Starting with ‘the hard stuff’

Although we are looking at how to measure the intangible, less visible or ‘softer’ aspects of business development, we are still using tangible and relatively ‘unforgiving’ criteria on which to base the methodology … namely money.

There is often a false distinction between strategic and financial planning, whereas we are actually quite often talking about the same thing but simply confusing the time frames in which we can expect to see the measurable results and benefits. Alternatively, we confuse the relationship between cause and effect, forgetting that the future is created now and that the present is generally a result of what was created in the past.

For example, a corporate ‘rationalisation strategy’ that is designed to reduce costs will show increased profit margins pretty close to the point of implementation, whereas a culture-change or people development strategy will take considerably longer but still be ultimately successful in the same way …i.e. increased profit margins.

The key is to define the ideal from the most tangible point of measurement and then create interim milestones - before setting KPIs with tracking and management systems - and money or financial performance is as good a yardstick as any because it’s like gravity - it’s real. 

You can go even further and target measurable improvements in share prices and share values but these tend to be a result of trading performance in any event, except in the case of ‘creative accountancy’, mergers and acquisitions, so it’s best to keep ‘the hard stuff’ as simple and as uncompromising as possible, given this will form the basis of your return-on-investment and also help to risk-manage input into areas that are less easy to quantify if looked at in isolation.

For example, imagine being in a taxi cab and telling the driver where you want to go but then thinking out loud about which route might be best and whether or not the conditions are right or even if you are sure that is the real destination to be reached. You aren’t likely to get very far and an organisation can get just as confused and fed up as that cab driver unless you are single-focussed in your own expectations.

At the end of the day, business success is measured by a highly sophisticated formula that you may need extensive training around … only joking, here it is… ‘You have to have more beans coming in than beans going out!’.

So, the best measures relating to getting ‘more beans in’ are around; sales volumes, gross margins and net margins and everything else could be called a means to those ends, even the most abstract and intangible strategies or activities you can imagine.

Getting the mix right

Having created a notional ‘point of arrival’ measured by tangible goals over a specific time-frame, we can start to sort out the areas or ‘pulse points’ of change that will achieve the objectives according to expectations.

These are the ‘catalyst’ points that cause the desired outcomes. The dictionary defines ‘catalyst’ as… “an agent that provokes or speeds significant change or action” and in this case, significant change is determined by only those elements that ultimately get the results.

It is relatively simple to create a strategy or change plan on paper, which (all things being equal) should inevitably achieve the results, so why is it that the eventualities are hardly ever as predicted and the times when everything goes ‘according to plan’ are so very rare?

The reason is that the plans are often actually a sort of ‘wish list’ covering a vast multitude of things to address or an insufficient number of things to emphasise, with little or no connectivity between the interim activities and milestones and the ultimate targets to be achieved.

This, in turn, is generally because the relationship between so-called ‘soft areas’ and ‘hard areas’ in business are not being controlled or tracked, even when the management instinct is appropriately balanced between the two.

If this ‘relationship of the parts’ is not understood and controlled at the outset, there is an inevitable degree of ‘chasing results’, ‘lack of follow-through and consistency’ and ‘pointless bureaucracy & reporting’ that occurs and then grows at an alarming rate.

‘Hard areas’ are those aspects of the business that are easiest to identify and measure in physical terms, such as systems, processes, income, outgoings, contracts, profits and customers.

‘Soft areas’ are those aspects that are less visible and relate to the energy-orientated activities and conditions that drive the business ultimately, such as people, culture, communication, vision, management, strategy and general goodwill.

Even where companies have understood the difference between the two areas, they are far less likely to understand or be able to control the actual relationship between the two.

It is understandably confusing because the ultimate ‘hard areas’ or tangible results are actually achieved as a result of the right combination of ‘hard’ and ‘soft’ areas and the ‘soft areas’ result in ‘hard measures’ when they come into fruition.

It’s not enough to have both aspects emphasised unless they are managed and tracked in relationship to each other (cause and effect) and setting the right KPIs are a way to achieve this.

Goals, milestones and interim targets

Let’s take a step back and return to the ultimate, measurable goals (over time) that are agreed upon and now simplify the process by creating interim targets that ‘map’ out the journey of key arrival points based on short, medium and long term measures.

A golden rule about goals and interim targets are that they must be physically measurable and linked to a specific date of completion, in other words are based ‘in time and space’.

Example:

Goal: To have increased turnover by 25% and net profitability by 33% …by Dec. 2004

Next, define the goal (exactly as it is above) as actual amounts and state the difference between the current and the ideal …

The next step is to create the critical milestones that are expressions of the above goals within a short, medium and long term schedule, such as annual or six-monthly stages, leading to, in this case, end 2004 and starting from now.

Balancing the growth and efficiency milestones

Try to keep the two major strands or drivers (as above) separate in ‘tactical’ terms because growing sales is a different affair to growing profitability even though both are influences and dependant on each other and do have to work in tandem.

Sometimes, you may choose to get ‘down the line’ on one strand before starting the other in earnest but circumstances rarely allow that luxury and a true ‘company turnaround’ must emphasise increased growth and increased efficiencies equally or the company will tend to swing from one problem to the other, bringing down progress achieved in each area to date.

It can look tempting when you see a great deal of top-heavy costs and ‘waste’ taking place but, to err on that side entirely is a mistake, as companies are actually living entities and you should always have compelling growth strategies running in parallel with cost-return improvement plans and vice versa.

If promotions, sales and market growth are stressed without basic ‘housekeeping’ or cost integrity improvements, you can actually grow a company up into bankruptcy before realising it.

When considering which businesses or activities to invest in or spend money around, check that there is the fundamental (even if buried) inherent capability to respond to change management on both sides of the business.

Perhaps you are looking at a high value-added service business that is able to rapidly defend or take market share and is only operating ‘hand to mouth’ because it needs more capital to grow revenues.

Perhaps you are looking at a volume manufacturing business that is able to exploit production capacity and is only operating ‘hand to mouth’ because it needs more capital to upgrade delivery facilities.

Either way, make sure the sales-driven business emphasises infrastructure and cost control improvements when you put the money in to help grow sales and make sure the delivery-driven business emphasises new routes to market and sales order improvements when you put the money in to help grow profitable capacity.

Quite often, this is a matter of incumbent management and the ‘type’ of experience the top management team have mostly in common. This is not a major obstacle, unless ignored.

If you are the manager in question, make sure your team has different but complimentary strengths and, if you are investing in a management team, make sure they have the right level and type of training and support to help them collectively be an ‘all rounder’.

KPIs are one form of solid support and, so long as growth and efficiencies are equally emphasised in the milestones and so long as they reflect ‘hard’ and ‘soft’ interim targets, the right catalyst or ‘agent of faster progress’ is in place safely and under control.

Without these ‘checks and balances’ the strongest management personalities will tend to drive the bus according to their side of the vehicle and KPIs make no real difference in these conditions, anymore than investment does unless correctly applied.

Interim targets that form the KPIs

Still using hard, tangible goals and milestone measures, interim targets are the place to introduce the ‘soft’ areas of change and they determine your tactics for achieving them.

In other words, take the principle of current and ideal and state the outcomes (hard and soft) that you are looking to achieve by each interim point, starting with where you are.

This may involve some in-depth questions, research, analysis or even surveying to ‘benchmark’ the current ‘soft’ issues, to put a stake in the ground. It doesn’t actually matter how accurate you are in defining the current status of the soft areas (this is not the same for the hard areas) as you are more interested in setting targets that allow you to compare ‘like with like’, using the same assessment process to validate progress or to troubleshoot ‘stuck’ areas.

Interim targets should be measured no less than monthly and no more than weekly in ‘hard areas’  ….but no less than quarterly and no more than bi-annually in ‘soft areas’, as this will create the right ‘tension’ for change to happen naturally.

This is vital as, rather than ‘opening the oven door too often to see if the cake has risen’, you can allow the true forces to work their ‘magic’. If you are a cook, then you know that ‘opening the oven door’ can stop the process from happening and tends to lead ‘back to the drawing board’, which is the same in business and areas undergoing fundamental change or transformation.

Key performance indicators

It is impossible to supply a definitive list of KPI measures that will work for you, given every business and its management is unique. The point is to use the above principles and issues of balance and integration to set the ones that are right for the company, based on the different cause and effect timescales discussed so far.

For example: 

Growing turnover

Each of these lines requires a tangible measurement in place, which forms the different interim targets. Even in the ‘softest’ areas, the item can be given a tangible measure (time and space) that allows you to track that this area of change is ‘doing its thing’ and have confidence that the milestones and goals will be realised as a result.

As you can see, it is the soft KPIs that are likely to create the successful hard KPIs at the end of the day, which is why they need a different time-scale for their interim targets, to allow the actual, measurable effects to come about.

Conclusion

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