By Frederico Gondim, partner at FALCONI
One of the basic principles of management is the measurement of results. In this context, the maxim of Joseph Juran: “Those who do not measure do not manage” could not be more appropriate.
However, choosing the right indicators, their deployment and follow-up can be a challenge for many organizations. Not only by the amount of information available, every day more abundant, but the difficulty of integrating and processing data in the right way to achieve goals.
With the technological developments over the last few years, some companies are able to measure almost everything, but this does not guarantee the achievement of goals and, in some cases, may even divert the focus of the few and most important indicators.
As Sam Walton said: “Few things are really important in a business. And it is these that you need to monitor.”
It is very important to understand that the metrics that have been chosen will drive the team’s behavior. Sometimes we see commercial teams being driven only by sales volumes. We know that if the discounts and even revenue are not monitored, this can lead to distortions in the incentives of the sales team, which can destroy the company’s value.
So how can we define and manage indicators in order to achieve more effective results?
First of all, it is important to be clear that there are indicators of distinct and complementary natures. We have metrics of financial performance, customer satisfaction, society and employees. They are all very important, however, the financial indicators are vital to all types of organizations. Without financial resources, no institution can survive.
Therefore it is important to start the indicator selection process always focusing on the financial results by following a few basic steps:
1st Step: How to choose the right indicators?
It is important to construct an indicator tree, placing at the top of this tree the main indicator that you want to measure. It should be linked to the goals of the President and reflect the financial health of the institution. Some good examples are the Ebitba *, the net income and even the economic value added (EVA) **.
Then you should unfold this indicator, linking it to operational and process indicators. No indicator should exist if not somehow contained in this tree in a relationship of cause and effect.
Thus, the impact on the main processes in the financial results of the company become clear and we can direct efforts, focusing on what really matters. For example: What is the financial impact if you reduce losses by 1%? How much do we gain if we increase the productivity of a given area by 5%? All these effects start to become clearer and financially quantified with this tree. Those that do not affect the operation loose their place.
2nd Step: How to unfold targets using the chosen indicators?
Goals should be challenging and at the same time attainable. They have to motivate the team to move and seek knowledge, and therefore, must be defined on the basis of shortcomings. You may not use “guesses” neither linear targets for the entire team, for example, reducing costs by 10%. Goals have to be based on shortcomings: an external good practice reference leading companies in the industry, good internal practices and even historical data of the company. Shortcomings must be reflection of the good performance and serve as guidelines in setting goals.
After setting goals, marked out by the shortcomings, we must test the “consistency and sufficiency” of indicators, ie: if they are interconnected so that reaching the goals of the lower levels, will thus consequently achieve the results of the higher levels.
This is a very common mistake: Sometimes, all areas are reaching their goals, but the company (and the president) is not generating the expected result. This is not correct!
3rd Step: How do you incorporate the indicators into the company’s management system?
Each employee must have their goals and specific indicators linked to the defined indicators tree.
A certain quantity of indicators must be chosen for each employee that allow them to focus and guide their activities. Ideally, choose between three and six indicators per level per employee. The indicators should be incorporated into the variable remuneration system of the team and communicated clearly.
Finally, combine the establishment of action plans for each indicator set and establish an indicator control system and integrated action plans to monitor the evolution of the results.
Then we will have created a consistent system of unfolding indicators with a financial focus, integrating that which is essential in the organization, which will enable better management of the results and range of the proposed goals.
*Ebitda: English acronym for Earnings before Interest, Taxes, Depreciation and Amortization, which translated means lucros antes de juros, impostos, depreciação e amortização.
** EVA: English acronym for Economic Value Added.
Text featured in the september edition of the magazine Super Varejo.