What makes the difference between companies that consistently hit their goals and those that fall short? Which metrics should you track to ensure your business stays on course?
Understanding key business metrics is fundamental to achieving sustainable growth and success. Verne Harnish’s Mastering the Rockefeller Habits provides a framework for measuring financial health and tracking progress toward company goals, emphasizing both profitability indicators and target metrics.
Continue reading to discover how tracking the right numbers can transform your business performance.
Key Business Metrics
Harnish argues that successful companies need to practice the Rockefeller Habit of Tracking Progress Objectively: Create ways to measure the company’s financial health and progress toward its goals. Keeping a close eye on key business metrics will help guide your strategic decisions in the short term.
Harnish recommends you primarily focus on tracking two types of business metrics: Profitability Indicators and Target Metrics.
Type #1: Profitability Indicators
First, identify metrics that give a clear impression of your company’s financial health and general productivity. We’ll call these metrics “Profitability Indicators” (Harnish refers to them as “Smart Numbers”). For example, a social media platform’s Profitability Indicators could be the percentage change in the number of new users this week compared to last week, the ROI for this week’s advertisements, and the percentage of users who used the social media platform every day.
According to Harnish, studying your company’s Profitability Indicators in real time allows you to detect rapidly changing market conditions and unforeseen budget problems caused by your company’s growth. Unless you have systems in place to collect and review these Indicators regularly, it’s impossible to adapt your strategy quickly enough to handle these sudden problems.
Discerning which metrics to track requires some experimentation—start by gathering all data you think might accurately predict your future performance. Over time, focus on those metrics that yield the most effective predictions.
Type #2: Target Metrics
In addition to Profitability Indicators that measure the company’s broad financial health, Harnish recommends tracking Target Metrics that measure the company’s short-term progress toward long-term goals (which Harnish calls “Critical Numbers”). Every year, decide on a new quantifiable Target Metric that reflects significant progress toward your BHAG. Likewise, every quarter, set a smaller Target Metric that marks significant progress toward the year’s Target Metric. This ensures that everyone in the company is always unified in their top priorities.
For example, if a healthy soft drink company is trying to drive Coca-Cola out of business, their Target Metric for one year might be to sell 150% more units than the previous year, and one of their quarterly Target Metrics leading to this goal could be to invest in supply chain infrastructure to lower manufacturing cost by 30% (allowing them to lower the retail price and sell more units).
Create Fun Quarterly Themes
In addition to setting a quarterly Target Metric, Harnish recommends creating an exciting theme for every quarter that drives home the Core Values behind your quarterly target—and makes achieving it more fun. Then, when your team hits their target, give them a reward that fits the theme. The reason quarterly rewards are enticing isn’t because the reward itself is practical or valuable. Rather, they allow the team to look forward to the satisfaction of celebrating their victories.
For example, if our soft drink company is trying to streamline their supply chain this quarter, their theme could be “Pass the Ball!” with soccer-themed posters in which different players represent stages of the supply chain. This soccer imagery could also reinforce the Core Values of teamwork and camaraderie. At the end of the quarter, the team could be rewarded with a new foosball table in the break room and a celebratory foosball tournament.
Keep Your Target Metrics Focused & Visible
Harnish recommends restricting these Target Metrics to one area of improvement at a time rather than trying to improve every aspect of your business at once. Organizations make progress much more quickly when they focus all their efforts on a narrow goal.
Additionally, writes Harnish, display these metrics prominently, with large visuals, in a communal space. Employees are more engaged when they can clearly see the effects of their work.
