MEASUREMENT AND PRECISION: KEYS TO BUSINESS SUCCESS

Article by Herb Rubenstein, President, Sustainable Business Group

Introduction

In the, “Recruit, Organize, Manage and Deploy” approach, one aspect of running or working at a business, non-profit organization or educational institution transcends time and strategic categories: the aspect of measurement. It is crucial to create a system to measure as many different aspects as possible of your organization and how it operates. With these measurements in place, your organization’s strengths, weaknesses, goals and objectives will be more clear and you will be better able to implement high-growth and sustainability strategies.

Metrics

Organizational development requires two types of measurement. First, it requires measurement of what is going on today. Second, it requires the setting of a standard that each part of your organization is to achieve as part of your high-growth strategy.

The term used today to discuss these types of measurements is “metrics.” Every organization seeking high sustainable growth must firmly answer the question of “What metrics are important to the organization?” Identifying the metrics that best describe your organization’s current level of performance, current level of ability, and willingness to adapt and grow and its ultimate growth potential are as critical to creating high-growth strategies for entrepreneurial organizations as maps are on a road trip.

The good news is that there are many places companies, non-profits, and educational institutions can turn to for help in getting new measurement systems put into place. Often professors and students from MBA programs and organizational development programs can assist your organization in developing measurement systems.

Other companies and non-profits are often willing to share or give away the descriptions of their measurement efforts. Joining into a strategic alliance with another company or non-profit organization can also speed up implementation and reduce the cost since some of the measurement issues will overlap between your organization and the business down the down the street.

Designing a Measurement Plan

Much has been written about the work of Robert S Kaplan and David P Norton, whose book The Balanced Scorecard: Translating Strategy Into Action and consulting services have made the term “balanced scorecard,” synonymous with an organization creating and implementing a system of measuring carefully numerous aspects of your operations and using this information to help guide your organization. We endorse wholeheartedly the concept that organizations seeking to develop and implement high-growth strategies should:

• identify benchmarks or levels that are considered to be “success”

• identify carefully what it is they intend to measure (“the metrics”)

• determine how to measure key aspects of the organization

• allocate resources for measurement and analytical efforts to insure that adequate resources are deployed in this effort

• develop a plan to integrate the results of their measurement and analytical efforts so they are properly used by the organization in strategic
planning and implementation efforts.

The Balanced Scorecard and EVA

A common approach to measurement emphasizes profits or earnings using generally accepted accounting principles. For some companies, this approach may be seriously flawed and must be modified in order to use valid economic measures to drive bonus systems, resource allocation and investment decisions. This will allow economic success of the enterprise to be measured accurately.

The Balanced Scorecard is a measurement tool used by businesses and business consultants to collect information and statistics on many processes in the business. For example, using the Balanced Scorecard, a sales operation can collect data on the number of cold calls made, number of calls answered, number of sales made from these calls, etc. The point of the Balanced Scorecard is to support companies in collecting useful information on many of the internal processes where they had previously not collected date on a real time or short delay.  With new information management systems, collection and analysis of these data can occur a very short time after the data are entered by the employees.

EVA, Economic Value Added, is an analytical tool based on the return on the value of the assets used in a business process. For example, if a generator cost $1 million, and produced $200,000 in annual value, one would know that the payback period is five years. If the life of the generator is 20 years, and assuming no maintenance costs exist, the return on investment, $4 million income vs. $1 million cost would be 400%. However, in many companies assets are valued on some other figure far less than cost due to depreciation or some other write off.  When companies calculate ROI on a reduced asset amount, it actually overstates the ROI. EVA simply makes companies look more closely at the true amount of investment in their operations and seeks to make operations produce positive returns on the higher figures for cost rather than lower figures for cost often used by companies.

Both the “balanced scorecard” and “EVA” represent advancements to the state of the art in measuring important elements of organizational behavior and their results.

Measuring the RIGHT Elements

Often large and small companies, non-profits and educational institutions fail at measuring key elements of their economic activities, employee behavior, customer attitudes or true growth potential in terms of either revenues or profits. No company can or should measure everything that an analyst can imagine.

However, it is critical for both non-profit and for-profit organizations to expand the number of items in their operations that they do measure and to measure them over time. This is the best way to discern trends and patterns.

For example, one non-profit, Child Trends, Inc., is in the business of measurement. The 30 researchers at Child Trends, Inc. measure poverty levels among children, teenage pregnancy rates, and the impacts of new federal programs on children’s well being. They are considering to be creating a “youth well-being index” that will track changes over time. The organization has an annual budget of $3 million.

One of the authors asked the organization’s leaders if they realized that they were spending only a nickel per year per youth of this country (there are approximately 60 million people under the age of 18 in the US).

Not only did the organization’s leaders admit that they had never made this calculation, they were quite surprised when asked if their research, their publications and their findings were worth $1 per youth per year. The CEO’s unequivocal answer of “Yes” to this question did reveal that in their eyes their agency should be a $60 million per year organization and not the $3 million per year organization trying to eke out a few percentage points of growth each year.

High-growth and sustainability strategies must be based on some rational belief or aspiration regarding just how big a company or non-profit organization can become within a given period. Measuring key elements of the economic and demographic landscape in which a businesses or a non-profit operates provides critical insights regarding how much growth potential it really has.

Measurement of the outside economic environment, competitors, and total market size and market share within your particular markets is critical to becoming intelligent about your organization’s high-growth potential.

This high-growth potential will change over time and only through measurement will an organization know whether it has vast room for growth in its market segment or needs to begin to explore other markets for high-growth opportunities.

Non-profits may have a tougher research task in measuring the appropriate indicators of their external economic marketplace, but the job is no less important than it is in the for-profit sector.

Precision is required when measurement takes place, especially if wages, jobs, investments, resource allocation and other important business strategy decisions depend on the measurement results. The segmentation and fragmentation of the training industry today may serve as a “growth brake” limiting either service providers (trainers or their companies) or service receivers (trainees or their companies) from ever doing rigorous research on the actual impacts of the training in such areas as changing workplace behavior, contributing to increased  productivity or profits or enhancing employee well-being.

Human Capital

Companies and non-profits cannot wait until the perfect measurement devices are created to begin to evaluate the effectiveness of the training programs in which they invest billions of dollars each year. Before sending someone to training, the organization must have a clear set of expectations of the results and be able to measure employee behavior against those expectations both before and after the training.

Econometricians are not needed (though they may be helpful at a steep price) to help organizations figure out whether a training program has  increased productivity, increased profitability, reduced costs or has been a waste of money.

Measurement of human capital is in its infancy though it has been discussed for over 100 years. Human capital, as we described earlier, is a measure of the relevant skills, knowledge and ability of the individuals that comprise an organization. While it may be arbitrary to say, “John’s Ph.D. is worth ‘x’ dollars,” we can assign a value to it because organizations are willing to pay Ph.D.s, on average, more than they are willing to pay for those with Master’s degrees. This is true if the knowledge gained or human capital gained through the Ph.D. program is expected to be useful to the organization.

Even more important than measuring the static value of the human capital on a particular day, if the organization wants to grow in its skills, knowledge(s) and abilities, it is important to measure the change over time of employees’ skills, knowledge(s) and abilities. While precision is always preferred, crude measures of human capital and the changes of human capital may be useful to an organization that seeks high growth and sustainability. They are certainly better than no measures at all.

Involving Employees

Measurement is a way that an organization says to everyone that what is being measured is important. Measuring the number of suggestions that employees make for improving an organization and measuring how many of them  management has adopted sends a strong signal to employees that their suggestions “count.”

Measurement programs can create opportunities for the rational allocation of rewards and friendly competition within different sectors of an organization. Measurement has never been cheaper. With new technology, a simple measurement system could be designed that would ask every employee every week to measure such factors as the following:

• attitudes
• self-assessments of how well they performed that week
• assessments of how well their co-workers performed that week
• assessments of how well their managers performed that week
• how much they learned on the job that week compared to previous weeks
• how willing or able they think they are to implement new procedures
• how willing or able they think others in the company are to implement new procedures
• how good their products or services were that week compared to previous weeks
• how satisfied or not satisfied their customers were that week compared to previous weeks
• how wasteful or efficient they believe their organization was that week
• other questions relevant to your organization.

Having employees, suppliers and customers (and students of educational institutions) pencil in answers in a multiple-choice format on a pre-coded answer sheet or respond by e-mail to questions posed by the organization can reveal, for pennies per answer, tremendously valuable information.  The organization can use this information to assess where it is, how to improve and give direction in developing and implementing high-growth and sustainability strategies.

Precision in Measurement

The implementation and improvement of measurement activities do not require a bevy of consultants, although many consultants will sell you fancy measurement tools that may be a step up from your home brewed version.
Some of us from the “old school” still appreciate the home brew for what it was: “the best we could afford under the circumstances and a lot better than nothing.” One of the silver bullets to high-growth strategies is that your organization, regardless of its size, can improve its measurement of key factors immediately and can learn and grow from the process.

Precision is important regardless of the size of the organization. Certainly, precision in space engineering is important because a small mathematical error can send a spacecraft thousands of miles off target due to weightlessness in outer space. In outer space, imprecise approaches and calculations can costs millions of dollars in a split second.

The importance of your organization, your business, your application of talents, energies and dedication is no less valuable than the millions that we shoot into outer space. Precision is the goal, but the inability to reach it with your organization’s first efforts at measurement must not get in the way of starting in earnest to measure what previously has been unmeasured.

Non-profit organizations would be well served to calculate the costs as precisely as possible of each service they provide (using some form of “activity-based accounting”). In addition, they should also enter into that equation a “cost” for capital that is donated to the organization and is employed in providing the service.

Measures of efficiency can be created for non-profits and educational institutions, just as an efficiency measure can be created for for-profit companies and, for example, NFL quarterbacks. The goal of this measurement is not to figure out to the last hundred of a cent how efficient your organization is at the present time. The goal is to track over time how efficient your organization is in delivering its goods and services in order to be able to think rationally about how to become more efficient over time.

Conclusion

Growth strategists often suggest that reinvention will yield greater results than improvement. From our consulting experience, we are clear that there is generally room for both improvement, which must always be based on some measurement system, and reinvention, which is the use of a completely new approach to success.

Measurement does not always require the use of an outside party to do the measuring or the analysis of the information/data generated by the measurement system. Self-measurement, by employees and managers, may well produce valuable information at low cost. In all measurement systems, the quality of the information generated will be the result of the quality of the questions asked and the integrity of the answers and analysis generated.

Measuring employee output and performance, measuring the amount and types of leadership exhibited by a senior manager, measuring the contribution of a board member, measuring the efficiency of your direct marketing program, sales and training efforts, measuring the value of the office location are just the tip of the iceberg of measurement activities that can be performed today. Measurement systems will evolve, and some will be abandoned along the way.

Organizational growth and development does not occur just because someone wants a bigger bottom line or higher revenues. Organizational growth is not just the result of trying to create a better product or advertising campaign. Organizational growth is promoted by knowing the current level of success or failure that each part of your organization is currently experiencing and this requires measurement.
Early implementation efforts of measurement systems will be experimental in nature and patience is required in implementing full scale, intensive measurement systems. The rewards from these systems can be bountiful and can contribute handsomely to your high-growth and sustainability strategies.

The existence of such measurement systems can be a significant asset in promoting your organization to foundations for contributions, to venture capitalists for funding and to other companies as they seek merger or acquisition candidates.

About the Author

Herb Rubenstein is the Executive Director of the nonprofit organization, THE LEEEGH, which stands for leadership in education, energy, environment, governance and health.  He is also the President of the Sustainable Business Group, a consulting firm to businesses, He is an adjunct professor of strategic management at the Global Energy Management Program of the University of Colorado Denver.

He is the lead author of Breakthrough, Inc.: High Growth Strategies for Entrepreneurial Organizations, lead author of Leadership Development for Educators, and the author of the American Bar Association book, Leadership for Lawyers.  He has authored over 100 articles and over 80 videos on business strategy, entrepreneurship, leadership, and improving organizations.

He can be reached at herb@sbizgroup.com or 303 910-7961. The website for the Sustainable Business Group is www.sbizgroup.com and for THE LEEEGH please see www.theleeegh.org. You can learn more about Mr. Rubenstein’s books at www.leadershipforattorneys.org, www.leadershipforeducators.org and view his videos at www.youtube.com/theleeegh and www.vimeo.com.

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