The Right Metrics

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Industry metrics are great. However, high level metrics such as ROA are simply not granular enough to assess the progress of internally derived strategic initiatives, such as improvement in a particular product line, service, or process. Here are four steps to developing meaningful internal metrics.

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The Right Metrics

  1. 1. THE RIGHT METRICS
  2. 2. “I’m not dumb. I just have a command of thoroughly useless information.” - Bill Watterson
  3. 3. 4 STEPS TO THE RIGHT METRICS • Industry standards help us to make valuable comparisons. Company B • As an investor we can choose one company over the other. • As an officer we can gauge our performance against industry peers. EPS ROA ROE Company A 0 10 20
  4. 4. 4 STEPS TO THE RIGHT METRICS 2% Q1 Q2 Q3 Q4 0% Asset Growth • However, industry metrics cannot gauge the progress of internally derived strategic initiatives. • High level metrics such as ROA are simply not granular enough to assess improvement in a particular product line, service, process, etc.
  5. 5. 4 STEPS TO THE RIGHT METRICS •Metrics can provide a basis for comparing performance: -Against prior performance -Against a target goal -Against competition
  6. 6. 4 STEPS TO THE RIGHT METRICS • To create relevant internal metrics, we’ll complete four essential steps: 1. Create measurable objectives 2. Gather data 3. Analyze data 4. Refine assumptions
  7. 7. CREATE STEP I: Create Measurable Objectives
  8. 8. “Without long-range goals, you are likely to be overcome by short-range frustrations.” - Zig Ziglar
  9. 9. CREATE GOALS & OBJECTIVES • If our goal is to increase profit, then… • Our strategic objective is to increase profit by completing projects A, B, and C. • And we need to know how much projects A, B, and C individually contribute to the increase in profits.
  10. 10. CREATE GOALS & OBJECTIVES • We quantify our objectives so that we can identify value additive activities to continue, and to identify non-value additive activities to discontinue. Profit 5 4 3 2 1 Profit 0 -1 -2 -3 A B C
  11. 11. GATHER STEP II: Gather Data and Relevant Information
  12. 12. “Everything that can be counted doesn’t count and everything that counts cannot be counted.” - Albert Einstein
  13. 13. GATHER DATA Quantitative • Quantitative data provides firm numbers that readily lend themselves to statistical manipulation. Qualitative • However, quantitative data does not provide a complete picture. • Qualitative data is needed to make the data meaningful.
  14. 14. GATHER DATA Quantitative Qualitative Quality 4 Assessment Risk Medium Low Wide Good Narrow Service Excellent Good Poor Other 2 High Fit 3 Good Average Poor Data 1 0 0 2 4 Objectively observe data. Assign qualitative attributes to the data.
  15. 15. ANALYZE STEP III: Analyze Data and Form Conclusions
  16. 16. “Torture the data and it will confess to anything.” - Ronald Coase
  17. 17. ANALYZE DATA • There’s a lot of readily accessible data; • However, all data is not relevant to your organization or to your strategic objectives. • Be critical and carefully assess all data: -Is this information relevant to me? -In what manner is it relevant to me? -Is there information that may be of greater relevance to me? -How reliable is this source of data?
  18. 18. ANALYZE DATA I Test Data for Relevance • Is the data objective? • Is there sufficient data to be conclusive? • Is the data related directly or indirectly to my industry, my market, or my product? • Is the correlation statistically significant, (>0.05)? II Observe for Direction • Is there an established pattern of behavior? • Is it stable, trending upward, or, trending downward? • Has there been a recent change in the trend? Why? • What does the data tell me about my consumers’ behavior during an economic downturn or when the price increases?
  19. 19. REFINE STEP IV: Refine Behaviors and Underlying Assumptions
  20. 20. “Meaningful data is one of the most powerful decision making tools.” - Anonymous
  21. 21. REFINE ASSUMPTIONS What Worked What Failed • Variables A and B exhibit greater than .05 correlation • Demand for products AA and CC is not elastic. • We expected variable C to be a major influence. However, there is less than .05 correlation. • Product BB: -Pricing may not be competitive -May be viewed as a luxury item • New products generated less than 1% of total revenue.
  22. 22. REFINE ASSUMPTIONS • Adjustments: -Discontinue use of variable C as an indicator -Discontinue or reposition Product BB -Complete a competitive analysis for pricing -Solicit consumer feedback for new products • Discontinue collection of some data • Begin constructive collection of new information
  23. 23. REPEAT The Cycle
  24. 24. “Discipline is the bridge between goals and accomplishment.” - Jim Rohn
  25. 25. REPEAT • The four steps to the right metrics is a never ending cycle. • Proper execution enables the organization to become better at identifying their strengths and better at creating reasonable targets. Refine Assumptions Create Goals and Objectives Analyze Data Gather Data
  26. 26. Comments or questions? Please send them to info@finandmrkt.com!

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