Blog Credit: Megan O’Brien, March 14, 2022 (Metrics That Matter: How to Identify, Track and Use Data Points Now | NetSuite)
- The environment in which companies benchmark performance has changed dramatically over the past two years.
- It’s time to reassess the relevance and usefulness of all metrics used in the business.
- In this series, we’ll reveal best practices for choosing the right KPIs for your company.
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It’s fair, and perhaps an understatement, to say businesses have experienced seismic operational shifts over the past few years. Supply chain issues, talent shortages and demand fluctuations now look increasingly like ongoing, long-term challenges. As a result, many finance leaders have become resilience experts, moving quickly from one challenge to the next.
Our advice: Step back, breathe and take a critical look at the metrics you’re now tracking.
For many, that basket of KPIs looks very different from a pre-pandemic dashboard. For others, it hasn’t changed much. In both cases, that may be hindering growth. In this new, ongoing series, we will examine the evolving metrics landscape, by industry. Each installment will contain insights from leaders on the metrics they’re tracking to measure business performance — and how they use the resulting numbers to set strategy.
What Are Business Metrics?
Business metrics are quantifiable measures used to track processes to evaluate the performance levels of various areas within your organization. There are hundreds of metrics. Some are broadly applicable, some are very focused on a specific company type or industry.
Within an organization, departments including operations, finance and sales have their own, sometimes very specialized, metrics that matter. It has always been smart to periodically reassess the internal and external metrics used to predict and track performance and to measure the impact of the challenges of the day. Now, it’s not just smart, it’s a must-do.
KPIs vs Metrics
While the terms are often used interchangeably, a KPI is an indicator of performance toward a specific, important — key — strategic goal, such as increasing sales by 20% quarter over quarter.
Metrics may feed into KPIs, or they may exist on their own. Metrics attached to that sales growth KPI might include conversion rates for new customers, average revenue per customer or upsells.
As part of an exercise to update your metrics, first make sure the company’s KPIs still reflect strategic goals. Then determine what metrics are needed to measure and quantify progress toward those goals.
The Case for Reassessing Metrics
“As an example, previously in the tech space, a metric that no one even thought much about before was recurring revenue,” said Dave Roberson, CEO of RoseRyan. “The metric of choice used to be license revenue. Now, no one cares about license revenue. Annual contract value and annual recurring revenue are huge metrics now for evaluating a business because the industry shifted.”
Over the past two years, the need to reevaluate metrics has become even more pressing across industries as many companies made significant changes to how they do business.
“Strategies, business models, operations, delivery methods, locations and geographies, interactions with customers, as well as emerging change around staff [have changed],” said Stacy Robin, founder of The Degania Group. “With all of these changes, it is imperative to ensure you are still measuring the right things and assessing/evaluating the information properly.”
Roberson found himself rethinking the KPIs of his own business as the nature of the company’s work changed. As consultants went remote, for example, he realized that ways of operating and measuring success had morphed. Now, consultant location isn’t a factor, and the pool of potential hires has expanded.
“The key metric change due to working remotely has been to focus on the hours and rates billed per day,” said Roberson. “Previously, we looked at monthly or quarterly only. This allows us to see what is happening in the business very quickly so we can adjust to find more people if needed.”
A Birds-Eye View From a Fractional CFO Company
As the director of market development at FocusCFO, a fractional CFO services provider, Michael Stier has a unique view of how metrics are shifting, garnered through feedback from his team of CFOs. In the past few years, they’ve seen an increasing emphasis on the following areas:
Additionally, Stier noted that EBITDA has taken on a more important role due to the treatment of forgivable PPP loans, which causes distortions in net income. Cash flow from operations is also being prioritized above total cash flow.
Some industries have seen an inordinate amount of change over the past few years. Let’s look at one of the most notable, airlines, in the context of changes to associated metrics.
Airlines Shift From Operational to Efficiency Focus
Without question, the airline industry has been one of the hardest hit in the past few years – and its tracked metrics reflect that. Previous to 2020, many KPIs tracked delays and causes, departure punctuality and arrival punctuality. If you have ever been on a two-hour flight that is listed as three, you’ve experienced airlines padding their schedules to improve the arrival punctuality KPI.
Additional metrics around regularity, which refers to how many flights an airline cancels, and misconnex quota, the percentage of passengers who missed their connecting flights, were also carefully watched.
However, two years of travel restrictions, financial losses and changes in consumer demand have caused airlines to place more focus on running each aircraft as efficiently as possible. Metrics that track how much money a flight is earning, while important before, have been given new emphasis.
- Revenue per available seat mile (RASM): Total operating revenue per seat (empty or full) flown one mile. Calculated as Total Operating Revenues/Available Seat Miles.
- Seat load factor: Also referred to as passenger load factor or simply load factor, this metric is the percentage of the used capacity of an airline or flights on a given route.
- Aircraft utilization: The hours and minutes in a day that an aircraft is used.
- Passenger revenue per available seat mile (PRASM): This looks at passenger revenue per seat (empty or full). Calculated as Passenger Revenues/Available Seat Miles.
- Operating expenses (cost) per available seat mile (CASM): The average cost of flying an aircraft seat (empty or full) one mile. Calculated as Total Operating Expenses/Total Available Seat Miles.
This data has become especially important since schedules from past years are no longer a good baseline for planning. Instead, major airlines are using these metrics to rethink route profitability and base their timing, routing, frequency and capacity allocation on that data.
This signals a larger shift in the air travel landscape. It’s likely that airlines in the future will rely more on clean sheet scheduling to optimize schedules and eliminate flights that are losing money. As larger airlines focus on matching demand to supply, this could present an opportunity for smaller airlines to enter markets that their larger competitors are now serving less.
Best Practices for Developing Metrics That Drive Performance
As a CEO of an advisory firm, Roberson has both chosen KPIs for his own business and helped his clients through the process.
“When I’m interviewing a new client, I always ask, ‘How do you determine success for your business? What are your KPIs?’” said Roberson. “It tells you a lot about what their business really is about.”
Choosing the right metrics has “a little bit of art to it,” according to Roberson. Here are his top tips for getting it right.
Choose SMART Objectives: Leaders should look at their company’s top-level strategy, mission and vision. Then, with this in mind, craft strategic objectives that consider the context and realities of today’s business landscape. This isn’t the time for vagueness. To create relevant and effective KPIs, businesses need SMART objectives, meaning:
For each objective, define the KPIs and associated metrics that will allow you to monitor progress. Additionally, leadership needs to define what success looks like for each of those KPIs and communicate it to the team.
“Ultimately, you need to decide what’s most important, what the associated metrics are, how you measure it and what success looks like,” said Roberson. Creating SMART objectives helps businesses designate KPIs that their employees can actually move the needle on, not a “pie in the sky” goal, as Roberson calls it.
“A KPI people can relate to, that they can engage with and make an impact on is, to me, a good one,” said Roberson.
For RoseRyan, Roberson worked with his leadership team to identify 20 initiatives for the business for the year, then narrowed that list down to a more manageable five. Then, they worked to determine new KPIs that would link to the designated strategic priorities.
For instance, when RoseRyan went remote, Roberson knew he wanted to track success for consultants differently. The main factor in assigning consultants to projects used to be location. But now, there was an opportunity to rethink how assignments were made. Focus shifted from where people were versus where the work was being done to the bandwidth and capabilities RoseRyan had as an organization.
5 External Metrics to Watch
Not all indicators come from within. Companies must look outward at customers and the market at large.
|1. Churn rate calculates how frequently customers stop using your product or service over a given timeframe. Are a quarter of customers abandoning your service after a year, or do most use it for five years? Does that churn rate make sense for your industry or business model? A high churn rate indicates problems.
Churn Rate = Lost Customers/Starting Number of Customers x 100
|2. Attrition rate is the number of customers a company lost in a specific time frame relative to its existing customer base. For example, if your business had 1,000 customers at the start of the quarter and 650 by the end, you’d apply the above formula as follows:
350 (number of customers lost) / 1,000 (total customers at the start of the quarter) = 0.35
|3. Net Promoter Score (NPS) measures how likely customers are to recommend your business to a friend or colleague on a scale from 0 through 10. Those who rate a company a 9 or 10 are “promoters.”
Those who give a rating of 7 or 8 are “passives.” Anyone who gives a rating of 0-6 is a “detractor.”
Net Promoter Score = Percentage of surveyed customers who are “promoters” – Percentage of surveyed customers who are “detractors”
Also look at measures of hiring and recruitment effectiveness, including:
|4. Referral rate measures the number of new hires that originate from employee referrals. This metric is useful for determining the performance of internal engagement programs. It also gives you insight to how your employees view and discuss their workplace.
Referral rate = # hires from referrals in a given period / # of hires in the same period
|5. Candidate net promoter score is another way to look at how your candidates view the hiring process. Use this metric to assess how likely they are to recommend a friend for a job at your company based on their recruiting experiences. Ask this question to determine the candidate net promoter score: “On a scale of 1-10, how likely are you to recommend [your company] to a friend or colleague?” and use the same 0 – 10 scale.
Candidate net promoter score = % of promoters – % of detractors
“What I wanted to achieve was always having the right consultant for the right client at the right time with the right skills,” said Roberson. “So we metricized that ‘matchmaking’ goal. I can tell you how many times we lost [a potential client] because we didn’t have that person or didn’t find the right person quickly enough. Because we have KPIs that measure that.”
Designate both leading and lagging indicators: KPIs should be used in real time to help inform strategy and change tactics as needed around goals. However, progress along designated strategic objectives can be difficult to track when using only lagging indicators. For instance, if a law firm is trying to increase its revenue by a certain percentage within two years, tracking revenue doesn’t necessarily help inform strategy because it is a lagging indicator — it tells you what already happened.
Instead, tracking a metric like new case intake can make a major impact on the business because it is forward-looking. By looking at the number of new clients walking in the door, the law firm can estimate what future revenue will look like. Using new case intake as a real-time indicator, it can tweak its strategy appropriately around areas like marketing and advertising to impact the larger goal at hand of increasing revenue.
And remember that a full slate of indicators may not be all classic metrics or KPIs with formulas. Include macroeconomic indicators, like unemployment, commodities and energy costs, wage pressures, even factors like weather severity, for some industries. This is where that “little bit of art” often comes in.
Look to others in your industry: RoseRyan belongs to an organization of 15 similar companies that benchmark themselves once a year to compare performance with one another.
“It’s an annual exercise for me to look at these numbers and say, ‘They’re doing really well in this area and we’re not,” said Roberson. “So what do we need to do to address that strategically, and how would we know we’re winning? What KPI can we design so if that metric starts improving, we know we’re getting better?”
Looking to others within your industry can mean joining industry associations, attending trade shows or researching — a step you’ve already begun by starting this series.
Communicate new KPIs frequently to the team: In Roberson’s opinion, KPIs have become even more important with companies going remote.
“I think it actually keeps people aligned when they’re not physically in the building,” he said. “It’s a way of having a shared language and a shared vision of where you’re going through the KPIs. If people are informed about what’s happening and what our key drivers of success are, they’re more likely to help us achieve that.”
However, Roberson caveats that you need to spend time on this process. You have to set metrics to support KPIs, inspect them and work through them on a very regular cadence. Once a month, Roberson discusses company KPIs and has teams report on progress. Additionally, there are work plans around each that anyone can access at any time to check on progress.
And remember, sometimes less is more.
“I used to have eight charts for every KPI, but I realized that people were tuning out,” said Roberson. “They weren’t really getting what they wanted out of it. So I have now just a couple of charts — the really important ones.”
Revisit your KPIs: Remember the initial point: KPIs should be assessed for strategic relevance constantly, not just when once-in-a-century events occur. Roberson recommends examining KPIs and associated metrics as a part of the annual planning process, at a minimum.
“Everyone plans their business every year,” said Roberson. “So why wouldn’t you also look at what are we going to track, as well as what’s broken that needs to be fixed as part of planning? That’s best practice from my perspective.”
The Bottom Line
Roberson perhaps summed it up best when he said, “How do you know where you’re going if you’re not tracking the right data about where you’ve been and where you’re heading?”
For businesses, having the right metrics in place is integral to informing strategy and ensuring that they adapt appropriately. Stay tuned for the rest of the series as we examine how companies across industries are using their metrics to stay competitive in a volatile market.