Business Metrics

This month, I am going to discuss one of my favorite topics – business metrics.

I came across a small interview of Cisco CEO John Chambers, in which he discussed one of the larger strategies for Cisco’s partner community; he stated that the future role of the consultant will be more about ‘business outcomes’, as opposed to particular vertical solutions.

I had expressed a similar notion on my previous column, in which I opine about the future of our own businesses as accounting technology and third-party experts. There was a time that getting people to computerize their financial processes was a big deal – and soon after that, the goal was to integrate all of the technology pieces to create operational ‘efficiency’.

With the proliferation of so many new mobile and specialized technologies, no one organization will – or can – become expert at all applications. Not only will we partner with other specialists, but we will – as John Chambers stated – become experts in helping organizations with business outcomes. And this is where business metrics come in.

A History Lesson

One of my earliest memories of my days as a business coach for the Austin Entrepreneur’s Association, was a session I had with a gentleman who wanted to sell a certain product, because of some ad he had read. He wanted to meet with me to discuss his business, and to prepare a business plan ‘to see how much money he was going to make’.

I remember very distinctly how he balked when I took out my 086 computer with Lotus 1-2-3 on it, to put in some numbers, and to look at break-even points, opportunity costs, on-going service expenses, etc. As I acted like the proverbial dentist to pull out the pieces from his rose-colored thoughts, it was becoming clearer and clearer to him, that the number of products he would need to sell on an average day, was not only unreasonable, but bordered on the perverse.

He graciously shook my hand, and said ‘thank you’ with a degree of trepidation, and it wasn’t until 5 years later, that I got a letter from him saying how much he appreciated my telling him the truth, and that he was always grateful for the several hours he spent with me – and how it might have been one of the biggest mistakes of his life, if he had stubbornly gone forward with his business plan.

Now this is not to say, that people should abandon their ideas because of what yours truly might have entered in a spreadsheet. If you believe in yourself, and are willing to make the sacrifices – you might succeed, despite the odds. But factual information helps make accurately define the decision making process. (I also used to tell the students in my college classes that before they succeeded, they better have been prepared to fail many times – even miserably fail.)

While it is true that a majority of business owners only care about two things – meeting payroll, and generating sales – many of us know that there are a multitude of moving parts to a business. Yet we have been so involved in solving the technology and ‘operational efficiency’ pieces that may have forgotten the importance of the business outcome – other than we ‘will save money’.

The Business of Metrics

As our company has forayed into the depths of business analysis, after having spent so many years in the ‘simple reporting’ space, we now spend more time with owners to strategize in the following areas:

1. Customers
2. Services and Products
3. Operations
4. Resources and Administration

The Simple Financial Statement

Even my view of a Balance Sheet or Profit and Loss Statement has shifted to where I really consider it to be a Dashboard with Drill-Down Capability. For many of us who have worked one-on-one with clients, it is the first thing we look at to determine the health of the company (or figure out what the heck they did with their accounting package).

We may eyeball a figure in a control account that ‘doesn’t make sense’, and it makes us want to drill further to get an understanding of that figure. Then we operate on hunches that we have honed over the years, to look at other areas of the financial statements, e.g. costs, sales history, debt load, etc.

What is important to note however, is that we never do this in a vacuum – it is ALWAYS about context. How does one year relate to another; how does this person’s books compare to other industry averages, or other companies we have consulted with over the years. We look at a large debt load, but when compared to the earnings average and multipliers for that company, maybe it isn’t that large.

It is all about CONTEXT.

Metrics are not just financials

Accounting software has traditionally provided the tools we need for compliance reporting, and every day operations. A/P, A/R, Sales, Purchases, Financials, Taxes.

Yes, I preach every day that it would be nice to just analyze data, when you want, where you want, and how you want – without need a rocket science degree. But the reliance on compliance reporting as a morph to management reporting is leaving most business owners wanting for more.

Let’s look at the following examples. If I were to ask the following questions of the average business owner, how many would be able to tell me – with any degree of accuracy – what the answers are:

• What is the cost of acquiring a new customer or client?
• How do you define your opportunity costs?
  How many leads do you average in a typical work week?
• What are the top three lead referrals in your business?
• How many leads become opportunities?
  What percent of opportunities do you close into a sale?
• On average, how many touches (e.g. e-mails, phone calls,) does it take to close a sale?
• What is the average time spent closing a sale?
  What percent of your business is repeat business?
• If you operate on upsell strategies, what percent do you upsell to the next level?
• If you operate on cross sell strategies, what percent buy other products in your line? How many purchase two or more?
• Do you have the 80%-20% rule, where 80% of your business and/or gross profit is commanded by 20% of your customers?
• What types of customers require the most ‘after product sale’ care. (e.g. help desk for a software product)
• What is the average cost of ‘after product sale’ care.
• What is the most visited page on your website?
• What pages on your website do people most commonly leave from?
• Give me a profile of your typical purchaser.
• Have you ever fired a customer?
• What were your top three advertising campaigns this year?
• What percent of your sales were affected by those campaigns?
• What percent of those customers did you retain for 1yr, 2yrs, etc.?
• What is your net promoter score? (or satisfaction metric equivalent)
• What are the top three industry types that affect your business?
• What is your overall customer average days to pay?
• What is your average dollar sale? Compared to?
• What are the two top reasons why potential clients have NOT purchased your product or service?

If I were to ask questions such as what is your gross sales, and are you up or down from the previous year, and what is your most profitable product/service/customer, I would probably get answers that are close to the truth. But I would surmise that most would not be able to answer that list of questions off of the tip of their tongue.

More about Customer Metrics

Another area that I find perplexing when discussing customer metrics, is the ‘target customer’ vs. ‘actual customer’ syndrome. A good business plan and marketing plan would spell the specifics of the target customer, industry, need – and as Richard Tripp from Tripp Analytics likes to say: which clients will require more attention than others.

I once had a client who would automatically send out a huge, costly, package of information for anybody who inquired – regardless of whether they really were ‘qualified’ to take advantage of his services. He had a high dollar membership clientele, yet he didn’t ask the appropriate (unobtrusive) questions to qualify those that were better suited for his membership fee structure and benefits.

He soon created a method to better identify the ‘real’ candidates, and not only did he save money on his advertising, he cut his opportunity costs by 60% and closed 50% more sales.

Customer Metrics and Accounting Packages

Our accounting applications can tell us profit margins, top selling customers – and with some advanced work the top selling profitable customers, but they can’t tell you what you need to know about those customers BEFORE they ever got entered into your accounting package as a sale. And of course this requires a good CRM package – which is beyond the scope of this article, but needs mentioning.

At the SAGE conference last year, I visited with them about one of their flagship CRM products – SalesLogix, and I was so impressed by the metrics built directly in to the product, so that I could tell at any one moment, the result of advertising campaigns, customer makeup, buying patterns, etc.. Truly amazing metrics, that let me analyze customer lead and buying patterns – and better business outcomes.

In the coming months, I will continue to pound away at the great universe of metrics that affect every area of business. In the next column, we will look at service and product metrics.

Tags: Business Analytics, Commissions, Excel, ODBC, Sales Tax, Sleeter

Category: Chuck's Business Performance and Technology Corner, Expert's Corner