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Regardless of whether you want to increase sales, decrease expenses, improve operations or reduce attrition, etc., the philosophy behind driving improvement is the same - measure what you want to manage!
In order to truly drive change and see improvement in performance, businesses should identify what matters most in the area they are trying to improve, gather data on it, develop metrics and set targets, and then link performance to compensation.
The most difficult step in improving performance is identifying what matters most in the area you are trying to improve. In order to do this correctly, you need to understand what the key drivers of performance are in that area. If a retailer is trying to improve the operational effectiveness of its stores, for example, they may want to focus on boosting sales per labor hour, driving transaction count growth, reducing shrinkage and reducing inventory, SG&A, wage and overhead expenses. Why? Because all of these drivers ultimately tie back to employee effectiveness and cost management, which are both critical elements when it comes to managing in-store operational effectiveness. The main point here is that it’s important to spend time upfront truly identifying what matters most in the area you want to improve, as focusing on the wrong things is counterproductive and could even lead to worse performance.
After identifying the key drivers of performance in the area that you want to manage, the next step is collecting data in that area. In the case of a retailer that wants to improve the operational effectiveness of its stores, it should collect, report on and analyze the following information by store:
Often, identifying what data you need to collect isn’t difficult, rather the process of actually collecting it and accurately reporting on it is the more challenging piece to manage. For larger scale businesses and Fortune 500s, investing in technology is critical and often worth the cost, as access to accurate information can help leaders manage and improve business performance in the long-run. For smaller businesses that don’t have the money to invest in technology solutions, data should be collected manually over time and stored in an offline database until enough information has been collected to begin analysis. The data collected offline can then be moved into a system, if the business opts to invest in technology at a later point in time.
Once you’ve identified what you want to measure and what data you’ll need, the next step is to develop a set of metrics and targets against which you’ll be able to measure and manage your performance. In the retail example, the business may want to consider using the metrics listed below to improve its in-store operational effectiveness over time.
In this particular case, many of the metrics are linked to in-store sales, because using sales as a baseline enables the retailer to compare and benchmark performance across multiple stores over time. As you select metrics for your business, think about what baseline information you can use to benchmark performance, especially if you are managing sales and operations across multiple locations or geographies.
After you have determined what metrics you want to evaluate, set targets for each metric. If aren’t sure what a realistic target is for a particular metric, focus on the end goal of driving improvement and set a stretch goal for the business. Once you’ve set targets, monitor performance across all metrics on a monthly basis and implement changes on a quarterly basis, or as needed. Resist the temptation to implement changes until after you have at least three months of performance data on hand, otherwise it may be difficult to determine if the changes you’ve implemented are working or if something else is responsible for fluctuations in results.
The benefit of using metrics to manage your business is that they can help align and focus behavior on specific goals the company wants to achieve in a particular area. Once metrics have been defined and targets have been set, this information should be shared with relevant managers and employees. From there, performance in these areas should be linked to compensation for relevant managers and/or employees. In the case of the retail example, if the business is focused on reducing shrinkage, for example, it could incentivize store managers by paying out bonuses for when they hit or exceed the set target for the quarter. Incentives can be tied to one particular metric or across several metrics, depending on what the business wants to focus on in the near-term. Either way, linking performance to compensation is often an effective way to encourage and incentivize behavior that benefits business performance.
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