“It is an immutable law in business that words are words, explanations are explanations, promises are promises, but only performance is reality.”

– Harold S. Geneen, the man who made ITT a world power

As business owners, we set standards and measure performance from the day we open our doors. We may not recognize that we’re doing it, give it a name, or consider it more than just part of our job. For example, when we walk, we see if recently received goods have been put away, if a custom job moves smoothly from one workstation to another, or if our A/R person is doing collections on time. All of these things measure performance, but at an operational level, on a day-to-day basis.

As we become more successful, our Company grows, we add more overhead (space, equipment, people), and it becomes difficult for us to oversee everything ourselves. Inevitably, at the same time, more competitors appear, use more aggressive tactics, and our customers become more demanding. As owners, we remain responsible for ensuring that the business delivers exceptional performance, but the way we do that has to change.

Now we have to do three things. First, set and communicate clear performance standards for the Company and make sure everyone understands them. Second, measure actual Performance against these standards regularly, provide feedback to everyone involved, and make changes if necessary. And finally, identify some key indicators of success or potential problems in the business and personally measure performance against ourselves on a daily, weekly, or monthly basis.

We set clear performance standards when, for example, we:

• Present a picture of what we want the Company to achieve in the future, for example in 3 years. We can say things like we want to have a 60% share of a specific market or we want profits to increase to 12% of revenue. A great way to do this is through a Planning process.
• Help our key players determine what each part of the business will need to do to, for example, achieve increased operating profit. Also ask them to involve their direct reports in developing what their area needs to do to support their goals.
• Have each staff member set personal goals that support the Company’s plan during their annual performance review.

The key inputs to our performance standards incorporate the expectations of our customers and what is happening in the rest of the industry. Have salespeople ask customers what problems they are facing in their business and what changes are taking place in their industry. Conduct regular customer surveys, they can be inexpensive to implement and easy to complete. But don’t just ask customers to rate our Performance on the topics we think are important. Ask them what aspects of our products, deliveries, etc. are important to them. Otherwise, we waste time and money fixing the wrong things. (There is really only one question for customers, do you know what it is? Send me an email and I will share it with you)

Get industry insights from the websites and annual reports of publicly traded companies in the same or a similar business. These companies frequently publish financial data, such as their margins and expense ratios, and operating information, including their service levels. We can use this information to guide our own thinking.

A good way to communicate performance standards and make sure everyone understands them is to hold a meeting and tell everyone what the goals are for the year. Be open and frank about what will have to be done to achieve them. Encourage everyone to ask questions and ask for their opinion. Hold key players accountable for sharing performance standards in meetings with their teams. Make sure they explain what the goals mean to each individual and how they can help them exceed them. Follow up by posting Performance standards and talking to people about them.

Measure actual performance against performance standards, and do so regularly. Imagine what would happen if a team in the NBA, NHL or NFL saw the results of each game only when it was over. The coaches and directors would not have a chance to adjust their game plan to what had actually happened in each period. Our businesses are no different. We need to take a half day right after each quarter’s results are available so we can compare actual performance to our forecast. At the same time, we need to check progress against the SMART goals we set for ourselves and our staff and see which ones have been completed. Compare developments in the economy, industry and market with assumptions and, with the help of our key players, make any necessary changes to our strategy. We should also share each quarter’s results (good and bad) and the improvements we’ve made to your strategy with everyone at regular staff meetings and encourage questions.

Finally, we need to identify some key performance indicators of success or potential problems in the business and measure them ourselves. Think about the things that give early warning of problems, in the company and in the industry, and identify the top 3 or 4. Some key questions that apply to all businesses and directly address the health of the company are: do we have enough cash for the next 90 days? Does the order backlog increase or decrease? Do accounts receivable arrive on time? or becoming obsolete, are we close to capacity in the plant? We need to find out which are the 3 or 4 most important for our Company. Then we have to have someone collect the data about them and provide it to us on a regular basis. I would suggest that we look at them at least once a week, particularly when there are many changes in the industry and in the company. Our financial statements (income statement, balance sheet and cash flow statement) are an important source of information. We must insist that we have it at the beginning of the month because, while that financial data is useful, it is also historical. They tell us the facts about a period that has already passed. Receiving prior month’s statements after the fifteenth of the current month should be unacceptable. (I know someone who says it’s better to be fairly precise and early rather than very precise and too late.)

If you disagree with anything I’ve said or to share your experiences, email me at [email protected] or call me at 416-258-9610.

© Copyright ProfitPATH, a division of JDS & Associates Inc., 2008