What Measures Matter?
by Christos Tsolkas
A couple of decades ago, I consulted for a meat processing company. The company was quite successful — number one in its market — and I was part of a team of people trying to help them expand their business into the Balkans.
The founder was an interesting character. He was a self-made entrepreneur who had a vision and relentless drive, and an instinct for questioning conventional thinking and beliefs. This kept me on my toes. For example, at our first meeting, I asked him about its share price and why it had fallen compared to the previous year. Was there anything behind it?
He said, “Why should I care about the share price?”
I went speechless. Still young and inexperienced, I thought there was nothing more important than the share price. Of course, that’s how the world judges a company, but it’s also how many CEOs like to keep score and assess performance.
To resolve my confusion, I pressed him on why he didn’t care about the stock price. He answered:
“I’m not planning on selling the company. So what does it matter what investors think it’s worth right now?”
Ooops. I instantly understood the wisdom of his perspective, and I loved it. But, suddenly, I wondered, what’s the purpose of measuring performance? Is it to reward or punish the people who got you there? Is it to evaluate the quality of your business proposition? Is it to assess and accelerate where you’re going?
I liked that last idea the most.
The Decision Driver
That was my first grasp of a new way of thinking about performance. I understood suddenly that the way we measure performance matters because it affects the decisions we make, the mindset we hold, and even the morale of our people.
Another client soon reinforced this perspective. This CEO was the head of a family-owned business (not publicly traded) in the shipping industry that had had a few bad years and lost quite a bit of money in the process. The CEO was okay with those stumbles, though, because he was more interested in the business's long-term prospects. He wasn’t worried about the past, he was worried about the future, and the measures he cared about reflected that.
More recently, I recalled these thoughts during an executive course on Governance at INSEAD. I asked my instructor, “Which is worse: missing targets that reflect performance in the past, or missing targets because of problems that will reflect the future direction of the company?” My instructor thought about it and said that answer is both.
When we measure performance, what are we really examining? It depends.
Some measures are all about the Past. For example, we measure revenue or sales numbers to understand better what’s already happened. Implicitly, I suppose, we believe this will help us learn what needs to change or improve to make a better future more likely. But is this true?
Some measures are about a Possible Future. Stock price, for example, is not a measure of the past but of what shareholders think will happen in the future, even though it likely never will.
Some measures are all about Comparisons. So, for example, when we look at market share, revenue, growth, and so on, we’re almost always comparing ourselves to a competitor, even if that competitor is our own ideal or past version.
And some measures are Sticks that assess a moment in time that may or may not be relevant. Employee satisfaction scores and brand penetration levels sound meaningful, but do they actually impact the business?
With these categories in mind, it’s easy to see how much leeway we allow ourselves when judging performance. For example, traditional companies are more likely to be assessed by comparing their current performance to their past performance or to their competitor’s performance. In contrast, new companies in new markets are more likely to be measured against their future potential. So which assessment is more valid? Which is more useful? The answers matter.
In fact, there are four simple dimensions of performance measurements:
· The Past (your record and history) vs. The Future (your plan and potential)
· Self-Directed (internal perceptions of what matters) vs. Externally-Directed (relative or comparative perceptions based on outside measures like competitors or the market)
Which ones matter most?
Emotional Matters
Over the years, I’ve come to realize how emotional leadership decisions can be. Many CEOs and Boards lean on “the numbers” to “take the emotion out” of the decision-making process, but those numbers have a tremendous influence on how we feel about the current status and future prospects. When we use different numbers — say, customer satisfaction over share price — we may “feel” entirely different about where we stand and what we should do.
In my view, whatever measures we use should help us improve the health and future of the business. As a leader, I like to know things about the current status that will influence future performance.
For example: How much do customers like your products and services? How much distance is there between you and your competition? Where’s the economy going? What does your innovation pipeline like? Are you confident in the quality of your people? Are you in a mature market or a rapidly growing market? How much cash, assets, resources, etc., do you have available to drive the growth you seek?
Those measures, in turn, influence the tactical decisions you need to make. Do you abandon a market that’s not growing as fast as expected? Do you hire more people or lay off people? Do you shy away from investments in new technology because you don’t have the cash or pour money into technology because you need to keep up with advances or seize opportunities?
Obviously, a single measure won’t give you all this information. So in my next article, I’m going to talk about four measures that can provide a framework for better decision-making.
CTjul21
==========================
Christos Tsolkas is an Independent Business Advisor, Entrepreneur, and Author of the new book, The Gift of Crisis: How Leaders Use Purpose to Renew their Lives, Change their Organizations, and Save the World.
He has spent more than 25 years in positions of significant responsibility (general management, sales & marketing) with multinationals in the fast-moving consumer goods sector, leading senior teams to achieve high performance and change. His educational background is in chemical engineering & business, and he is dedicated to continuous learning.
