How can the board of an SME or privatelyheld company deliver sustainable value through an effective governance methodology? Let me start by asking you a simple question: When you evaluate your enterprise on a regular basis, what are the measures or KPIs that you use to determine the health of the company?
Do you focus primarily on net profit margins? Solvency and liquidity? Return on assets or equity?The challenge with all these traditional, financially-driven measures is that they look backwards, evaluating past performance.
Yes, an upward trend tells you something, yet it does not go far enough in measuring the extent to which a board and a company are creating enduring growth in value.Here are a few insights that may help shift how you measure company performance through the implementation of an ‘expedition update’ or measurement dashboard.
1 DRIVERS OF PERFORMANCE
An expedition update requires that you really understand the drivers of performance that enable your company to analyse, predict and forecast what will happen. This helps the board track likely future performance and take proactive and corrective action en route.
These drivers are unique to your company and should reflect the value creation drivers of your business model. For example, success may be driven by R&D or by plant production.In that case, ‘new products launched’ and ‘production line capacity’ respectively might be powerful measures to use.
2 YOUR STRATEGY SETS THE SCENE
Your strategy focuses on what you want to achieve and how to get there. This will directly impact the speed and complexity of your journey and how your measures should best reflect those outcomes.
Using the plant production driver, how would an aggressive international expansion strategy impact the ongoing measurement of your plant’s capacity to support growth?
3 A BALANCED VIEW IS VITAL
The board must monitor and review the business with a balanced perspective across the enterprise to ensure that all parts function in synergy.As an example, you might assume that two really good measures would be high sales conversions and low staff wages.
However, if this is achieved with high staff turnover and lack of customer care due to low morale, then the collective outcome may not be positive at all. Always keep the bigger picture in mind.
4 PEOPLE, OPERATIONS AND FINANCE
A balanced perspective can be achieved by ensuring that there is an appropriate mix of measures across the three areas of people (your staff and customers), operations (technical and business activities) and finance. I’d recommend not more than nine to 12 measures across all three areas.
Examples of people measures could include employee turnover, customer database size, sales calls made, or number of health and safety incidents. Operations measures could include product and service development, average delivery times, and quality assurance indicators.
Lastly, finance measures do not measure the usual KPIs – they should instead indicate how operational parameters are translating into financial performance.
Examples might include average customer spend, cost of redo work and exchange rate variances.
5 BOTH ART AND SCIENCE
You can’t take any example that I’ve provided, simply drop it into your business dashboard, and expect magic.You have to select indicators that reflect likely future performance, but also track the extent to which your team is delivering on the strategy your board has approved.
This requires absolute clarity on: Your business model and how your company makes it money; your strategy and direction; and how your operational processes and systems can support the extraction of those measures that could indeed mean life or death on the mountain of your business expedition.