Numbers. They are everywhere, and if accurate, you cannot argue with them. They represent the facts, not opinions, not thoughts and not suggestions. They present in many ways: some as drivers, key performance indicators (KPIs), critical numbers, leading and lagging data points, milestones, and targets. They can be expressed in scoreboards, priorities, tactical planning frameworks, communication rhythms, and weekly huddles. But they all are part of what I like to refer to as execution disciplines. There are three execution disciplines; Priorities, Data/Metrics, and Communication Rhythms. Each are described as follows:
Priorities: In the short term (i.e. one year or less), company priorities are set by the leadership team that align with broader three-year (or longer) strategic targets. There should be a line-of-sight created that links priorities that have been set for this year with the strategic differentiators identified in the three-year planning horizon. The priorities identified and deployed during the current year are critical to achieving the line of sight. If we have an aspirational differentiator in the three-year horizon, then it follows that we need to be working on elements of that differentiator in the current year.
The quarterly period provides an opportunity to link current monthly, weekly, and daily activities with the annual priorities, and each individual accountable for those priorities must be engaged in activities that support them. Individual accountability ensures that employees’ daily activities are adding value and are accretive to the overall company objectives.
Metrics / Data: Before describing how to measure a performance variable, it is important to understand why the variable needs to be measured, and why the it has been chosen by leadership as something to be tracked. If growth of the enterprise is the primary objective, the activities of the enterprise need to be organized around specific strategic objectives tailored to such growth.
Enterprise activities should be focused on improving or driving one primary objective in the current time period that is critical to the ongoing success of the organization. The measure for that one objective is often referred to as a ‘critical number’. A commonly accepted definition of critical number comes from Wikipedia, , which is “an operational or financial number that represents a weakness or vulnerability that, if not addressed and corrected, will negatively impact the overall performance and long-term security of the business.”
The critical number defines winning. It rallies people around a common goal, providing a focus on what’s most important in the business. It is the determining factor critical to the company’s success. It’s ‘The One Thing’ that, at any given time, is going to have the greatest impact on your business, ‘The One Thing’ you must achieve, or nothing else you achieve really matters much.
Like other lagging indicators, the critical number is influenced by other input variables, or drivers. When we look at the Critical Number, it is usually on a historical report such as a statement of cash flow, balance sheet, or profit and loss. Examples of critical numbers are profit before tax, gross margin percentage, conversion rate, return on assets, cash conversion cycle, debt coverage ratio, among others.
As you think about your critical number, invite others on your leadership team to offer their perspectives. Debating critical issues in the business is healthy for the team, and agreement on what is most critical in a collaborative way encourages teamwork and deeper understanding of the business objectives. Once you select the ideal Critical Number, then define the improvement target related to that number. And that is where the real excitement happens. It is in the process of getting to the critical number and improving it by focusing on the right drivers.
The drivers to the Critical Number are often referred to as KPIs. The right KPI is a number that directly influences the Critical Number and will help predict the outcome. The appropriate KPI also demonstrates cause and effect, by pointing directly at the Critical Number as one of its components. A driver is a leading indicator, a number which provides insight or forewarning of what’s likely to happen with the Critical Number. KPI’s are metrics to predict and measure progress, or achievement of a priority.
Leading KPIs usually change before the lagging indicator changes and are extremely useful as short-term predictors of the direction of the performance variable being measured. Some examples of leading indicators, and the lagging indicators they influence include: Average weekly hours in manufacturing, impacting scheduling or backlog; vendor performance, impacting on time delivery, or materials variances; requests for proposals (RFPs), impacting revenue; bonus plans, impacting labor efficiency. More examples are listed here...
Lead Measure → Lag Measure
Measures Progress→Measures Success
How will we achieve? →What we will achieve?
Activity→Outcome
Behavior→Result
Cause→Effect
Driver→Critical Number
Weekly scrap dollars→Material cost reduction
# of upsells→Increased revenue per customer
Daily Labor Hr. Variance→Reduced cost of goods sold
Weekly new qualified customers→Increased revenue
These are just a few. For more, see www.kpilibrary.com, or click the link below for a detailed list by category.
Communication Rhythms: Once you have determined the critical number, determined the drivers that can influence that number, assigned accountability to the number, and decided upon the improvement objective, then you can begin to manage the process. Your meetings should be about discussing how you are progressing with movement of the critical number, or the input measures, or drivers, associated with that number.
Your daily huddle should include members of the natural work teams or departmental units that are focused on some aspect of the critical number. Each day those teams will have brief 5-10 minute stand up meetings where each member of the team is able to share 1.) what they accomplished yesterday; 2.) what they will be doing today to make progress towards the one most important priority they have; and 3.) where they might be struggling or ‘stuck’.
The daily huddle is not a problem-solving session. Instead, it provides an opportunity each day at a specific time for the team to communicate with each other on a specific topic that everyone on the team can relate to and understand. Each member should come prepared to talk about the three topics, for no more than a minute or two. Talking about what we have recently accomplished, what we intend to accomplish, and where we are struggling to achieve our priorities creates higher team function, team awareness and team cohesiveness. Other team members need to practice empathetic listening while their teammate is talking for maximum effect.
The weekly huddle is a longer meeting lasting up to 1 or 1.5 hours where the discussion can be centered around weaknesses or problems that are difficult to solve, or opportunities to leverage. If your company has a gainsharing or bonus plan, the weekly huddle is the place to update forecasts, assign accountability for line item ownership on the P & L or Balance Sheet, and to forecast the variables that drive the critical number and have an impact on the overall bonus. In the weekly huddle, the entire team can see the playing field in front of them, and gain perspective and understanding on all aspects and complexities of the business.
Additional meetings include monthly all hands, quarterly planning and review, and annual strategy planning. There are also going to be many ad hoc meetings that occur each week outside this set of communication rhythms, but those will be minimized because most of what you need to talk about is covered during the daily and weekly sessions.
If the leadership team can be clear about the three execution disciplines: clear with priorities, with data and metrics, and with communication rhythms, the company will be well positioned to improve performance, experience less process variance and less drama, and accelerate growth.
