|(Twelfth instalment of the upcoming book Natural Enterprise. List of previous instalments here.)
Enterprises today have a dizzying selection of performance measurements to choose from. While at one time measuring financial profitability, growth and asset management effectiveness were considered enough, businesses are now told that they need broader metrics to avoid the landmines that may not show up in a simple financial report card.
How does an entrepreneur decide which measures to use? The decision ultimately comes down to which measures best reflect and assess the achievement of the enterprise’s objectives. As we explained in an earlier chapter, in a Natural Enterprise these objectives are more personal and less restricted than in a traditional company beholden to absentee shareholders and creditors, whose needs usually (and tragically) trump those of the people who actually operate the enterprise. In fact, Natural Enterprise recognizes that each member/partner will have different personal objectives, and attempts to accommodate those objectives, unlike traditional companies that merely contract for services of employees and make no attempt to assess those employees’ individual needs (often at the cost of their best people). Some individuals may want or need to earn a significant income to meet personal financial obligations, while others may be prepared to trade off income for more time for non-business activities, and still others may not care about either financial reward or time demands, as long as they’re having fun working with people they love.
Just as the selection of members for a Natural Enterprise is a self-brokered juggling act (ensuring members’ skills are mutually exclusive yet collectively sufficient), so too is the measurement of Natural Enterprise success a balancing act — choosing measures that assess each member’s achievement of his or her personal objectives and needs, yet still ensuring that the enterprise as a whole remains viable and sustainable. For that reason the selection of measurements needs to be a collective decision, one that optimizes everyone’s desires and needs in a fair and objective manner. If one member has a huge mortgage that can probably only be serviced if everyone in the enterprise works longer hours than they want to, for example, this needs to be hammered out early, to avoid inevitable conflicts (and resignations) later.
While the measurement process described in this article is designed for Natural Enterprise, it can also work in any entrepreneurial business with a democratic spirit. Just be forewarned it takes a bit more work than the traditional business success measures, and requires a lot more accommodation of individual employees’ needs and aspirations than most entrepreneurial managers are accustomed to!
Although there are many accepted sets of measures that attempt to look at enterprise success holistically, in my opinion none of the widely-used templates is flexible enough to meet the needs of entrepreneurs who are not fixated on maximizing profitability and growth. My recommendation, then, is that you start by having each member of the enterprise articulate his or her own personal objectives for being part of the enterprise, and then as a group reconcile and optimize them to create a set of enterprise-wide measurements. I’ve developed two tools to do this, the Personal Enterprise Success Scorecard and the Enterprise Success Scorecard. Those who have worked in large organizations that use Norton & Kaplan’s Balanced Scorecard will recognize this as similar to the process used to reconcile personal goals to enterprise goals, but with an important difference: While in traditional companies this reconciliation is a top-down process (“describe how your personal goals and improvement objectives for the next year will contribute to each of the organization’s Balanced Scorecard goals”), in Natural Enterprise the process is bottom-up. Here’s how it works:
Fig. 1 Sample Personal Enterprise Success Scorecard
Fig. 2 Sample Enterprise Success Scorecard (column headings based on Norton & Kaplan’s Balanced Scorecard)
Some of the objectives in the sample Enterprise Success Scorecard above are quite grandiose and abstract, and sometimes you need to employ some more readily measurable intermediary metrics to get a clear idea of whether you are achieving, and will likely continue to be able to achieve, some of the higher-level objectives. For example, achieving a cash flow target means achieving certain revenues and/or cost minimization targets. So there is still a place in this measurement process for the traditional financial and operating measures like margin and turnover, and like ‘eyeballs’ and ‘stickiness’ measures of e-commerce sites. You can find information on some of these traditional measures at About.com, at NetMBA, or at the UK Small Business Service site. While these ratios aren’t terribly useful to most entrepreneurs as raw data, they can be very useful in identifying trends that may indicate problems or opportunities, in diagnosing the cause of problems, and in comparing your enterprise to companies in a similar business that are outperforming the market. Trends in intermediary metrics can also have great predictive value: I know of several businesses who noticed modest drops in gross margin or inventory turnover, and discovered that they signalled important (negative) shifts in customer perception of their products, early enough to take vital remedial action.
If you are interested in knowing how much your business is ‘worth’ (at least on paper), I published a Primer on Business Valuation last year on my weblog.
Norton & Kaplan’s famous Balanced Scorecard, which you can learn more about on their site, breaks the measurable enterprises objectives into four major categories: Financial, Customer, Internal Processes and Learning, Growth & Innovation. Many variations of these classifications have since been published, adding Knowledge (Intellectual Capital), ‘People’ (Human Capital) and Technology categories, among others.
No matter what objectives you choose or how you categorize them, it is essential that they meet three criteria:
My book, Natural Enterprise, will include some real-life examples of entrepreneurial measurement systems, and some success stories and horror stories about business measurement.
I’ve spent much of my career being paid to measure enterprise success, and in my experience most entrepreneurs know instinctively how well their business is doing, and many rely on one overarching measure — daily cash flow — to confirm or challenge their business instinct. I’ll be describing how to manage cash flow in the next article in this series. In the meantime, some final thoughts about measurements:
It’s been said that “what gets measured, gets done”, and there is some truth to that. But nowhere in business is the ‘conventional wisdom’ so likely to lead you astray than in business measurement. Measure your success on your own terms. It’s all that counts.