Business Systems and Processes.

The Systems Thinker Blog

Systems Thinking: What We Can Learn from the Legendary MacGyver!

Ron Carroll

From 1985 to 1992, there was a popular television character known as MacGyver. He was a secret agent with a scientific background and an unusual knack for solving urgent and often complex problems with simple everyday materials he found lying around. Of course, he was never without his duct tape and a Swiss Army knife. In every episode, MacGyver would jerry-rig a clever contraption to accomplish his purpose and save the day.

Years later, people still refer to MacGyver when using chewing gum, a paper clip, duct tape, or whatever is simple and handy to solve a pressing problem.

Solve problems like MacGyver

Wallpaper by PhantomBladeV18


A MacGyver Moment

One of my MacGyver moments came when our family moved into a new house that had an unfinished basement. When it began to rain, I was distressed to find water running down one of the inside concrete walls and flooding the basement floor. I grabbed an empty fifty-five-gallon drum left from construction and pushed it against the wall to catch the running water. However, the drum could not sit close enough to prevent the water from running behind it.

I looked around in storage boxes and found an old 16×20 picture with glass in the frame. I removed the glass, set it on top of the barrel rim, and leaned it against the wall. I then applied duct-tape to seal the top edge of the glass and hold it in place. The water cascaded down the wall, hit the glass, and successfully ran into the barrel.  However, within a few hours, the barrel was three-quarters full and too heavy to move… and it was still pouring rain!

From our garden shed, I grabbed an old hose, dropped one end into the bottom of the barrel, and ran the hose out the sliding glass door to a low spot in the backyard. I then sucked on the end of the hose to start a siphon. At that point, the barrel began to empty at about the same rate it was filling. We continued to have torrential rains for three days. However, my little MacGyver water-collection and draining system prevented hundreds of gallons of water from filling the basement.

What Would MacGyver Do?

So, what does this have to do with your business? Keep reading; there’s a message here. But first, let’s look at another example of MacGyver thinking in a business setting.

A toothpaste factory had a problem of sometimes shipping empty boxes—no tube of toothpaste inside. This was due to a minor timing deviation in the mechanical production line that couldn’t easily be controlled in a cost-effective way. Understanding how important it was not to frustrate customers, the company CEO finally decided to hire an engineering company to solve the empty-box problem.

After six months and several hundred thousand dollars, a solution was in place—on-time and under-budget. The problem was solved by using high-tech precision scales that would sound a bell and flash lights whenever a passing toothpaste box weighed less than it should. The production line would automatically stop while a worker walked over, removed the empty box, and pressed the conveyor restart button. Everyone thought the solution was fantastic.

One day, the CEO decided to look at the return on investment of his project. The results were amazing! No empty boxes ever shipped out of the factory after the scales were put in place. Customers were happy, and the problem was solved. “That was money well spent,” he said, before noticing the other data in the report.

To his surprise, the number of defects picked up by the scales after several months of production was zero. “There should have been at least a dozen a day,” he thought. Maybe there was something wrong with the report. After investigating, the information turned out to be correct. The scales really weren’t picking up any defects because all boxes that got to that point in the line had toothpaste tubes in them. There were no empty boxes!

Puzzled, the CEO traveled to the factory and went to the production line where the precision scales were installed.

A few feet before the scale, there was a $20 desk fan blowing any empty boxes off the conveyor belt and into a bin.

“Oh, that,” said a nearby worker, “one of the guys put the fan there because he was tired of walking to the scales every time the bell rang.”

Three Lessons Learned

So, what can be learned from these two stories? Here are three takeaways you can apply to your business for better problem solving:

1.     Apply Systems Thinking, a creative—MacGyver-like—approach to business problems. (What would MacGyver do?)

2.     Choose the simplest and least-expensive solution that gets the desired results (Ockham’s razor).

3.     Go see the problem first-hand and get input from workers before undertaking any grandiose or expensive solution (Lean Thinking).

Now, put on your MacGyver hat and go save the day!

Cost Reduction: Make Products and Services Better, Faster, Cheaper!

Ron Carroll

Years ago, I went into a local printing shop to do business. The proprietor had a sign on the back wall that read:

Good-Fast-Cheap

I got a chuckle out of the sign, but at the time, it made some sense to me.  I could understand that:

    • If I want the best quality and the lowest price, I may have to wait.
    • If I want the best quality and the job rushed, I should expect to pay a higher price.
    • If I want the job fast and cheap, I probably won’t get the highest quality.

Of course, like every customer, I really wanted my print job with the highest quality, as fast as possible, and at the lowest price. I wanted GOOD, FAST AND CHEAP!

Breakthrough Principle

Upon becoming a Systems Thinker, I learned that it is quality and speed that create for the lowest possible price. You and your customers can and should expect all three!

QUALITY + SPEED = LOW COST

By creating business systems that have minimal mistakes, defects, and rework (good), you will reduce waste and increase process speed. By eliminating delay, downtime, and other speed bumps, you will boost sales throughput (fast). This powerful combination will give you the lowest possible cost and your customers the greatest value (cheap). Remember: Quality plus speed equals low cost.

Side Note: To increase speed without losing quality, don’t push workers beyond reasonable performance standards. Instead, focus your efforts on reducing the idle time in a business process—the time things are sitting around waiting to be worked on. Keep work-in-process to a minimum. Eliminate over-flowing in-baskets and items stacked up in cues or on pallets. Create an even and steady workflow.

Happy Customers and More Profit

In short, low quality and slow speed are what make business processes—and the resulting products and services—more expensive.

Whatever your business—in the office, the store, on the production line, or delivering a service—use well-designed business systems to get work done efficiently and effectively. Increasing quality and throughput (rate of speed) will guarantee happy and loyal customers. And you can take that to the bank.

Total Quality Management: Seven Principles to Boost Business Quality!

Ron Carroll

For years, Ford Motor Company has reminded us: QUALITY IS JOB 1. It really should be the goal for all of us. Commitment to quality reflects our personal values and ultimately determines whether we can compete in the game of business. Customers are the final judge.

Retired business executive Jack Welch, said, “The value decade is upon us. If you can’t sell a top-quality product at the lowest price, you’re going to be out of the game.”

What is Quality?

For many, quality suggests the superiority of design, materials, or workmanship in a product or service. You may think of high-end brands like Mercedes, Gucci, or even Apple. However, “quality” is vital to every business, even if the target customer is at the low-end or mass market.

Dr. W. Edwards Deming, pioneer of quality improvement methods, says that the customer’s definition of quality is the only one that matters.  So, what should quality mean to you?

Customer Review

I like to think of quality as a product or service that conforms to—and exceeds where possible— customer specifications or expectations. For example, are the roof shingles the grade specified in the house plans? Has the steel part been machined to engineering specifications? Was the furniture delivered within the promised range of 8:00 a.m. to 10:00 a.m.? Are the restrooms “clean”?

And a customer is not only the end-user or consumer, but can also be the next step in a business process—the often overlooked internal customer (see “Five Customer Types”).

In an assembly line operation, station two is the internal customer of station one. The order-fulfillment department is the customer of the order-processing department. The sales process is a customer of the advertising or lead generation process. Each “customer” in a chain of business activities wants their specifications or expectations met.

Quality is achieved when you put measures into a business system or process that prevent mistakes, defects and deficiencies—the waste of the business that drives away customers and robs you of profit.

In short, everything that moves without errors through your business operation—from receipt of order to the delivery of the product or service—represents quality. And you might be shocked by the number of errors and mistakes made every day in a typical business, including yours!

Total Quality Management

Total Quality Management (TQM) is an approach used by organizations to achieve continuous improvement of business processes. A focus on quality will lead your organization to reduced waste and rework, greater efficiency, lower costs, and happier customers.

Total Quality Management (TQM)

Here are seven principles of TQM that provide a foundation for improving quality in your organization.

  1. You can and must manage quality – Quality doesn’t just happen. It is the result of intelligent effort. Many companies struggle with low-grade business processes and reoccurring customer complaints. Operational excellence and quality goods and services can only be accomplished by focusing on the improvement of daily business activities.
  2. Processes, not people, are usually the problem – First look for a weak business process before blaming people. If your process is causing quality problems, no amount of new hiring or training will change the outcome. Put people into an effective business system or process and you will get their best performance.
  3. Find and fix the root cause of the problem – When you have a quality problem, use the 5-Whys Analysis to discover its true source; it may not be what you think. Go observe the process first-hand. Talk with workers. You may even find the source of the problem to be in a different part of the business.
  4. Quality must be measured – Your quality management system is only effective if you can quantify results. Are you achieving at least 4 Sigma on a 6 Sigma scale? Workers need frequent feedback to know how they are doing in relation to the goal. You can’t know how many mistakes or errors happen in your operation unless you measure.
  5. Strive for continuous quality improvement – Total Quality Management happens every day. The work is never done. It is a permanent mindset within your business culture. Real improvements must occur frequently and continually in order to drive customer loyalty, profitability, and growth.
  6. Every person is responsible for quality – As discussed, the customer of every business process is the next process in the line, ending with the person who buys your goods or services. Every worker and manager has a part to play for ensuring the highest level of quality—the fewest number of rejects, rework, and returns. Delighting the customer is the core responsibility of every employee and every business.
  7. Quality is a long-term investment – Quality management is not a quick fix—not just problem-solving. Creating a business culture around quality requires managers to promote improvement workshops, refine business processes, learn by measurement and feedback, and then repeat the cycle as needed. Management style and business culture determine long-term success.

Quality is a Choice

Human error and mistakes are normal. How many you will tolerate is a business decision. Remember, without a conscious effort to improve, you will hover in the 2-3 Sigma range and lose a significant portion of your potential profit. High-quality business systems and processes pay for themselves many times over!

I recommend that you strive for a 99% yield, or 1% waste—about 4 Sigma in your core business processes. This is not only achievable but essential in a competitive marketplace. Get your team together and begin today!

Beware of Employee Discretion!

Ron Carroll

“Employee discretion is the enemy of order, standardization and quality” (Theodore Levitt, Marketing for Business Growth, 56). So what is employee discretion and why should you care?

No More, No Less

My accounting business was located near two Subway Sandwich restaurants where I occasionally had lunch. I always ordered my favorite 6-fat-gram Sweet Onion Chicken Teriyaki sandwich. I preferred one restaurant over the other, and here’s why:

Subway Sandwich
In restaurant A, after placing my order, the food preparer would scoop the chicken teriyaki out of a pan onto the wheat bread. Influenced by a little pleasant chit-chat, the person would give me a generous portion of the marinated chicken. After all, we like to make customers happy, right?

In restaurant B, the food preparer would empty a pre-measured paper tray of marinated chicken onto my wheat bread. No “discretion” was required; the person just followed the system put in place by the franchise owner. I always got exactly 2.5 oz of meat—no more, no less.

It was always nice to get a little extra chicken in store A. However, the owner of store B was the smarter of the two. Employee discretion—such as deciding how much chicken to put on the sandwich—can be very costly to the business over the course of a year.

In a national meeting of Walmart employees, managers were trained to eliminate employee discretion in the fabric department. At checkout, clerks would cut the bolt of fabric a few extra inches beyond what the customer ordered to make sure they weren’t shorted. Managers were told that the extra fabric was costing stores an average of $2500 per year (per store). Employee discretion was replaced by a policy that clerks cut exactly the length purchased. (Most customers have already estimated a little extra anyway.)

Avoid Vague Policies

Employee discretion is when individuals are allowed to make responsible choices, judgments, or decisions within their job description. However, in many business systems, the employee is forced to make decisions without clear policies or procedures, particularly in dealing with exceptions (e.g. solving customer complaints). When a course of action is uncertain or ambiguous, workers make mistakes and waste time—both of which cost YOU money!

Too much discretion exists where rudimentary business systems are invented by workers, training is by word of mouth, and procedures change as workers come and go.

Empower People to Build Systems

There’s a lot of talk these days about empowering employees by delegating authority to them to get the job done. Results, however, are very dependent on the employee’s commitment to the company and their individual skill level. Higher-skilled people make better use of discretion than lower or under-skilled people.

To a Systems Thinker, only results determine how much employee discretion is appropriate within a job description or business system.

I like this statement by Jim Collins, “A culture of discipline involves a duality. On the one hand, it requires people who adhere to a consistent system; yet, on the other hand, it gives people the freedom and responsibility within the framework of that system” (“Good to Great”).

Appreciate your people and their unique contribution. However, keep the uncertainty of discretion to a minimum. Instead, encourage people to use their talents, experience, and insights to improve your policies and business systems.

“When you build on a foundation of systems, people will come and go, but the systems remain constant” (Michael Gerber).

Beyond Business Goals—The Right BHAG Will Catapult Your Company!

Ron Carroll

“What you get by achieving your goals is not as important as what you become by achieving your goals” (Zig Ziglar).

If your goals don’t challenge you, they won’t change you, and they certainly won’t stretch your team “to dream the impossible dream and reach the unreachable star.” So let’s take a minute to consider the kind of goals that will last beyond a few weeks and elevate your company to remarkable levels of achievement. Let’s create some BHAGs!

So what’s a BHAG you ask (pronounced BEE-hag)? It is a BIG HAIRY AUDACIOUS GOAL, a term discussed by Jim Collins and Jerry Porras in their book “Built to Last.”

Big-Idea

A BHAG is a clear, compelling, and overambitious goal that leads a company out of its comfort zone toward accomplishing the impossible. It unites the workforce behind a game-changing idea, worthy of their highest creativity and energy. BHAGs are often long-term and bigger, bolder, and more powerful than typical goals. They require commitment, confidence, and even a bit of bravado.

The right BHAG is a lofty vision with a deadline. It will catapult your company to a new plateau.

Jay Arthur of “Lean Six-Sigma” provides an example.

”During the second world war, when cargo ships were at a premium, Liberty ships required almost 250 days to build. As the demand increased, the builders were asked to create ships much faster. Eventually, they innovated the design and building of the ship and got the average to 40 days, about 20% of the time it took when they started. This wasn’t because of learning gains; it was because the U.S. had a BHAG to build ships much faster. Setting the BHAG demanded that the shipbuilders think differently, organize differently, and work differently. It also created a sense of urgency to know that their work was driving the war effort. If it can be done in shipbuilding, it can be done anywhere.”

How to Create a BHAG

The steps to craft an effective BHAG include:

  1. Conceptualize it – Involve key people. Make the goal tangible, innovative, compelling, and even fun. And be sure it’s AUDACIOUS (daring, bold, risky, and practically impossible)!
  2. Test it – Is the BHAG easy to understand, communicate, and remember? Will it stretch people to perform at their best? Is it measurable? Does it have a clear finish line? Is it life-changing? Will the effort be worth it?
  3. Commit to it – Get everyone in your company behind the goal. Talk about it at your power meetings. Encourage thinking and working differently. Measure and report progress. Celebrate victories. Make it part of your business culture.
  4. Systemize it — Break the BHAG down into smaller chunks or mini-goals, and then incorporate them into specific and measurable business systems (the Box Theory™ Way). Goals are only fantasy—wishful thinking—until you build them into a system or process, until the wheels of Cause and Effect start turning.

Incorporate the mini-BHAGs into your Balanced Scorecard objectives and key measures. For example, set big hairy audacious goals to increase sales per employee by 20% (productivity), reduce mistakes, defects and rework by 50% (quality), or improve on-time delivery to 99% (customer service). Reduce lead time (from order to shipping) to twenty-four hours, and so forth.

I am familiar with a builder who constructed a standard house in twenty-four hours. Now that’s a BHAG! It required different thinking, planning, and working. It was a marvel to watch. It shook the local building industry. It distinguished him from all other home builders.

Stop doing business as usual—like every other company—and “dare to be great.” Develop extraordinary goals supported by extraordinary business systems and processes. The most difficult step is the first one. Get going today. Demand immediate results. Stay the course. Seek continuous improvement. It takes time, but I promise, it will be worth it!

“Make no little plans. They have no magic to stir men’s blood. Make big plans; aim high in hope and work.” (Daniel H. Burnham, American Architect, master planner of Chicago and Washington D.C)

Now, what big plans could you implement in the next three to six months that would elevate your company—that would expand or improve products, open new markets, provide “killer customer care”, or drastically reduce waste, inefficiency, and cost?

As the saying goes, “GO BHAG OR GO HOME!”

Give Your Way to Business Success—Five Laws!

Ron Carroll

‘Tis the season of gratitude and selfless giving—two qualities of character that lift, inspire, and bring out the best of ourselves and others. That same spirit of gratitude and giving can also be a key to business success.

Laws of Success

I recently read a book called “The Go-Giver,” by Bob Burg. It is the parable of a “go-getter” who learns a powerful new idea. The lessons he discovers are expressed in “The Five Laws of Stratospheric Success.”

  1. The Law of Value – Your true worth is determined by how much more you give in value than you take in payment.
  2. The Law of Compensation – Your income is determined by how many people you serve and how well you serve them.
  3.  The Law of Influence – Your influence is determined by how abundantly you place other people’s interest first.
  4.  The Law of Authenticity – The most valuable gift you have to offer is yourself.
  5.  The Law of Receptivity – The key to effective giving is to stay open to receiving.

Put Others First

The grand lesson is to put others first and give, give, give your way to success. It reminds me of the Scottish proverb: “Help thy brother’s boat across the water, and lo, thine own has reached the shore.”

It is the best of human nature to freely give, and a natural response for others to reciprocate. Our greatest joy and satisfaction in life—and in business—comes in helping and serving one another.

So, begin finding new ways to bestow abundant value upon all the important people in your life—including your customers and employees. And be amazed by the results!

I wish you and your loved ones a Merry Christmas and a Happy New Year! And thank you for your continual support.

The Balanced Scorecard for Small Business—Set Goals!

Ron Carroll

Organization leaders generally have a pretty clear picture of the direction they want their company to go. However, research shows that just 5% of the workforce understands their company’s strategy, and only 25% of managers have incentives linked to that strategy (Kaplan).

To help remedy this, Doctors Robert S. Kaplan and David P. Norton of Harvard Business School introduced the Balanced Scorecard in 1991. It has gained wide acceptance as an effective strategic management system, a performance measurement system, and a communication tool.

Simply put, the Balanced Scorecard enables organization leaders to convert mission, vision, and strategy into specific and measurable goals, with action plans to achieve those goals. And it’s actually quite easy to do.

The scorecard is described as “balanced” for the following reasons:

  1. It recognizes the need to balance financial indicators of success such as sales with non-financial indicators such as customer satisfaction (business measures).
  2. It balances the internal requirements of employees and processes, with the external requirements of customers and shareholders.
  3. It looks at past performance (lagging indicators) such as financial statements as well as current performance (leading indicators) including the measurement of daily business systems and processes.
  4. Finally, it provides a balance between short-term and long-term objectives.

A completed Balanced Scorecard will not only link your business strategy to measurable company goals, but it aligns employee efforts and business processes to those objectives. It is the foundation for creating a culture of continuous improvement!

Balanced Scorecard

The Four Perspectives of Balanced Scorecard Goals

When setting Balanced Scorecard goals, you will look at your business strategy from four different perspectives.

  1. The Financial Perspective promotes strategies for growth, profitability, cash flow, return on investment, and mitigation of risk, as viewed by an owner or shareholder.
  2. The Customer Perspective promotes strategies for creating product value, market differentiation, and customer loyalty.
  3. The Internal Processes Perspective promotes strategies for developing high-performance business systems and processes—operational excellence. 
  4. The Learning and Growth Perspective promotes strategies that create a culture of continuous learning, innovation, and the personal growth and retention of valued people.

While a Balanced Scorecard may seem like a tool for big business, it is simply a form divided into four sections, one for each of the four perspectives. In column one, you write several objectives within each perspective. In column two, indicate a unit-of-measure such as numbers, dollars, or percent. In column three, express the target goal in that unit of measure. In column four, briefly indicate your plan of action to achieve the target goal.

Below is an example of an abbreviated Balanced Scorecard developed by a home builder.

Financial Perspective (How can we increase growth, profitability, cash flow, and return on investment?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Increase Sales growth
 Number of new housing
starts per month		 10 new starts Expand geographic market / open new office
Improve profitability Percent income from operations 10% profit margin Reduce construction cycle time and unit costs

Customer Perspective (How can we create product value, market differentiation, “killer customer care,” and raving fans?)

OBJECTIVE
 MEASUREMENT TARGET ACTION PLAN
High-quality homes Points / quality rating of subcontractors Subcontractor must maintain 90-point average of 100 possible Create a “quality” score sheet for each sub and provide them job feedback
Fast completion
 Average days to complete 30 days from building permit to close Intense scheduling system / reduce delay

Internal Processes Perspective (What systems can we create or elevate to achieve operational excellence?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Fast Start—Minimize time from contract to building permit Days in-process Submit application to city within 5 days of customer contract Reduce upfront interface and preparation time with customer
Effectively schedule sub-contractors Percent of work started at scheduled time 75% of jobs started within 1 day of schedule Purchase BuildStar management software

Learning and Growth Perspective (How can we promote learning, innovation, and the personal growth and retention of valued people?)

OBJECTIVE MEASUREMENT TARGET ACTION PLAN
Subcontractor certification Number of subs that are certified 75% of subs are certified Create subcontractor certification program
Improve staff building-process skills Number of skill sets times number of people 80% skill competency Create a staff training program

For instance, let’s say from the financial perspective you want to increase sales by 20% next year. Your unit of measure is dollars. Your target goal is $1,000,000, and your plan of action is to spend 20% more money on lead-generation advertising.

In another example, from an internal-processes perspective, your goal is to reduce product defects. Your unit of measure is a percent. Your target goal is 99% yield, or expressed as 1% waste. Your action plan is to apply Six Sigma analysis to the manufacturing process and dramatically reduce production errors.

System Scorecards

The Systems Thinker also aligns goals at the system or process level with the major Balanced Scorecard objectives of the company as described above.

Let’s take a closer look. A company Balanced Scorecard has an objective of 10% sales growth in the coming year. The action plan is to add six more sales per week. Based on the sales conversion rate in this example, the marketing department must receive twenty-four additional leads each week. To achieve this, their action plan for this System Scorecard objective is to increase the weekly advertising mailers by 1500. Likewise, the production department must increase its target to manufacture six more units per week.

Every department plays a role in accomplishing the high-level company goals.

By cascading the strategy and objectives down through all levels of the organization, every employee and internal process is engaged in achieving a common set of goals. People throughout the organization ask, “Which company objectives or measures are we in the best position to influence?” and “What can we do at our level to help the organization achieve its goals?”

Strategy is everyone’s job in a Balanced Scorecard environment. It is a top-down responsibility to communicate strategy and unite the workforce, and a bottom-up responsibility to internalize and execute the strategy.

On one page, your Balanced Scorecard tells the whole story—everything important—about your organization’s current strategy and targeted objectives!

I have prepared several worksheets to help you determine your unique business strategy and create a company Balanced Scorecard. You can get them in the Zone.

Two Counter-Intuitive Principles for Business Improvement

Ron Carroll

Things are not always what they seem. In the picture below, do you first see the old woman or the young woman? Can you see both? (Hint: the ear of the young woman is the eye of the old woman.)

Illusion

In business, sometimes the best solutions—the simplest and least expensive—are not so obvious. We are often counseled to work “smarter instead of harder.” The Systems Thinker does that by seeing through operational illusions to understand things as they really are—to solve business problems in the smartest possible way.

Consider two principles that may seem counter-intuitive, but are important to squeeze the most value out of your business operations.

Improvement Principle #1

“If you need a new process and don’t install it, you pay for it without getting it” (Ken Stork).

If you have a business system or process that is sputtering along, you can be sure there are excessive errors and inefficiencies. Perhaps you also have customer dissatisfaction or even defection. To let the faulty system continue is to suffer an unnecessary loss of profit. If you don’t improve the system now, you’ll eventually lose the money you might have used to install a better one. You will pay the cost of the new and improved system without actually getting it! Every day you wait is taking money out of your pocket.

Improvement Principle #2

You always pay for the “A” employee. The lesser cost of a “C” employee, plus the hidden cost of inferior performance, poor decisions, and costly mistakes, is equal to or greater than the higher cost of the “A” employee. Within the same job description or grade, replace “C” employees with “A” employees to improve system performance and reduce costs.

So, what is an “A” employee? These people have a history of getting results. They aren’t afraid of accountability or score-keeping. They are self-confident and able to apply past successes to new assignments, but they are also teachable and eager to learn. “A” employees will make good things happen in your business, especially when their personal goals are aligned with your company goals. As Jim Collins advises, “Get the right people on the bus and the wrong people off the bus” (“Good to Great”).

Keep these two principles in mind, and remember: Systems Thinkers find ways to save and earn money that many business owners never discover! At what stage of Systems Thinking are you?

Do You Know Your Key Performance Indicators?

Ron Carroll

In 2002, Billy Beane, general manager of the Oakland Athletics baseball team, stumbled upon something that changed the game of baseball. His discovery could also be a game-changer for YOUR company!

After a dismal start, Beane’s team of unknowns and misfits stunned the baseball world by setting a record with twenty consecutive wins, and finishing first in the American League West. What amazed everyone was his ability to accomplish this with a team salary of one-third of teams like the New York Yankees—41 million dollars compared to 125 million dollars. His cost per game-won was the lowest in baseball.

Billy Beane was given a relatively low operating budget by the Athletics’ owner, Lew Wolff. He lost three of his star players to teams that would pay higher salaries. Billy was desperate to put together a competitive lineup. One day he met Peter Brand, a nerdy accountant from Yale who crunched baseball statistics. Peter looked at the game through a different lens; he saw numerical connections no one else saw.

Key Performance Indicators

The collected wisdom of baseball insiders—players, managers, coaches, scouts, and the front office—over the past century was subjective and often flawed. Players were judged and paid by their batting average, home runs, runs batted in, base steals, and so forth—well-publicized key numbers that fueled the weekly chatter of baseball commentators and fans.

However, Peter showed Billy other key performance indicators (KPIs) that were more accurate in predicting a player’s contribution to winning games.

  • On-base-percentage – how many times a player gets on base (by a hit, walk, or being hit by a pitch) as a percent of times at-bat.
  • Slugging percentage – total bases divided by at-bats.

These two numbers proved to be far more effective at determining a player’s value to a team. Against everyone’s advice, Billy Beane hired players who were not the most popular, not in their prime, not the highest in batting average or home runs, and not the players who commanded attention or big salaries. He stayed within his budget by signing underrated players for bargain prices who had above-average on-base and slugging percentages.

In the years that followed Oakland’s success, many major league teams changed the way they valued players to a different set of key performance indicators, now referred to as Sabermetrics (from SABR – Society for American Baseball Research).

After the “Moneyball” revolution, Billy added a KPI for defensive efficiency (percentage of balls put into play by opponents that resulted in outs), and in 2010 his team allowed the fewest runs in the American League. Whatever you measure gets better!

Key Performance Indicators

Business measures are often expressed as a ratio, that is, a numerator divided by a denominator. In his book, “The Game of Work,” Charles Coonradt describes these measurements as the “Results to Resource Ratio (RRR)”—how much is being accomplished with the resources available. For example, these measurements may appear as:

  • Sales per person-hour (sales-dollars is the result, person-hour the resource)
  • Ounces of gold per ton of rock (ounces of gold the result, ton of rock the resource)
  • Average sales dollar per customer visit
  • Defective units per million units produced
  • Service calls per maintenance contract
  • Sales dollars per square foot of floor space
  • Board-feet cut per machine hour
  • Profit per mile driven

Do you see how this works? It is a useful way of looking at things. By focusing on the most important results and the most expensive resources, you will find it easy to see which vital few business systems or processes have the most influence on “winning games.”

Coonradt teaches that managers are responsible to turn resources (at-bats) into results (total bases). The more efficiently they do this, the more successful they are as managers.

What Key Performance Indicators Drive Your Business?

While you may find it valuable to measure the performance of any business system  (numbers are the language of improvement), there are only one or two critical numbers that drive the “economic engine” of your organization. If these numbers are good, everything else falls into place.

For example, most football fans judge game performance by the scoreboard. However, one of the coach’s KPIs may be the number of third-downs converted to first-downs. If the conversion rate is high, the team is moving the ball and probably scoring. A consistently high third-down conversion ratio correlates to a winning season.

In his book, “Good to Great,” Jim Collins describes the key measurement for several large companies. They include Pitney-Bowes—profit per customer, Wells Fargo—profit per employee, Walgreen’s—profit per customer visit, Kroger—profit per local population, and Nucor Steel—profit per ton of finished steel.

Manage by the Numbers

Faithfully measure your core business processes and diligently work to improve their results. Establish measurements that let you know every day how you stand in relation to your goals.

Take a little time now to determine the one or two key performance indicators that drive the success of your organization? Focus attention on your most important results and your most expensive resources.

A thoughtful approach to determining your KPIs could produce the next game-changer for your company!

What are Some Common Business Measures?

Ron Carroll

In a well-run organization, leaders manage by the numbers. They measure and monitor business performance to improve results and to guide their problem-solving and decision-making. These numbers can be expressed as leading indicators (real-time) or lagging indicators (historical). A few key numbers drive the success of every company—including YOURS!

Manage by the Numbers

Balanced Scorecard Measures

Performance measures are often established using a tool called the Balanced Scorecard. These measures reflect a company’s current strategy and goals. Below are some commonly used measures within the four perspectives of the Balanced Scorecard. Focus on the few numbers that matter most to you, and ignore the rest (unless they later become important).

Financial Measures

Sales or Revenue
Sales growth
Gross Margin or Profit
Contribution Margin
Profit Margin
Profit or revenue per employee
Return on Investment (ROI)
Dividends
Cash flow
Days in A/R (e.g., an average of 75 days for the collection of money)
Days Held in Inventory (e.g., 90 days of stock on-hand)
Inventory Turnover Ratio (e.g., four inventory turns per year)
Current Ratio (current assets divided by current liabilities)
Quick Ratio (current assets minus inventory, divided by current liabilities)
Debt to Equity

Customer Measures

Customer satisfaction
Customer retention/loyalty/referrals
Customer complaints/customers lost
Product return rates
Response time per customer request
Customer lifetime value
Customer acquisition rate
Number of customers
Annual sales per customer/Re-order rate
Average purchase per customer
Win rate (sales closed/contracts signed)
Marketing cost as a percentage of sales
Number of ads placed/response rate/proposals made
Sales volume/per channel/per-square-foot of space
Frequency of sales transactions/mean-time between sales
Average customer size
Customers per employee
Customer service expense per customer

Process Measures

Average cost per transaction
On-time delivery/response time to customer requests
Average lead-time to ship the product
Inventory turnover
Labor utilization and effectiveness rates
Defect percentage/Rework
Break-even point
Cycle time
Warranty claims
Waste reduction
Space utilization
Frequency of returned purchases
Downtime

Employee Learning and Growth Measures

Employees with advanced degrees/participation in professional or trade associations
Training investment per employee
Average years of service
Number of cross-trained employees
Absenteeism
Employee turnover rate
Employee satisfaction
Reportable accidents/Lost-time accidents
Employee productivity
Training hours/certifications/leadership development
Personal goal achievement
Timely completion of performance appraisals

Financial Ratios

The above list will get you thinking about various ways to look at your business and measure performance. For more information, google the less-familiar terms you are interested in.

Many of the financial measures listed are lagging indicators known as business or financial ratios. They are often looked at by investors or bankers. Some of the common financial ratios are described with formulas at the following online locations:

NetMBA
Online Calculator

Get everyone in your company behind the few critical numbers that drive your business strategy and goals. People should know every day how they are measuring up. Frequent feedback is a powerful motivating tool.

Related Articles:

Numbers are the Language of Business Improvement!
Measuring Your Business Processes Pays Big Dividends!
Your Clues to Uncover Weak Business Systems!
Do You Know Your Key Performance Indicators?
Learn How to Do a Business Break-even Analysis (In The Zone)
Box Theory™ Gold Measurement Tools (Box Theory™ Software screenshots)

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W. Edwards Deming

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