring the performance of their business. Within an industry, you will probably find every business will look at the same metrics and benchmark themselves against others in that industry. It is doubtful that this is best practice but rather an indication that often leadership do not think carefully about what they individually need to measure for their own business to achieve high performance.
Note – you should use measurement to support high performance, not as a tool of control.
The point worth noting from above is that what you measure will be overwritten by what you reward. If your reward structure is not aligned with the performance outcomes you are seeking, then those performance outcomes won’t be achieved. Rewards will always win out.
Revisiting The Balanced Scorecard
The balanced scorecard (BSC) as a means of measuring business performance has been around for a long time – 25 odd years – and continues to be used in many businesses at senior levels as a key tool. It’s worth quickly revisiting its basic structure as a starting point for this discussion.
The standard BSC consists of four perspectives through which to view a business:
- Financial– What financial objectives must be achieved to satisfy shareholders?
- Customer– To achieve the financial objectives, what customer needs must be served?
- Internal– To satisfy customers and shareholders, in which internal business processes must the business excel?
- Learning– To achieve the business’s goals, how must you learn and innovate?
These four perspectives were considered to comprehensively cover the full range of issues that a business must manage and reflected the causal understanding of performance.
The BSC was designed to allow leadership to build a comprehensive tool for performance management, with each of these perspectives cascading down into more detail with some 25 focuses of measurement typically being developed.
There are two key points to draw from the BSC model:
- Performance comes from the blending of a range of activities.
- The outcome sought is a financial objective to satisfy shareholders.
Both of these points are on the mark with respect to the way I believe almost every leadership team views performance. But I also think they are incorrect and do not allow businesses to achieve what they are capable of delivering by way of performance.
What Outcome Are You Seeking?
The first questions you must ask and answer is, ‘What outcome are you seeking? What reflects high performance in your business?’ Profit is the simple answer but also not necessarily the right answer.
The BSC is targeted at a single ultimate outcome and that is to deliver the financial objective that will satisfy shareholders. If in doubt, look at the customer perspective and the question that is asked, ‘To achieve the financial objectives, what customer needs must be served?’
Customers and their needs are a means to an end and that is a targeted financial return to shareholders. Setting performance objectives in this structure will not deliver the greatest possible performance from any business, as you are simply saying:
- ‘Customers, we are here to maximise our profit and you are necessary for this outcome, so what do we need to do for you so we can make our profit?’
- ‘Employees, we need you to work hard so we can give our shareholders the profit result they expect, and demand, and, as part of that outcome, be assured we will keep your wages as low as we can.’
The reality check is that profit maximisation is the objective that most leadership teams are tasked with achieving. Therefore, the BSC was designed to provide a tool to deliver this outcome.
The flaw in this is that a profit-first motive in a business does not lead to it achieving its highest level of performance. Therefore, nor does it result in the highest possible profit result.
It is interesting to note that the ‘Bain Management Tools and Trends Survey’ in 2017 reflected that the two highest-ranked management trends were:
- ‘Today’s business leaders must trust and empower people, not command and control them’.
- ‘Culture is, at least, as important as strategy for business success’.
A focus on maximising profit for shareholders is unlikely to support either of these management trends.
Catalysts, Not Outcomes
Outcomes are achieved by strengthening the catalysts of performance, not focusing on the outcome of that performance. Profit is merely one outcome of performance. Catalysts are also lead indicators reflecting future results, whereas profit is a lag indicator reflecting merely the result of past efforts.
In developing the measures that you will monitor in your business, you must be focused on the catalysts and not just the outcomes. This leads to the question of, what actually are the catalysts of success in a business?
As a foundational statement, in seeking to identify the catalysts, I would say that you must be looking to what drives the capital value of your business. I define that capital value as being ‘the ability of a business to produce an enduring income’.
It is this ability that underpins market value and profit expectations. It is also worth remembering the expression ‘capital value lies in certainty’. Therefore, the more clearly you are able to identify the capital value drivers of your business, and reflect your continuing investment in them, the greater the certainty and, therefore, higher capital value.
Traditionally, and in a simplistic way, we would say the capital value is determined by profit. We would look to the tangible assets that underpinned that value with the difference being goodwill. More recently, we have started to look into goodwill more closely and sought to identify the intangible assets that make up that sum. Why? Because the value of goodwill has far exceeded the value of tangible assets and to try and bring more certainty to that value it became necessary to identify its components.
We are just only now beginning to come to grips with the fact that there are elements beyond what the accountants can define as intangible assets, which actually drive the capital value of a business. These are the true catalysts that business leaders must seek to identify and monitor.
I define this catalyst of capital value as the competitive engine of a business.
How Do You Compete?
When all is said and done, the measures that leadership create to support the performance of a business should be clearly targeted at those activities that directly determine the level of performance.
By performance, I am not referring to the result but rather what allows that result to be achieved. In business, that is the ability to compete, how competitively fit is your business? It is this level of fitness that will set the ceiling to your business’s performance.
There are five core elements that determine the competitive fitness of a business. Plus an additional three elements that set direction, and two further elements that either power up or power down that level of fitness. These are the elements of the competitive engine in your business, which is operating whether you recognise its existence or not and sets the ceiling to the level of your business’s success. An earlier article I wrote, ‘How to achieve an entirely new level of business performance’, will assist you in better understanding the competitive engine’s impact on performance.
If you want to take your business to an entirely new level of performance, then you must not only activate your competitive engine but monitor and guide its operation. These are the right measures of performance and will deliver the profit result that your competitive fitness deserves.
An entirely new level of performance.
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All the best in the success of your business,