Don’t Fear Your Numbers

Twenty or so years ago, organizations would hire guys like us to come in and help them define metrics and measures.  Often times there were not adequate data collection and storage systems, so we ended up counting a lot of things manually, and then getting our crayons out to hand draw graphs to represent these indicators.

Skip ahead in time a couple of decades, and organizations are still hiring guys like us to help them with the measures and metrics, but now its usually because they have thousands upon thousands of data points, but no ability to turn this data into wisdom, and ultimately better business decisions.

Blame Microsoft.  They made it easy to have powerful spreadsheets and databasing capability on every desktop relatively cheaply.  Now the guy who runs the janitorial service at the office has a PC with more computing power than the Space Shuttle, and 500 indicators he’s tracking.  Bad news – if you have much more than half a dozen metrics you’re following, that’s not a scorecard… that’s a laundry list.

We also see it in any professional sport.  Did you know that in games that take place on the road, in the Central Time Zone, on odd-numbered days, in the same month as the coach’s birthday, when the starting line-up all had chicken for the dinner the previous night, the team has posted a win 58% of the time?

Now that’s valuable data.

Professional Sports organizations are very fat with cash – they can afford to waste some on useless statistics.  Your organization probably can’t.

You need to figure out what results your organization is trying to produce, and then determine the key drivers of those results.  For many organizations, the goal is to make money while minimizing various forms of risk.  What are the simple key drivers of these things?

Many managers are scared away from data because their accountant and their stats professor from college teamed up to make sure that any numbers were completely incomprehensible to the average human (and thereby keeping them both employed).

Yet, taking just a bit of time to better understand the key numbers in your business is time extraordinarily well spent.  And a fringe benefit is taking those numbers (that you now understand them) back to your stats-prof, or your accountant, and truly baffling them.

 

Scatterplot Graph: A Simple Decision-Making Tool for Managers

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The Scatterplot Graph is a simple technique that is not often used to help managers make better decisions.  Below we talk about the following aspects of the Scatterplot Graph:

  • Why would I use a Scatterplot Graph?
  • Types of correlations
  • Two Examples of how to use the Scatterplot Graph.
  • How to do a Scatterplot Graph

Why Would I Use a Scatterplot Graph?

  • The Scatterplot Graph can test for possible Cause & Effect Relationships.  There are a variety ways to do Cause & Effect analyses, but the Scatterplot Graph is a good place to start if you’ve got some data.
  • A Scatterplot Graph can be used for predictive action when the is a strong correlation between variables.  This is explained in further detail below.

Types of Correlations in a Scatterplot Graph

When gathering data points, a pattern may or may not emerge.  Here are how we label those patterns:

  • Positive correlation.  If two things are positively related, there will be a visible pattern on the Scatterplot Graph, that moves from the Southwest quadrant to the Northeast quadrant of the graph.  If you drew a line between the Scatter plots, most of the data points would be very close to the line.
  • Possible positive correlation.  This looks much like the pattern above, but the data points are a bit further from the trend line, and it is not as clear as to whether the variables are correlated.
  • No correlation.  The pattern of the data points on your Scatterplot Graph appear to be random.
  • Possible negative correlation.  If two things are possibly negatively correlated (ie: more of this is a cause of less of that), then the pattern on the Scatterplot Graph will generally move from the Northwest quadrant to the Southeast quadrant.  However, the distance from the trend line may make the pattern less distinct.
  • Negative correlation.  If two things are negatively correlated, the pattern will be the same as the one above, but will be much more easily recognized, and tightly connected to the trend line.

The R-Squared

Excel makes it easy to determine a trend line for any Scatterplot Graph.  Excel will also provide an equation for the line, and an R-squared statistic.  The R-squared stat measures the collective distance from the trend line of all the data points.  If something is highly correlated, the R-squared number will approach 1.  If the data points are not at all correlated, the R-squared number will approach 0.

Example 1

This is actual data from an industrial operation that was testing a theory that their production was largely based on the output of one machine.  After tracking their overall output, and the availability of the machine for 30 days, this Scatterplot Graph was produced, showing very little correlation between overall production, and the availability of the machine in question:

Scatterplot Graph

Example 2

This is actual data from a retailer that was trying to predict soft drink sales based on outside temperature.  As you can see, the Scatterplot Graph shows a very tight, positive correlation between the outdoor temperature, and the volume of soft drink sold.  As a result, the retailer could use the equation on the trend line to predict volume for inventory control purposes.

Scatterplot Graph

How to do a Scatterplot Graph

Some people will avoid doing a Scatterplot Graph because they think it is time consuming or difficult.  It is neither.  Here’s how to do it:

  • Determine what you are trying to test.  What two variables do you want to test a correlation for?  The examples above should provide some ideas.
  • Gather data (the more points, the better).  Ideally, you will want to track 30 – 50 data points as a minimum.
  • Put it into a spreadsheet.
  • Create a scatter graph.  This can be done with the “charts” function in Excel.
  • Ask for a trend line.  This is in the “tools” menu.
  • Ask for the equation.  You can do this by right-clicking on the trend line.

Three Things to Remember About the Scatterplot Graph

  1. Lies, damn lies and statistics.  You can probably find data to support anything, so make sure you leave your mind open to what the data you have is telling you.
  2. This is easy – do it once.  It is easy to dismiss this if you aren’t comfortable in Excel or with statistics.  It is actually very easy.
  3. Find someone you work with who is good with Excel if that is what it will take to get this done quickly.

Watch the ‘3-Minute Crash Course’ about the Scatterplot Graph (CLICK THE ARROW TO START THE VIDEO):

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Introduction to Business KPIs

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Why Measure at All?

As part of your introduction to business KPIs, you should have some idea as to why you should bother to measure at all.

  • To know where you are in your business, and how to improve it.
  • To build a business case for a course of action, or an investment.
  • To determine the impact on clients or customers.
  • To improve objectivity, and reduce reliance on opinion and rumor.
  • To establish accountability amongst teams or team members.
  • To ensure people are not working at cross-purposes.
  • To celebrate success.

Where Performance Measures Fit

Introduction to Business KPIs — Definitions

  • A Strategy: Longer term direction or scope that differentiates you you’re your competitors. (How do you make money or if you are not in a profit business how you achieve your organizational “end”).
  • Goal: Something specific you work towards to achieve your strategy.  (What you’ll do to realize your strategy)
  • Key Success Factors: Those critical areas (or key work activities) we must focus on in order to be successful (achieve our goals).  Some generic KSFs are:
    • Quality
    • Quantity
    • Cost
    • Time
    • Safety
  • Performance Indicator: A metric that tells you how you’re doing in working towards the achievement of a Key Success Factor.
    • Result indicator: Measures outcomes or results
    • Process indicator:  Measure activities that lead to outcome or results

Introduction to Business KPIs:  Good indicators

  • Simple to understand and use
  • Aligned with corporate strategies
  • Promotes continuous improvement
  • Controllable or significantly “influenceable”
  • Examples of Good Performance Indicators:
    • Tons per hour
    • Absenteeism rate
    • Time loss numbers
    • Overtime as a % of salary

The Business KPIs you choose must be within your sphere of control or your sphere of influence.  You may measure some things that are in your sphere of concern, but they will not drive your business the way that Business KPIs in the other spheres will.

Introduction to Business KPIs:  Bad Indicators

  • Are too complex
  • Are not specific enough
  • Not connected to larger goals
    • Lousy production
    • Bad attitude
    • Bad safety
    • Good overtime control

Introduction to Business KPIs:  3 things to remember

  1. There is never one perfect measure – look at a variety of things.
  2. Don’t let your metrics take on a life of their own.  They should enable decision making and action.
  3. Let your indicators change over time.  As you learn more about your business, and as your business changes you should allow your Business KPIs to change too.

Watch the ‘3-Minute Crash Course’ about Business KPIs (CLICK THE ARROW TO START THE VIDEO):

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Managing Measurement by Best Seller

Performance metrics often provide an excellent illustration of how a really good idea can be made difficult and useless by poor implementation.  It’s a lot like watching your favourite sports franchise consistently snatch defeat out of the jaws of victory.

Usually it goes down like this:  someone in some position of authority will read the first fifteen pages of a book about measurement.  Without reading the following 250 pages, he concludes that his organization needs to get everyone on the measurement bandwagon.  Then he strikes a committee, or hires a consultant to go forth and make this happen.

Fast forward in time six months, and a significant portion of everyone’s work week becomes dedicated to counting the number of paper clips they have consumed since last week, and calculating the annual impact of that paper clip consumption.  They then have a meeting to discuss how to reduce paper clip consumption, thereby reducing annual operating costs by $48.50, or roughly 1/100th the cost of the first meeting about paper clip consumption.

OK… that might be a bit harsh.  But here are some actual examples of performance metrics gone horribly wrong:

  • The technology company that measured sales success exclusively on dollar volume at the end of each quarter.  THE RESULT:  A whole bunch of clients went somewhere else because they were tired of being sold things they really didn’t need.
  • The grocery retailer that measured check-stand effectiveness by calculating the frequency of cashiers using customers’ names.  THE RESULT:  the customers went to stores where they measure how much time was spent waiting in line – something the customer actually cares about.
  • The restaurant owner that attempted to reduce cost by reducing the number of paper napkins provided to each customer.  THE RESULT:  I don’t know… probably sticky fingers and dirty tables – this one just seemed really silly to me
  • The lumber manufacturer that measured how much fibre it recovered from each log, as opposed to how much money they made on different dimensions of lumber.  THE RESULT:  Very few wood-chips, but a yard full of garden stakes that no one would buy (and a whole bunch of trees unnecessarily harvested)

Some people will tell you all that matters at the end of the day is how much money you make.  Not true – if you focus exclusively on this, you are in a never-ending cycle of sub-optimized decisions that forbid any long term success.  Most obviously, if you ignore safety while focusing exclusively on how much money is make, it is only a matter of time before you injure or kill someone, which beside being ethically reprehensible, is very expensive.

Here’s the bottom line about measurement:  The great thing about measuring performance is that people will adjust their behaviors to affect the outcome of the measure.  Unfortunately, the really scary thing about measuring performance is that people will adjust their behaviors to affect the outcome of the measure.

So measurement (like other recreational drugs) should be used cautiously and in moderation.  Second, you should never have only one number you are tracking.  And finally, you need to understand why numbers are trending the way they are, as opposed to (over)reacting to one data point.

Let’s be careful out there.

 

You Can’t Always Get What You Want

Mick Jagger was right – you can’t always get what you want.

One of the dynamics that managers face is weighing off short-term objectives against longer term ones.  This sometimes results in seemingly poor decisions being made.

Often, I get to hear people in organizations complain about the seemingly silly decisions that are made.  It is so clear to them, that by investing $100,000, you can recover a $1m.  They’ve done the cost benefit analysis, and the answer is clear.  The only problem is that they haven’t figured whether there is $100,000 to spend in the first place.

Think of it like this:  If you replace the windows in house with better insulated ones, install high efficiency furnaces and air conditioners, and put new insulation in your attic, you will undoubtedly save thousands over the lifetime of those renovations.  However, you may not have the $25,000 required now to do those modifications.  Further, you may not be sure you’ll be in the house long enough to recover the investment.

It is the same for organizations.

Don’t get me wrong – I’ve seen lots of examples of corporate stupidity, too.  My favorite one is the company that decreed in blood that all travel occurring within an operating division must be by surface, and that air travel was restricted to those going across operating divisions.  This made a lot of sense in Northern California, where the decree was issued.  It didn’t make a lot of sense in British Columbia (about twice the size of Texas, and full of mountains).  It turns out to drive from one side of this division to another was a four or five day exercise.  Surely a plane ticket would be cheaper?  Nope – the policy stands.  Truly stupid.

The dynamic of measuring the short term and long term costs and benefits is not easy.  Leaders need to do the math and figure out the right thing to do.  But sometimes, the right thing to do is deferred to what can be done.

You might not get what want, but rather “get what you need”.  Thanks Mick.

 

How to do a Cost Benefit Analysis

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What is a Cost Benefit Analysis

  • It is a tool used to more objectively assess:
    • the value of a solution or action
    • the comparison between alternative solutions or courses of action
  • For our purposes, it does not include detailed financial analysis

When to conduct a Cost Benefit Analysis

  • To determine feasibility of a solution or course of action
  • To compare alternative solutions or courses of action
  • When you are justifying a course of action
  • When you are requesting additional resources for something

How to do a Cost Benefit Analysis

  1. Determine the Costs
  2. Calculate the Benefits
  3. Compare Alternatives
  4. Report and Plan Action

Determine the Costs

  • You should first check to see if any analysis has already been done on your project or idea.  Perhaps there has already been some detailed costing work done.  If not, you will need to collect the cost numbers.
  • List out costs of your solution or course of action:
    • Initial or capital costs
    • Ongoing costs – what are the costs in the coming months or years?
    • Labor costs – how much time will your idea take from people?
    • Contractor costs – Are there external labor costs?
    • Supply or input costs
    • Non-monetary costs – what is the impact on safety, morale, reputation and other less tangible things.  You may not be able to assess a number to these things, but you should at least list them for consideration.

Calculate Benefits

The next step in the Cost Benefit Analysis is to estimate the benefits on all the same dimensions as you did for costs:

  • Dollar value of benefits:
    • Time (labor) saved
    • Supply (input) savings
    • Energy savings
  • Non-monetary benefits:
    • Safety, environmental
    • Reputational
    • Morale, turnover
    • Quality

You should consider the immediate, yearly, and ongoing benefits in your Cost Benefit Analysis.

Compare Alternatives

You now need to compare the costs and benefits from each of your alternatives.  If you only have one alternative, you are still comparing your option with the status quo.

  • Subtract costs from benefits for each alternative
  • First compare against doing nothing
  • Compare each alternative with each other
  • Take non-monetary into consideration

Below is a comparison table for a simple Cost Benefit Analysis.  In the last 4 rows, a dollar figure may be difficult to quantify, so you can put a description of the cost or benefit in each of these areas:

Status Quo Option 1 Option 2
Initial Costs
Ongoing Costs
Time Savings
Supply Savings
Energy Savings
Safety
Environmental
Reputational
Morale

Report and Plan Action for your Cost Benefit Analysis

  • Make a recommendation based on your Cost Benefit Analysis
  • Put together a brief plan of action for your recommendation.
  • Don’t forget about other influencing conditions.  Sometimes, you may have a compelling argument that still needs to be deferred for other reasons, such as:
    • Cash flow
    • Availability of resources
    • Competing priorities

3 Things to Remember About How to do a Cost Benefit Analysis:

  1. Non-monetary conditions may have a considerable influence.  Safety considerations, for example, may trump all other criteria in determining action
  2. The time-value of money must not be underestimated.  Many people forget that capital has a cost, and if your idea ties up dollars there is a direct cost to this.
  3. If it gets complicated, more detailed financial analysis may be more appropriate.  You may need to seek out a finance individual in your organization to assist with your analysis.

Watch the ‘3-Minute Crash Course’ about How to do a Cost Benefit Analysis (CLICK THE ARROW TO START THE VIDEO):

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Measure Your Measures

Last time I wrote about measurement in the workplace, I got quite a bit of hate mail.  I could tell you the exact quantity and relative quality of that hate mail, but suffice it to say, that people seem to have very definite ideas about how things ought to be measured (or not measured) in their workplace.

So I’ve beefed up my security detail, and put on my protective cup, and I’ll tackle business metrics again – this time for service oriented businesses.

Let me describe the two opposite ends of the continuum on this silly debate.  Way over on the far left hand side, are those people who say, “I’m a lawyer (graphic designer, LR negotiator, marketing specialist, etc.), you can’t measure what I do.”  Sorry – I can, and I will.

On the extreme right hand side of the scale are those people (mostly consultants, who’ve never actually worked in any of these jobs), who say, “Measuring service businesses is exactly the same as measuring production-based businesses.”  You should throw such people out of your office quickly, before any more of their ignorance wears off on your people.

As with many things, the truth lies somewhere between these extremes — in the less comfortable grey area.  You can and should measure service business functions, but it often much harder than simply counting widgets.

In some cases, there are very repeatable and transactional things that occur within a service function, that should be counted like widgets.  If you work as a recruiter, you should be prepared to disclose how many resumes were screened, how many people were shortlisted, how many interviewed, and your time to fill the position.

You should also have a quality ranking as to how well those positions were filled that will only become clear after some time has passed.  For example, how many of your new recruits quit or are terminated within the first 18 months is a quality indicator of the recruiting process.  So are the upward mobility of new hires, and their scores on performance appraisals, in the first couple of years after they come onboard

That wasn’t so hard, was it?

So rather than fire-bombing my office, perhaps you could measure the effectiveness of your current measurements – but we’ll leave that for another day.

 

Service KPIs: Measuring Unmeasureables

How do you got about measuring those things that are more elusive than counting the output of your Widget Factory?  Join Jed and Bob as they discuss how to tackle this common problem.

Watch the ‘Service KPIs’ Video (16 mins 06 sec):


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Service KPIs: Measuring Your Unmeasureables

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Measures in service businesses have some fundamental differences from those found in manufacturing or production businesses.  Below we discuss Service KPIs (Key Performance Indicators) in the following context:

  • What is a service business?
  • Why measure Service KPIs
  • How service businesses differ from a widget factory.
  • Four steps to measuring the seemingly unmeasurable

What is a Service Business?

People most often associate Service Businesses with those that have a retail facing customer service offering.  In fact, the definition is broader than that:

  • One where the product or outcomes are less tangible than other goods.
  • Businesses where work is performed, or expertise is offered.
  • Often are information based.
  • Can be temporary in nature – for example, when you buy a lamp, you keep that good for some period of time – perhaps indefinitely.  When you buy a massage, you pay for the service, and afterwards all that is left is your memory of the service.
  • Service sector businesses are much faster growing in advanced economies than are the manufacturing and/or resource sectors.

Why Measure Service KPIs

  • To know how your business is doing, and how to improve it.
  • To build a business case for a course of action, or additional resources.
  • To determine the impact on clients or customers.
  • To improve objectivity, and reduce reliance on opinion and rumor.
  • To establish accountability amongst teams or team members.
  • To celebrate success.

How Service KPIs Differ From Other Business KPIs

  • There are typically longer cycle times in service businesses.
  • There are more complex process maps in many cases.  There may be many more boxes, and many more decision points.  As such quality metrics become less clear.
  • The criteria for success and progress is more subjective.
  • There is usually a need to go beyond numbers, and to also use descriptive qualifiers.

Four Steps to Establishing Service KPIs

  1. Identify Desired Results.
  2. Identify Behaviors That Drive Those Results
  3. Quantify and Qualify both results and behaviors and actions wherever possible.
  4. For each metric establish the BATT.

Identify Desired Results When Establishing Service KPIs

  • In a manufacturing setting, you count how many widgets you make in a given time period.  Your Service KPIs should be based on the ultimate desired outcomes of your efforts.  In some cases, this can only be measured in years or perhaps even decades; which is why you need to also look at process, activities and behaviors.
  • If you are having trouble identifying your results or outcomes, ask the following questions:
    • Who are your “customers”, and what do they expect from you?  Do not get caught up in a retail definition of customer.  A customer is anyone who relies on you to provide them with something.
    • If you got hit by a bus, who would notice, and what would they miss?

Identify Behaviors That Drive Results

If your outcomes or results are several years removed from what you do daily, then you need to determine what steps lead to those outcomes:

  • What are the behaviors, actions or activities you suspect drive the results or outcomes you produce?
  • What is the change or effect of those behaviors?

Quantify & Qualify to Establish Service KPIs

Quantify

In some cases, you will be able to count the output of your results, actions or behaviors.

Typical Service KPIs fall into the categories of:

  • Cost
  • Cycle Time
  • Timeliness
Qualitative

In many cases, your Service KPI will be harder to count.  In such cases, you need to evaluate or judge the output or behavior:
  • Quality or satisfaction.  What is the perceived quality, or level of satisfaction of the service provided?
  • Sometimes a descriptive statement can take the place of a hard metric when establishing Service KPIs:
    • Describe in detail the desired outcome, and then
    • Compare against current performance.

BATT

  • Baseline – what has performance historically been.  The baseline (as well as Actual and Target) can be:
    • a hard metric
    • a perceived level of satisfaction
    • a perceived level of performance
    • level of quality.
  • Actual – what is the current performance?
  • Target – what is the desired performance?
  • Timelines – over what period of time are these things measured?

Three things to remember about Service KPIs

  1. It’s definitely harder to measure in service businesses, but don’t give up.
  2. Don’t count stuff for the sake of counting.  Your Service KPIs should help you better run the business, and make better decisions.
  3. Don’t spend more time measuring than doing the work.  It is easy for Service KPIs to take on a life of their own.  Make sure you keep it simple.

Watch the ‘3-Minute Crash Course’ about Service KPIs (CLICK THE ARROW TO START THE VIDEO):

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Awash in Data

Twenty or so years ago, organizations would hire guys like us to come in and help them define metrics and measures.  Often times there were not adequate data collection and storage systems, so we ended up counting a lot of things manually, and then getting our crayons out to hand draw graphs to represent these indicators.

Skip ahead in time a couple of decades, and organizations are still hiring guys like us to help them with the measures and metrics, but now its usually because they have thousands upon thousands of data points, but no ability to turn this data into wisdom, and ultimately better business decisions.

Blame Microsoft.  They made it easy to have powerful spreadsheets and databasing capability on every desktop relatively cheaply.  Now the guy who runs the janitorial service at the office has a PC with more computing power than the Space Shuttle, and 500 indicators he’s tracking.

We also see it in any professional sport.  Did you know that in games that take place on the road, in the Central Time Zone, on odd-numbered days, in the same month as the coach’s birthday, when the starting line-up all had chicken for the dinner the previous night, the team has posted a win 58% of the time?

Now that’s valuable data.

Professional Sports organizations are very fat with cash – they can afford to waste some on useless statistics.  Your organization probably can’t.

You need to figure out what results your organization is trying to produce, and then determine the key drivers of those results.  For many organizations, the goal is to make money while minimizing various forms of risk.  What are the simple key drivers of these things?

When I worked in the Retail Food industry we were very good at making a really simple business far more complicated than it needed to be.  It seems to me there are only two drivers of the business that impacted all of the other things we were tracking:

  1. Did we have what the customer wanted on the shelf when s/he wanted it?
  2. Once that customer had everything she wanted in the cart, did we make it as easy as possible for her to part with her money?

There were literally hundreds of other things we were tracking, and some of them were actually valuable; but only these two things really mattered.  Only the two things above would impact all the important result indicators.

What are the key drivers in your business?

 

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