What are three characteristics of good business scorecard metrics? In constructing an effective metric, the designer needs to look at three factors before setting targets:
1) Simplicity: Is the metric simple and easy to understand? Is there a direct relationship between action and result? For example, say this is a retailer who operates in multiple countries and the metric is “watches sold”. This is easier to measure than constructing a composite metric where “watches sold” is measured on 33% digital watches, 33% data watches and 34% analog watches. There may be a business need to sell each category, but the additional complexity makes it more difficult to communicate and execute.
2) Fairness: Is the metric fair to the various groups which use it? Can all equally achieve the target? Using the example of “watches sold”, this measures unit sales (high volume). Suppose one group has low volumes, but luxury watches so their total sales are actually much higher? While it’s possible to set targets and compensate for this, the metric wouldn’t directly measure business health equally for all.
3) Measurability: Is the metric easily measurable? Can it be consistently and accurately measured week after week? Are there precise definitions as to what counts and what does not? In the watch example above, what does “watches sold” mean? Is it total number of units sold? shipped? is it adjusted for returns? are free sample units (demos and promotions) excluded? What are the precise time periods? Is it 12/31/2012 11:59pm Pacific time?
Thinking about how we measure, this week’s book of the week is Smoot’s Ear: The Measure of Humanity by Robert Tavenor. While this book won’t tell you how to construct a business metric, it’s a fascinating look at how we measure things, from human measurements like “feet”, “pounds” to more abstract like the meter , which was originally defined as 1/40 millionth of the circumferene of the earth through the poles to The metre is the length of the path travelled by light in vacuum during a time interval of 1⁄299,792,458 of a second.
The book’s name comes from the Smoot which was a measurement unit devised as a fraternity prank at MIT in the 1960s. Oliver Smoot, a pledge was rolled across the Harvard Bridge which connects Cambridge and Boston. The bridge was determined to be 364.4 Smoots +/-1 ear. Smoot day was celebrated last year at MIT. The Harvard Bridge is painted with “smootmarkers” as you walk across it.
The book is a great weekend read on what it means to measure something and what the human implications of measurement are.