Metrics That Matter in Scaling Up Your Business

Scaling up a business is a challenging and exciting endeavor that requires careful planning, execution, and continuous evaluation. To achieve sustainable growth, it’s crucial to identify and measure the right metrics that drive success. 

In the book “Scaling Up,” Verne Harnish outlines a framework for business growth and provides insights into the key metrics that matter. In this article, we’ll explore these metrics, why they’re essential, and provide real-world examples to illustrate their significance.

People Metrics

Your team is the backbone of your business, and measuring the right metrics related to your people can help you ensure you have the right talent in the right seats for scaling successfully.

Metric #1: Percentage of ‘A’ Players

Focus on getting the right people living your core values and doing the right things with clear accountabilities and metrics. What this means is striving to have a high percentage of ‘A’ Players on your team. If you can achieve a high percentage of ‘A’ Players in your business – everything else that follows will be so much easier for you as a leader/manager.

Metric #2: Employee Turnover Rate

High employee turnover can be costly and detrimental to business growth. Measure your turnover rate regularly to identify any issues and work on improving employee retention. If your turnover rate is higher than the industry average, it might indicate that you need to prioritise improving your company culture or compensation packages to retain A Players.

To calculate turnover rate, divide the number of ex-employees during a specific period by the number of employees at the beginning of that period. If you start the year with 200 employees, and during the year, 10 people leave the business, turnover is 10/200 = 0.05, or 5%.

It’s important to note that turnover rates vary significantly from industry to industry. However, turnover rates should (ideally) be lower than 10%, which is a healthy turnover rate across the board.

Metric #3: Employee Engagement

Highly engaged employees are passionate about their jobs, feel connected to their company’s mission, and are willing to invest extra effort to help the business succeed. A classic example of a company priotitising employee engagement is Zappos, an online shoe retailer, whose CEO Tony Hsieh recognised a poor culture and initiated a number of changes, including offering new hires a $2,000 bonus to quit after their first week if they didn’t feel that Zappos was a good fit. He also emphasized a core set of values like “Deliver WOW through service” and “Create fun and a little weirdness,”. These small changes resulted in a strong company culture focused on employee engagement, leading to excellent customer service and growth. 

Measuring employee engagement accurately is essential for understanding your workforce and implementing strategies to improve it. It is not always straightforward to measure it, because it is a complex topic with a combination of motivation, happiness, satisfaction, and commitment. However, there are several methods and tools you can use to measure employee engagement. Here are some common approaches:

  • Employee Surveys which typically contain questions that assess various aspects of engagement, such as job satisfaction, commitment, and work environment. Use a mix of quantitative (scale questions) and qualitative (open-ended questions) to gather a comprehensive understanding of employee sentiments. Note: surveys should be conducted regularly (such as annually or semi-annually), to track trends and changes in engagement levels.
  • Employee Net Promoter Score (eNPS), a simple metric that asks employees how likely they are to recommend the organisation as a place to work. It measures overall satisfaction and engagement. Employees are typically classified into Promoters (score 9-10), Passives (score 7-8), and Detractors (score 0-6). NPS is calculated as the percentage of Promoters minus the percentage of Detractors.
  • Pulse surveys, which are shorter, more frequent surveys (e.g., monthly or quarterly) that focus on specific aspects of the workplace or employee experience. These can capture real-time feedback and help identify immediate areas for improvement.
  • 360-Degree Feedback which collects input from employees, managers, peers, and sometimes even external stakeholders to provide a comprehensive view of an employee’s engagement, performance, and development.
  • Software platforms and tools, such as employee engagement software or HR management systems, provide a structured way to gather and analyse employee feedback and engagement data.
  • Exit Interviews are a commonly underutilized tool that analyse feedback from employees who are leaving the organisation to identify common reasons for disengagement or turnover.

Strategy Metrics

Measuring the right metrics regarding your strategy helps you understand whether your business is making progress toward its long-term goals. The specific metrics you choose should directly reflect your strategic goals, and they should be regularly reviewed and adjusted as needed to stay aligned with your evolving strategy and business environment.

Metric #4: Key Performance Indicators (KPIs)

KPIs are specific, measurable metrics that directly align with your strategic objectives. They are often unique to your industry and business. Examples include:

  • Sales Growth: the increase in revenue over a defined period compared to a previous one, often expressed as a percentage. For example, if your revenue was $1 million last year and is now $1.2 million, you’ve achieved a 20% sales growth.
  • Margin Growth: the increase in gross margin over a period (generally year-on-year) expressed as a percentage. This is a ‘balancing’ indicator – as it can be easy to grow top-line revenue at the expense of margin. This is not sustainable. 
  • Market Share: your company’s market share in your industry. If your goal is to increase market share, then measure this percentage regularly and set targets for growth.
  • Customer Acquisition Rate: evaluates the number of new customers gained in a specific period. If your strategy involves expanding your customer base, monitor how quickly you’re acquiring new customers.
  • Customer Lifetime Value (CLV): the total revenue a customer is expected to generate over their entire relationship with your company. It’s essential if your strategy emphasizes customer retention and loyalty.

Metric #5: Customer Satisfaction and Loyalty

Measuring customer satisfaction and loyalty allows you to better understand how well your company is serving its customers and whether your strategic efforts are making a positive impact. It provides valuable insights into the overall health of your customer relationships and can help you fine-tune your strategy to better serve and retain your customer base. Some ways to measure this are through:

  • Net Promoter Score (NPS) can also be used with customers to measure their loyalty and satisfaction. They are asked how likely they are to recommend your company to others. 
  • If your strategy focuses on reducing customer attrition, measure the Customer Churn Rate, the percentage of customers who leave over a specific period.  A high churn rate indicates that a significant number of customers are leaving, which can negatively impact your business. Reducing churn is often a key strategy for companies.
  • On the flip side, track your Customer Retention Rate, the percentage of customers you’ve retained over time. A high customer retention rate indicates strong customer loyalty.

Execution Metrics

Execution metrics provide insights into whether your business is on track to achieve its strategic objectives. They allow you to identify issues early, adjust strategies, and ensure that the plan is successfully carried out. 

Metric #6: Project Timelines and Milestones

Track project-specific milestones and deadlines to ensure that key initiatives stay on schedule.

This can include:

  • Percentage of projects completed on time
  • Average time to complete specific project phases
  • Milestones achieved in product development

Metric #7: Operational Efficiency

Analyse how efficiently your business is using resources to achieve strategic objectives.

This can include:

  • Employee productivity metrics (e.g., sales per employee)
  • Cost per unit produced
  • Inventory turnover rate

Cash Flow Metrics

These metrics help assess cash generation, liquidity, and the ability to meet financial obligations, which are all key aspects of financial health and business success.

Metric #8: Cash Conversion Cycle (CCC)

CCC quantifies the time it takes for a company to convert resources into cash. It is calculated by subtracting the average number of days accounts payable (the time it takes to pay suppliers) from the average number of days accounts receivable (the time it takes to collect payments from customers), and adding the average number of days inventory is held. A shorter CCC indicates efficient cash management, while a longer CCC can suggest inefficiencies in cash flow.

Metric #9: Operating Cash Flow (OCF) and Free Cash Flow (FCF)

OCF shows the cash generated or used by a company’s core operational activities, excluding investment and financing activities. It is calculated by adding back non-cash expenses (like depreciation) and adjusting net income for changes in working capital. A positive OCF indicates that the company’s day-to-day operations are generating cash, which is crucial for meeting ongoing expenses and investments.

FCF represents the cash generated after covering both operating and capital expenses. It is calculated by subtracting capital expenditures (CAPEX) from OCF. It reflects the cash available for debt reduction, dividends, share buybacks, or other investment opportunities. Positive FCF demonstrates the company’s ability to invest in growth, pay down debt, and return value to shareholders.

Metric #10: The Sustainable Growth Metric

The Sustainable Growth Metric is designed to show whether your business can fund future Revenue growth. The concept is based on the initial presumption that all the relationships within your business remain exactly the same. If you were to sell $100 of additional Revenue would your business be able to fund that growth? It will tell you how much Surplus (which is good) or Deficit (which is not good) you have for sustainable growth. If it is a Deficit – you most likely will be growing broke.

In summary, measuring metrics in your business provides a clear and data-driven picture of your company’s performance and progress. It helps you identify areas of strength and weakness, align your efforts with strategic goals, and make informed decisions to drive growth and success. 

By tracking the right metrics, you can not only assess your current state but also adapt and optimize your strategies, improve processes, and ensure that you’re on the path to achieving your long-term objectives. In a rapidly changing business landscape, metrics serve as the compass guiding your business toward sustainable profitability, efficiency, and customer satisfaction.

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