December  2005     Edition 8
Key Metrics

Key Metrics

should track and report on current, imminent, and future results, AND give you the time to change an outcome they predict.

Example Headscratcher

:  What type of metrics can give you more reaction time?

Momentum is the law that states

that a body stays in motion unless a force redirects it, and the force required is related to the object’s mass.  It’s why it takes so long for an aircraft carrier to change direction.  The opposite is also true.  It takes a big push to get an aircraft carrier moving.

Companies have momentum too

. Whether your company can change direction like a PT boat or an aircraft carrier, it has momentum.  Examples include:  A company with a 3 month sales cycle can’t easily alter the revenue forecast two weeks out.   Employee morale develops over a period of time and you generally can’t change it overnight.   A project schedule that is only 6 weeks long still can’t easily recover if a delay is communicated the day it is due.

So just as important as what you measure is when you measure it.

  Key Metrics need to be thought of as an early warning system, not just a report card.  

The “Measure”, and the “Change in the Measure”.

  A “Measure” is visible,  such as the Revenue, Margin, Product Development Schedule, etc.   A “Change in the Measure”, such as a Change in Revenue, might be driven by the sales opportunity funnel, and closure rate.  Wall Street tracks  “Measures” and the “Change in the Measures”.   Most companies track these two “levels” of metrics,  But there is a third and extremely important level.


.   Remember the Aircraft Carrier, or PT boat.  Its current location is the “Measure”.  The “Change in the Measure”, its location, is governed by its speed.  Obtaining a new speed is related to the power of the engines and the acceleration they provide.  This is the change in the change.  For those mathematically inclined, it’s the second derivative of the Measure. 

Back to Revenue.

  Understanding business drivers behind acceleration can produce fantastically useful Metrics.  In the example, the change in revenue is related to the sales funnel and the closure rate.   To accelerate revenue beyond the current trend, you need to change the funnel and/or the closure rate.    Examples of  factors that will do this are; number of sales people, training, pricing, morale, competitiveness, etc. 

Acceleration as an early warning sign

.  If Revenue is increasing qtr over qtr by 5%, then the change in revenue is steady.   A qtr over qtr increase of 5%, then 6%, then 7%, etc., means not only is your revenue increasing, but it has a positive acceleration.    If however,  the acceleration is negative, then your qtr over qtr growth might look like +5%, +4%, +3%.  For awhile, revenue still looks good because it is increasing.  But if nothing is done, the revenue change will go negative, i.e. -1%, -2%, -3%, etc.   A negative acceleration, is a Red Flag.

An Acceleration Metric can guide your reaction.

  When reviewing visible measures, a temptation might be to act immediately if results are poor.  First take a look at the acceleration.  It might be positive, meaning that the cause of a problem was already understood, action was taken, and while the top line results have not shown it yet, they will.   Conversely, you might sit back if the results are good,  however the acceleration might be negative, so while things may look good for now, an action is warranted to reverse a bad looking future.  

The Takeaway:
Take a look at your metrics. What do they tell you and how much time in advance of what they predict will you have to change the outcome.   Distinguish between metrics that belong on a report card, verses those that predict a future outcome.  Create an “Acceleration Metric” for each of the visible (Measured) metrics, and understand the drivers behind them. 

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