Smart Business Metrics
Measure What Really Counts &
Manage What Makes the Difference

By Bob Phelps
Pearson Education / Financial Times
February 2004
ISBN: 0-273-66396-8
220 Pages, Illustrated, 6 ¼" x 9 ¼"
$72.50 paper original

A CEO receives a full bonus in a year when the share price fell by 70%. Why? Because the remuneration committee says he has 'met all his operating targets'. Have the right operating targets been set? If you are going to manage by numbers, make sure they are the right ones. Understanding your organization's key performance drivers is crucial to the success of your business. Too often, the wrong operating targets are set, and bad targets can bring bad performance.

Smart Business Metrics provides the tools that will enable you to make strategic decisions based on factual analysis. It shows how smart metrics can produce joined-up management to allow all parts of your business to work together to create value for the firm. Smart Business Metrics will: help you understand your organization's key performance drivers, show you how to set the right targets and measures for your business, enable you to apply quantitative measures to the behavior of your managers, customers and employees, allow you to make financial and operational decisions, provide you with the tools to enable you to make strategic decisions.

Part 1 Do your metrics miss the wood for the trees? This part shows why smartmetrics are needed. All firms use metrics but most are poorly designed. How the wrong metrics distort performance and why individual managers will not make the best decisions for the firm without smartmetrics to guide them.

1 Doing the right thing This chapter illustrates the problems of non-scientific strategy decisions: while the direction of strategy is right, the details are wrong How strategy gets set - case scenarios of typical strategy setting processes How poor measures lead to internal fights and lack of alignment eg data consistency vs usable reports, sales revenue vs profitability How strategy leads to the right idea but the wrong results eg NHS, CEO bonuses, e-business, Enron and derivatives.

2 Why is setting strategy difficult? This chapter explores the difficulty of getting the right strategic decisions: pinpointing what causes success. The firm as a complex system. The causes of complexity: autonomous agents (people and their behaviour) Issues in complex systems: local optima (empire building); sensitivity to small changes (the devil is in the detail) The problem of how to know which actions were responsible for success: the credit assignment problem How these issues appear in practice. Case M&S

3 Pointing managers in the right direction This chapter shows why managers need a framework to direct their efforts: their unaided intuition is not enough to figure out value drivers and measures. Why smart people don’t make smart decisions Managerial decision biases and common errors: biases toward the simple, the recent and the local. Why there is no ‘invisible hand’ of the market to guide them. Managers acting in their own self-interest will not produce optimal outcomes for the firm. Their different biases and interests lead to a lack of alignment and cooperation. How firms attempt to impose alignment: process, culture, KPIs KPIs as the link between value drivers and alignment The problem of perverse behaviour under KPIs: meeting a stated goal while destroying unstated goals How alignment affects performance: examples of poor KPI alignment vs examples of good KPI alignment

4 Applying rocket science This chapter synthesises basic principles of analysis and measures from techniques used in different areas of management A survey of techniques from various areas of management specialisms, including finance, marketing, operations research, business modelling Synthesis of the basic principles to address the credit assignment problem: variation, grouping, preferences, linkage and dynamics. Finding drivers in the depths of the organization. The need to take a whole organization drivers approach. Research findings on success factors for value creation programmes. Issues in measuring drivers: problems of which financial measures (eg EVA vs TSR) at firm level, measuring both hard and soft factors, problems of group rewards, short vs long term measures, setting KPIs for interacting groups of drivers non-measurable or rewardable behaviours – why they may be needed and how to get them indirectly via measures Setting KPIs that promote alignment and joined-up thinking: whether the KPI set supports or destroys them. Dynamic analysis from different managerial and customer viewpoints.

Part 2 Constructing Smartmetrics for your business: Killer Analyses This part shows how to construct the specific smartmetrics that are right for your business. How smartmetrics can have a major impact on performance on all aspects of performance including examples from M&A, marketing, finance, HR and operations.

5 Killer Analyses: setting the right KPIs Paying for performance – setting executive rewards that reward effectiveness Selling value - setting the right salesforce targets 50% of marketing is money wasted – find out which half Futureproofing – putting a value on flexibility, the lease vs buy decision

6 Killer Analyses: joined up management Synergy, synergy, synergy – realising M&A value Black holes – getting value from large scale IT investments Value, but not as we know it - e-business channels and the parent firm Cheap and cheerful? – call-centre staffing and performance Walking the talk – giving a consistent performance management message Neighbours - organizational design and cooperation

7 Killer Analyses: finding the drivers Value that grows on trees: value trees to find where value is created (and destroyed) How many sizes should we stock? – understanding customer segments; How to stop losing customers - churn and customer VAR; Giving the customers what they want - product attribute mix - drivers of sales success eg price, discount, service, lead time, relationship (similarity product grouping to find distinctive atts –what really drives?) Laying out the stall – retail store configuration and sizing The War for talent – what drives attraction and retention and motivation, designing the total rewards mix; Linkage – what are the behaviours that make for a good employee?

Part 3 Putting Smartmetrics to work This part addresses implementation and change management issues of how to introduce smartmetrics within your organization The way forward This chapter addresses issues of how to introduce the toolset within organizations How to implement this approach to joined up management Incremental value analyses vs big bang alignment Upskilling managers for value creation and alignment Use of external consultants The price of value is eternal vigilance


"There are hundreds of books and articles about performance measurement, but few that really explain how to design robust measurement systems. This is one of the few that does and it does so in a way that is both engaging and actionable" - Andy Neely, Chairman, Centre for Business Performance, Cranfield School of Management "Performance management is a critical concern for service businesses, and it’s a difficult nut to crack. Smart Business Metrics shows how to improve performance based on the facts of each individual business, avoiding the trial and error approaches that often pass for expertise" - Camilla Aitchison, Director Management Development, Dixons "A practical approach that brings to light how the right balance of art and science combined with tailored metrics for each organization removes the blindfold of ‘me-too’ solutions and leads to success in the company" - Kanogkpun Krabuanrat, Director, ACNielsen

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