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What are the "traditional" enterprise performance management metrics for a mid-sized (~$500M) company?

Enterprise Performance Management MetricsWhat are the "traditional" enterprise performance management metrics for a mid-sized (~$500M) company? We do high tech product development and manufacturing. I am looking for company performance metrics to benchmark against and report on internally but want to look outside of my own finance dept for knowledge as to what the more broadly accepted metrics are. This would include company financial ratios and financial performance metrics that would be part of a financial ratio analysis. Thank you.

Answers

Topic Expert
David Wittenberg
Title: Director of Financial Strategy
Company: World Vision
(Director of Financial Strategy , World Vision) |

This question is a wonderful opportunity for your Finance Dept to step up and demonstrate your value as a strategic asset to the company! I assume you've already gone through the generic lists in old Finance 101 text books for profitability, capital efficiency, liquidity and leverage. The objective now is to select metrics that will to drive better decisions and behaviors across the company.

I recently responded to a similar question in the discussion section that, to do this well, it is completely dependent on your industry and your company's unique strategy. I'm a fan of Jim Collins who, in 'Good To Great', found the companies that substantially outperformed their competition (regardless of their industry) rallied around a single key metric that "Drives Your Economic Engine."

This can take time to find and differs from one company to the next. For example, Walgreens chose profit per customer visit and Wells Fargo chose profit per employee. Each was right for their situation and required a deep understanding of their strategy and industry dynamics.

Sorry there's no easy answer to this but here are a few guiding principles:
- Keep the number of key metrics used in performance appraisals to one or two. If well chosen, they will drive both short-term and long-term profitability. Too many metrics and managers will self-select just one or two to focus on anyway.
- Remain mindful of the difference between performance metrics and diagnostic metrics. Performance metrics affect a person's bonus while diagnostic metrics should be used only when things aren't going well and identify areas to investigate.
- Beware of unintended consequences. Test every metric you are considering with the question "How might achieving this metric actually hurt performance?" If managers & employees work single-mindedly to 'make their numbers' are there harmful behaviors that would do this?
A quick story here: I was evaluating a distribution firm that, in reaction to poor ROIs, developed more than a dozen (too many) working capital metrics (diagnostic measures) that feed into the performance appraisals of managers at their 50+ sites. Long story short, these metrics that were intended to make efficient use of working capital ended up tanking ROI because they encouraged poor product mix choices (unintended consequences).
- A powerful metric often comes in the form of "Profit per ________." The magic comes through filling in that blank wisely.

Again, this is a wonderful opportunity to show the executive team a Finance Department can bring far more value than just crunching numbers and managing treasury. Making this a strategic exercise can be a key element to driving maximum profitability and elevating the role of the finance team.

Good Luck!

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

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Best... Sarah

Dan Everett
Title: Director of Marketing
Company: SAP
(Director of Marketing, SAP) |

Hi David,
I agree that less is more. I usually talk about Key Performance Indicators, if there are too many they can't be KEY. And then there are usually a number of metrics (I believe what you are calling diagnostic metrics) that are used in the calculation of the indicator. And the metrics should span departments (finance, sales, manufacturing, etc). What I usually see is that finance knows something is wrong like working capital is increasing but the don't have visibility into what is causing it. Is there a problem with sales, are material cost rising, is there a problem in manufacturing with throughput or yield, etc.
Its the ability to trace back to the root of problems from the indicator that really enables you to manage performance versus just measuring ratios and metrics.
Regards,
Dan

Augusto Gautier
Title: VP Finance
Company: McLean
(VP Finance, McLean ) |

KPIs to focus on costs - or as one of our managers calls it "Staffing to Revenue"

Our focus is on the variable costs since fixed are by definition fixed.

One of our lines of business is Outpatient Rehab. The revenue source is rehab visits. Each visit is x minutes. Multiply scheduled visits by x which determines how many hours of therapists you should have the next day. Scheduler is responsible for not only scheduling the visits but for scheduling the therapists, this way they can determine if someone needs to take the day off. Since this process was started the days in the office for therapists was changed so that we would minimize overtime on certain dates. This indicator is prospective.

The retrospective indicator is productivity. We take number of visits for the week times x to determine required staffed hours and divide by hours paid for working. If it is missing our objective we discuss situation with scheduler. This is a small line but these changes have helped us turn it around from a -4% profit margin to a plus 3% profit margin.

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

Have you measured impact of patient satisfaction subsequent to this change?

Augusto Gautier
Title: VP Finance
Company: McLean
(VP Finance, McLean ) |

Good question. We are still slightly overstaffed (my feeling)based on the productivity %s so so far there has not been an impact on the patient as to responsiveness or ability to schedule time with a therapist. Some of the therapists that have to switch days off during the week were not happy at the beginning (i.e., some took Fridays off, yet Fridays was a busy day and not as much on Tuesdays, thus Tuesdays were a low productivity date...and Fridays were partially staffed with per diems instead of regulars). If this attitude has impacted patient satisfaction, I am not sure yet. However, as mentioned in he parenthesis now Friday visitors have regular therapists.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

Dear inquirer,
My SKYPE Profile says "When a metric’s movement causes everyone to be called into a meeting and asked “what’s going on here?”…then it’s most likely a KPI. Otherwise, it’s not a KPI it’s just an interesting metric." {copied from somewhere ;-))

David hit it on the head... DO THE WORK... MEET the department heads. Ask the questions "What is most important to our company's success next year (and then ask, why, why, why, until the answers finally tell you what you can measure to DRIVE that success.) For instance, Augusto points out a metric he feels is pertinent to his business (Staffing to Revenue or Rehab Visits to Therapist time), yet it has nothing to do with the customer (the Outpatient him/herself.) Will the business be successful if therapists are incented to drive productivity higher by cutting how much time they spend with the Outpatient? Thus, those may be important metrics that help keep things in balance, but THEY ARE NOT KPIs...

Publishing a bunch of "traditional" metrics is useless unless they really 1) INFLUENCE behaviors, 2) Fit your company's Vision/Mission. IN “Good to Great”, the message was not one size fits all, but find the few metrics that ALL other indicators roll up to. In my SaaS business, the market heavily rewards growth, and growth in a SaaS business is first driven by net MRR (monthly recurring revenue); NET is as much a factor of Annual or Total Customer Contract Value as it is a factor of churn or lost customers. Lost customers are because of many reasons, but the controllable ones – product features, pricing, customer satisfaction, etc – are ones that each department can relate to. THUS, every department's KPIs are tied to Net MRR, but it may start at customer retention, customer satisfaction, or customer-driven feature sets on the roadmap.

Each metric you consider to put on your dashboard also requires that you ask “If it moves up or down, who takes action? And what actions? “

Finally, you have an excellent chance of being seen as an enabler, as being much more strategic to the organization, IF – ONLY IF – you start the company on the journey of finding those KPIs instead of just publishing a bunch metrics. GOOD LUCK

John Sanders
Title: CFO Partner
Company: Tatum
(CFO Partner, Tatum) |

I like Keith's vision of Net MRR since it force everyone to move from a "transaction" mindset to a "relationship" mindset which generates more value and more Net MRR.

Michael Kuhlmann
Title: CFO
Company: Computer Guidance Corporation
(CFO, Computer Guidance Corporation) |

If "Anonymous" is looking for suggestions/recommendations on meaningful metrics metrics I would suggest that Cash Flow be included.

Many organizations and senior staff struggle to understand the relationship and timing of Contract Bookings/Sales, P&L Revenue Recognition, and actual Cash Receipts....Businesses fail when they run out of cash and this happens frequently following record periods of Sales and Revenue increase because the organization does not understand how much cash will be required, where it will come from, or when it will be received.

Dan Everett
Title: Director of Marketing
Company: SAP
(Director of Marketing, SAP) |

I agree that in general cash flow is a bigger problem than profitability in mid-size companies

Augusto Gautier
Title: VP Finance
Company: McLean
(VP Finance, McLean ) |

Cash flow could be a big problem on any size enterprise.

Story #1 - One year (in a $1 billion plus company) we were having a tremendous financial year bonuses were going to be significant, yet the receivables were building up. I mentioned casually to the LOB directors that it would be a shame that the bonuses would have to be paid with accounts receivable instead of cash since these were not being collected. I just printed a one page poster saying "collect or cancel." By the time the bonuses were to be paid, there was plenty of cash to pay them.

Story #2 - If you go back and read "Barbarians at the Gate" I believe KKR rewarded improvements of the RJR Nabisco acquisition 50% based on cash flow and 50% based on earnings improvement. RJR (multi-billion company) was in a cash flow bind ... you will need to read the book to find out the reasons.

Story #3 - while researching (in a $27 million revenue company) why we had overpaid for the construction of apartments (when compared to benchmarks), the answer was because we had the cash. Reminds me of the story of the two men, one with money another one with experience, at the end of the meeting, the one with the money had the experience, and the one with the experience had the money.

Morale of the stories - cash flow has to be linked into the variable compensation structure.

Dan Everett
Title: Director of Marketing
Company: SAP
(Director of Marketing, SAP) |

I agree cash flow can be a problem in any size company.

My original post specified mid-size because that was the context of the original question, and its where I have the most direct experience.

I love your stories.

Dan Everett
Title: Director of Marketing
Company: SAP
(Director of Marketing, SAP) |

The following site lists KPIs by industry, process (finance, sales, etc) and framework (COBIT, SCOR, etc).
http://kpilibrary.com

Lee Crumbaugh
Title: President
Company: Forrest Consulting
(President, Forrest Consulting) |

This may be well known, but I just attended a presentation by the CFO of IBM given to mark the company's 100th anniversary. He told the story of how IBM could not make payroll in the early 90s, saved only by an emrgency line. Operations were very decentralized and out of control. Gerstner came in, and through better controls and centralization (plus a more coherent strategy), fixed the problem.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

I like a small number of major metrics including direct margins, various EBITDA measures, particularly EBITDA to invested capital and debt divided by EBITDA, end economic value added [EVA]. Cash flow is reflected in EBITDA but notions that cash flow is more important than profitability [margins driven] are risky as profits are the cornerstone of cash flow over time. Cash flow withoug profitability is a form of slowly bleeding to corporate death.

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