Dave Pollard's papers on business innovation & knowledge management

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	August 24, 2004

MEASURING ENTREPRENEURIAL SUCCESS (Twelfth instalment of the upcoming book Natural Enterprise. List of previous instalments here.) Enterprises today have a dizzying selection of performance measurements to choose from. While at one time measuring financial profitability, growth and asset management effectiveness were considered enough, businesses are now told that they need broader metrics to avoid the landmines that may not show up in a simple financial report card. How does an entrepreneur decide which measures to use? The decision ultimately comes down to which measures best reflect and assess the achievement of the enterprise's objectives. As we explained in an earlier chapter, in a Natural Enterprise these objectives are more personal and less restricted than in a traditional company beholden to absentee shareholders and creditors, whose needs usually (and tragically) trump those of the people who actually operate the enterprise. In fact, Natural Enterprise recognizes that each member/partner will have different personal objectives, and attempts to accommodate those objectives, unlike traditional companies that merely contract for services of employees and make no attempt to assess those employees' individual needs (often at the cost of their best people). Some individuals may want or need to earn a significant income to meet personal financial obligations, while others may be prepared to trade off income for more time for non-business activities, and still others may not care about either financial reward or time demands, as long as they're having fun working with people they love. Just as the selection of members for a Natural Enterprise is a self-brokered juggling act (ensuring members' skills are mutually exclusive yet collectively sufficient), so too is the measurement of Natural Enterprise success a balancing act -- choosing measures that assess each member's achievement of his or her personal objectives and needs, yet still ensuring that the enterprise as a whole remains viable and sustainable. For that reason the selection of measurements needs to be a collective decision, one that optimizes everyone's desires and needs in a fair and objective manner. If one member has a huge mortgage that can probably only be serviced if everyone in the enterprise works longer hours than they want to, for example, this needs to be hammered out early, to avoid inevitable conflicts (and resignations) later. While the measurement process described in this article is designed for Natural Enterprise, it can also work in any entrepreneurial business with a democratic spirit. Just be forewarned it takes a bit more work than the traditional business success measures, and requires a lot more accommodation of individual employees' needs and aspirations than most entrepreneurial managers are accustomed to! Although there are many accepted sets of measures that attempt to look at enterprise success holistically, in my opinion none of the widely-used templates is flexible enough to meet the needs of entrepreneurs who are not fixated on maximizing profitability and growth. My recommendation, then, is that you start by having each member of the enterprise articulate his or her own personal objectives for being part of the enterprise, and then as a group reconcile and optimize them to create a set of enterprise-wide measurements. I've developed two tools to do this, the Personal Enterprise Success Scorecard and the Enterprise Success Scorecard. Those who have worked in large organizations that use Norton & Kaplan's Balanced Scorecard will recognize this as similar to the process used to reconcile personal goals to enterprise goals, but with an important difference: While in traditional companies this reconciliation is a top-down process ("describe how your personal goals and improvement objectives for the next year will contribute to each of the organization's Balanced Scorecard goals"), in Natural Enterprise the process is bottom-up. Here's how it works: Have each member of the organization complete a Personal Enterprise Success Scorecard (see Fig.1), honestly and independently. Circulate these Personal Scorecards among all members of the enterprise, and allow time for one-on-one discussions and exchange of suggestions to ensure all Scorecards are fair, reasonable and consistently filled out. Get the group together to develop a plan that will achieve everyone's Minimum Need Targets, and get as close as possible to achieving everyone's Ideal Targets. This will require considerable consensus-building skills -- it has to be a highly respectful and accommodating process with no bullying, intimidation or reluctant compromise. You might even have to rethink your membership if you realize that no matter what you do, someone's going to be unhappy enough to leave. PERSONAL OBJECTIVE MEASURE TARGET (MINIMUM NEED) TARGET (IDEAL) Meet personal financial objectives Personal monthly cash flow (income) $X/month $Y/month Time for important non-work activities Average weekly work hours max. X hours/week max. Y hours/week Work hours flexibility Ability to choose which hours to work avoid working X-Yam and X-Ypm unlimited flexibility Work autonomy, authority, responsibility Ability to make decisions affecting my role $X spending authority unlimited autonomy Personal learning Time allotted for learning activities X hours/week unlimited at my discretion Creative outlet Time & $ allotted for innovation activities X hours/week + $X/month Y hours/week + $Y/month etc. Fig. 1  Sample Personal Enterprise Success Scorecard Drawing on the Personal Enterprise Success Scorecards, and adding other holistic objectives of the enterprise, compile an Enterprise Success Scorecard (Fig. 2). Put in place processes to capture the data (qualitative -- surveys etc., and quantitative) needed to assess the achievement or non-achievement of the collective targets. When a minimum-need target is not achieved, convene the group to discuss implications for individual members and remedial actions to achieve the target in future, or changes to the target. ENTERPRISE OBJECTIVE MEASURE TARGET (MINIMUM NEED) TARGET (IDEAL OR BENCHMARK) ACHIEVEMENT/ REMEDIATION INITIATIVES Meet members' financial targets Cash flow distributed/month Meet members' work hour targets Total hours worked/month High product/service quality Score per customer survey High business process quality Down time & wasted time High member/employee satisfaction Score per employee survey High customer satisfaction Score per customer survey Strong relationships Face time with members of networks High connectivity Number of contacts with networks High enterprise value Computed valuation High sustainability & agility Meet above targets even in weak economy Social & environmental responsibility Buy local, employ local, no waste/pollution Community responsibility Outreach to schools & charities High market/customer share % of total market in areas served High innovation % of sales from new offerings etc. Fig. 2  Sample Enterprise Success Scorecard (column headings based on Norton & Kaplan's Balanced Scorecard) Most of these measures are contingent on others. For example, a member may be willing to work more hours if he or she has greater flexibility over when those hours are worked. So optimizing the needs and objectives of all members is not only a balancing act, it's an iterative process. And over time the demand for and costs of the enterprise's products and services may change for reasons outside your control, which will require a re-optimization of members' and the enterprise's scorecards again. Some of the objectives in the sample Enterprise Success Scorecard above are quite grandiose and abstract, and sometimes you need to employ some more readily measurable intermediary metrics to get a clear idea of whether you are achieving, and will likely continue to be able to achieve, some of the higher-level objectives. For example, achieving a cash flow target means achieving certain revenues and/or cost minimization targets. So there is still a place in this measurement process for the traditional financial and operating measures like margin and turnover, and like 'eyeballs' and 'stickiness' measures of e-commerce sites. You can find information on some of these traditional measures at About.com, at NetMBA, or at the UK Small Business Service site. While these ratios aren't terribly useful to most entrepreneurs as raw data, they can be very useful in identifying trends that may indicate problems or opportunities, in diagnosing the cause of problems, and in comparing your enterprise to companies in a similar business that are outperforming the market. Trends in intermediary metrics can also have great predictive value: I know of several businesses who noticed modest drops in gross margin or inventory turnover, and discovered that they signalled important (negative) shifts in customer perception of their products, early enough to take vital remedial action. If you are interested in knowing how much your business is 'worth' (at least on paper), I published a Primer on Business Valuation last year on my weblog. Norton & Kaplan's famous Balanced Scorecard, which you can learn more about on their site, breaks the measurable enterprises objectives into four major categories: Financial, Customer, Internal Processes and Learning, Growth & Innovation. Many variations of these classifications have since been published, adding Knowledge (Intellectual Capital), 'People' (Human Capital) and Technology categories, among others. No matter what objectives you choose or how you categorize them, it is essential that they meet three criteria: Measurability -- If you can't measure attainment of the objectives, or even come up with compelling intermediary metrics that can serve as credible surrogates for what you're trying to measure, there isn't much point in listing it as an objective, because you'll never know if you've achieved it. Actionability -- You need to be able to identify remedial actions you can take if you fail to meet your targets. If your measures aren't actionable, there's limited value in taking them. Analyzability -- You need to be able to understand why you are, or are not, meeting your targets, in order to be able to act on them. My book, Natural Enterprise, will include some real-life examples of entrepreneurial measurement systems, and some success stories and horror stories about business measurement. I've spent much of my career being paid to measure enterprise success, and in my experience most entrepreneurs know instinctively how well their business is doing, and many rely on one overarching measure -- daily cash flow -- to confirm or challenge their business instinct. I'll be describing how to manage cash flow in the next article in this series. In the meantime, some final thoughts about measurements: Don't get obsessed with them -- they're a means to an end, namely the achievement of your business objectives (not your accountant's!), not an end in themselves. Make sure that the measures you use are timely, and that you take them continuously; I've seen businesses fail because they made decisions based on obsolete, misleading data. Make sure the measures are meaningful and the process used to collect them ensures accurate data. Before you make major decisions based on your interpretation of a surprising or disappointing measure, get some others to provide their interpretation. Choose a few, meaningful measures over a mass of numbers that are hard to digest. Don't focus solely on short-term measures -- they can make you too impatient, and cause you to over-react. It's been said that "what gets measured, gets done", and there is some truth to that. But nowhere in business is the 'conventional wisdom' so likely to lead you astray than in business measurement. Measure your success on your own terms. It's all that counts. 5:19:42 PM  trackback []  comment []

© Copyright 2004 Dave Pollard. Last update: 03/09/2004; 5:06:25 PM.