In our experience, we find many businesses rate strategy as hugely important but don’t have the time, skills or knowledge to implement meaningful strategy in their own businesses. This often stems from business owners being subject to the ‘tyranny of urgent’ – meaning everyday tasks often take precedence over the more valuable and highly necessary big-picture requirement of taking stock of where the company is going.
In today’s modern environment, business value is no longer primarily driven by physical or tangible assets but increasingly by non-financial business drivers. Financial measures are those that can be directly measured; for example, revenue margin, profit, administration costs, debt reduction and cashflow. Non-financial measures are those that cannot be represented by a data point but are more likely to be descriptive or evident by their absence. For example, you may rely on qualitative feedback from customers to determine whether an employee has achieved their goal with respect to providing exceptional client service.
Understanding your value drivers
Success and future strategic positioning depends on the effective measurement and management of these critical non-financial or intangible resources, alongside financial metrics. The first step in this process is understanding your organisation’s value drivers. What are the key non-financial and financial resources in your business? How important are your different resources to achieving your overall value proposition? How strong are your existing resources and how can you use them more effectively? If your existing resources aren’t meeting your needs, what gaps do you need to fill? Have you considered your overall operating environment, competitive position, benchmarks and market analysis data? Have you considered the key risks for your business both now and in the future?
Measuring business performance
After identifying and mapping the value drivers, you can start measuring your business’ performance, once you’ve decided which are the most important values to measure. An excellent way to determine whether an indicator is worth measuring is to establish what key performance questions you need to answer. For example, what is it that you want to measure? Why do you want to measure this? How do you plan on using this information moving forward? How do you want this data presented? Who will be responsible for this measure? When is the most suitable/appropriate time to conduct this measure?
Using the above questions is a useful tool to ensure all decision makers are working towards the same overarching business goals. It can assist in validating any key changes that may need to be implemented, while also endorsing current practices or procedures within the business that are generating positive outcomes.
Lag and lead measures
Lead indicators are measures that provide information about expected future results based on current performance. For example, marketing investment, research, product development, employee skill development and practice growth trends. Lag Indicators provide information about past performance such as revenue, profits, overheads and accounts receivable.
By combining lag and lead indicators you can not only determine whether you have achieved goals set in the past, but whether you are on track to achieving goals set for the future.
Organisational success measures
Common organisational success measures include:
- Customer satisfaction - referrals, repeat business and customer gain sources
- Product/service innovation - cross selling opportunities/skills utilisation
- Marketing activities - measure effectiveness against agreed milestones and objectives
- Customer profitability analysis - customer segmentation
- Output quality - timing vs service quality
- Staff attraction/retention - proportion of first choice candidates secured and turnover rate
- Profitablity growth
- Value creation - financial and non-financial growth for each quarter and the expansion/review of service offerings
Strategic thinking is particularly more important for business owners in these fast-changing days of disruption. The need to be pro-active towards addressing this changing operational landscape is vital as it will likely determine which businesses flourish, and which will be left struggling to keep afloat. We often ask clients, when was the last time you took time to think about where your company might be in five, 10 or 20 years? And when we persuade clients to make that time to think strategically, they usually end up saying ‘Now I understand why it was important’.
About the author: Lisa Townshend is a Director with BDO Central (NI). She has extensive experience assisting both small and medium sized entities with a wide range of advisory services. BDO Central are Chartered Accountants and Business Advisors, with offices in Napier and Palmerston North. The firm is an independent member of BDO New Zealand and part of the global BDO network.