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Your Metrics Are Too Simple

        posted by , June 21, 2011

Years ago I worked for a company that had a simple slogan: revenue, revenue, revenue! That company is no longer around.

Metrics have the power to abstract business performance. They have a simple elegance about them — executives often have dreams of managing entire organizations with a single dashboard view.

There is a tendency to take the simplicity of metrics too far.

Taking Simplicity Too Far

Executive compensation is often completely based on improving 1 or 2 key metrics.

This leads to neglect of all other concerns, excessive risk taking and temptation to game the system.

business metrics

Example — Sales Metrics

Suppose you measure the head of sales with only two metrics: revenue and gross margins.

The head of sales will pass these targets down to the entire sales organization. Revenue and margins may well improve. However, since nothing else is measured the sales organization may be tempted to:

- dramatically increase selling costs (increase costs)
- reduce financial checks of customers (increase risks)
- neglect existing customers and small accounts (damage reputation and customer satisfaction)
- focusing on selling cash cows over developing new products (damaging growth prospects)

Best Practice

Business and individual performance measurements need to mirror the complexity of the business. Metrics are a great tool to measure complexities — but you need more than 1 or 2 simple metrics to capture business realities.

Departments, teams and roles should be measured by no less than 10 metrics that accurately reflect the nature of business. Metrics should reflect the physics of the business universe — measuring revenue, cost, risk and customer experience from a current and future perspective.

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