Crises have a way of focusing company owners' attention on a single critical indicator of the business's health. If owners are smart, they help everyone on the payroll understand what the key number is, so that people can pitch in and help. If your business has tanked because of the Covid pandemic, the one number you're probably watching most closely right now is revenue. If business has skyrocketed, you'll have some other metric you are tracking every day--maybe inventory levels or the number of qualified job applicants.
There's a lesson here for normal times--and for the many businesses right now that are slogging through the pandemic without either famine or feast. Almost every company can use a key number: a simple, easily trackable metric that ties directly to the business's financial results. Companies can put that number up on a big scoreboard. They can get everyone involved in tracking it, forecasting it, and figuring out how to move it in the right direction.
As we argued in a previous post, a highly visible key number tells everyone in the organization whether they're winning or losing right now. It helps frontline employees understand the business. It gets them thinking more like partners than like hired hands. If you tie a bonus to agreed-on improvements in the number, so much the better. Suddenly, everyone's on the same team.
So how do you determine your key number? In our experience, the process is just as important as the result. There are four steps, all of which can be undertaken more or less simultaneously:
- Survey your employees--everyone except the managers. Ask people what they see as the company's biggest challenges and opportunities. For some, this will be the first time their boss ever asked their opinion about anything. Right away, you're starting to build trust and buy-in.
- Interview your managers, asking a similar set of questions. If their answers are wildly different from the employees' responses, you know you have a communications problem. You can start by getting everyone on the same page.
- Pull up your financials for the past three years and see what they can tell you. (Sometimes they don't just tell, they shout.) Maybe your gross margins have been steadily declining. Maybe G&A expenses have been creeping up faster than revenue. A little financial analysis goes a long way toward identifying opportunities and threats.
- Talk to your customers. Ask people in your organization to call a representative sample of customers. Find out what those customers like about doing business with you and where they think you could improve. Make it personal. You'll not only get great input, you're also likely to boost your repeat and referral business. Remember: What your customers value defines your company's economics.
We have seen all kinds of key numbers emerge from this process. Rework costs at a manufacturer. Direct profitability (revenue minus direct costs) at a travel agent. Revenue per employee at a professional services firm. Average tab per table at a restaurant. Note that each of these numbers directly affects the company's financial performance. Yet everyone can understand them and learn how to move the needle.
The best key numbers combine an "offense" measure, such as revenue, and a "defense" measure, such as "per employee" or "per dollar revenue." And they aren't necessarily permanent. The manufacturer we mentioned began tracking rework costs assiduously and soon got them under control, so it was time for a change. Your company's annual planning process is a good time to revisit the number.
One number gets people pulling together. Years ago, our friend and mentor Jack Stack said, "It's easy to stop one guy, but it's pretty hard to stop 100." Change "100" to the size of your company--and then see how hard it is for competitors to stop you.