“In God we trust; all others must bring data.”
– W. Edwards Deming
Who am I to argue?
Deming is regarded as having had more impact upon Japanese manufacturing and business than any other individual.
The problem is, this quote was more than likely birthed over half a century ago, well before the digital era. To update it all you have to do is add ‘the right’ before data.
And what does this have to do with Business Model Innovation? In today’s increasingly complex, uncertain business environment the frequency of twists and the magnitude of turns one has to deal with means that you must be more agile than ever.
At one point in time it was good enough to recognize fundamental environment shifts, file them away, and eventually slowly & methodically address them during the annual planning period. Try this today and you’re toast. Competitors, and more importantly your customers, adjust at the speed of electrons. Information scarcity is no longer a concern, or advantage – just ask floor traders at the New York Stock Exchange.
Being able to break stride midstream to correctly position for a new reality is now a core business competency. What gets you there is identifying and most importantly measuring the right quantitative data set. And, this is the heart of Business Model Innovation.
Embrace the discipline of testing
When it’s missing, one often finds a concern that:
- is only making a fraction of its profit potential
- feels stuck in purgatory
- and, all the fun is gone
These signposts are essential to ascertaining a feeling for the health and progress of an initiative. And, it’s no different with a business model innovation project.
Most all businesses focus on revenue (or revenue growth), expenses, and cash flow. However, every industry group has its own specific metrics and it’s vital that you understand what they are and why they’re important. Don’t blindly accept anything; determine if the benefits of tracking it correctly reflects your specific goals and the current environment.
You need to be conscious of falling into the trap of tracking too many performance indicators. With today’s ability to extract, sort, and crunch an ever-increasing amount of data how can you tell which metrics are critical?
Metrics vs. KPIs: What the difference?
All KPIs are metrics, but not all metrics are KPIs.
- They are explicitly linked to a concern’s strategic objective.
- And most importantly, they are actionable.
This combination is what we are looking for during a business model innovation project, for it allows us to identify where we’re doing well and where we need to make adjustments to our course or thinking. In other words, they allow us to judge our success or failure in executing a strategy by provide quick insights while supporting the ability to drill-down into more detailed metrics.
The Litmus Test
There are three criteria employed to determine if a metric meets KPI status:
Outcome-oriented – the metric tracks outcomes that are tied to a definitive objective/goal. The big tip is that if you cannot describe the outcome a measurable tied to it’s a metric.
Target-based – the metric provides context by having at least one defined time-sensitive target value – think milestones.
Gradable – you must be able to derive an easy to understand take on whether the KPI is good or bad. It should be done by taking the difference (delta or gap) between what was achieved and the expected target and then rank it with explicit thresholds.
Finding effective KPIs
Wayne Eckerson best summed up this process in his 2006 article in Information Management titled ‘Creating Effective KPIs’.
“KPIs are powerful agents of organizational change, but creating effective KPIs is challenging; it is more art than science.”
He goes on to state that despite all efforts most every foray down this path will result in 20% of the KPIs not being discovered until the initiative is deployed and you see how it impacts market behavior and performance. To help us secure the 80% and readily recognize the backend 20% Wayne was kind enough to share his experience in the form of the graphic below.
Finally what needs to be developed is a systematic way to collect, manipulate, and present the raw data such that it yields tangible insights into your concerns performance. And, is this best accomplished with a dashboard.
Dashboards serve three key roles, they:
- Demand that you determine how your key assumptions can be quantitatively measured
- Force you to think critically about the most pressing issues presented
- Show whether the concern is on course, or not
I know that for most of you when dashboard is mention the first thing that flashes into your mind is a computer screen with a dizzying array of colored charts and numbers tracking a slew of factors. What’s interesting is that some of the most effective dashboards that I’ve come across track three to four KPIs. This is especially true when in the process of launching or repositioning a business.
If you’re interested in learning more about dashboards in the context of Business Model Innovation I suggest you start with the book “Getting to Plan B: Breaking Through to a Better Business Model”. In particular Chapter 2: Guiding Your Flight Progress, which focuses on using dashboards in the trial and error environment of business model development.
Putting it to work
Find the KPIs that matter to your concern. Run experiments. Be honest about what you find.
- Business [Re]Ignition: The 7 Rock Solid Elements of Execution Business Model Innovation – Part 4 (donaldmcmichael.com)
- Business [Re]Ignition: The 7 Rock Solid Elements of Execution Business Model Innovation – Part 3 (donaldmcmichael.com)
- Business [Re]Ignition: The 7 Rock Solid Elements of Execution Business Model Innovation – Part 2 (donaldmcmichael.com)
- Business [Re]Ignition: The 7 Rock Solid Elements of Execution Business Model Innovation – Part 1 (donaldmcmichael.com)
- Business [Re]Ignition: The 7 Rock Solid Elements of Executing Business Model Innovation (donaldmcmichael.com)