The old adage that says “You can’t manage what you don’t measure,” still holds true today. Without some sort of measurement, your decisions are based on anecdotal information and can easily lead you down the wrong path.
Often times when we create goals, they are vague without any real measurement. For example, one goal we frequently see is to improve the hiring process. It is a good goal, but how do you know when you have reached it? In our Power of 3 model for turning objectives into reality, we focus on creating meaningful measurement to gauge progress and success.
To create meaningful measurement, start asking questions. Let’s look at the example of improving the hiring process. Ask what you mean by that, what behavior would result from improved hiring and what impact it would have on the company. Does that mean a higher employee retention rate, a shorter training cycle, or a shorter interviewing process? Choose the measurement that has the most impact on your organization. Now you’ve turned a seemingly intangible objective into something measurable. Your new goal may look something like this: Improve the hiring process to decrease turnover rates in the first three months of employment from 40% to 20%.
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Look at Economic Value
The next thing to consider when creating meaningful measurement is economic value. If there is little to no economic impact on the organization by achieving your objective, you need to ask yourself, is this worth pursuing?
Basing your calculations on historical data and educated estimates, it is best to come up with a range instead of a specific dollar amount. This allows you flexibility as you develop the economic impact and increases the probability that the actual number will fall within your range.
- Current state: 40% turnover in the first three months
- Goal: 20% turnover in the first three months
- Economic Impact: On average, it costs between $3,000 and $5,000 to replace an employee. Currently we have 20 employees and are replacing 8 every three months. If we can reduce that to 4 employees every three months, we could save $12,000 to $20,000 in hiring and training costs per quarter.
Finally, determine if the economic benefit outweighs the implementation cost. If you can answer “yes” to that question, you have created meaningful measurement. Let’s look at our example one more time:
- Increased revenue/Cost reduction = $12,000 to $20,000 per quarter
- Cost to implement = $2,000 per quarter
- Economic value (a-b) = $10,000 to $18,000 per quarter
More on Economic Impact
When we talk about creating a range, we don’t mean just throwing numbers out there and hope they’ll work. In our Power of 3 model, we use a 90% confidence approach to create realistic ranges. That simply means, to validate your confidence level, ask yourself, “Based on historical data, can I be 90% confident that my results will fall within this range?”
Why not 95% or even 100%?
The farther away you get from 90% confidence, the less usable your objectives become. If you are too optimistic in defining your 90% range, which is common, your range will be too tight and less achievable. Using a 90% confidence factor narrows your goals to what is considered an acceptable risk factor for most business decisions.
To create realistic ranges, use the 90% confidence approach when calculating both the revenue increase and the cost to implement.
For more information on developing a 90% confidence level, check out our white paper, “Turn Objectives into Reality with the „Power of 3‟”, and “How to Measure Anything: Finding the Value of Intangibles in Business” by Douglas W. Hubbard
The following source was consulted for these articles:
Turn Objectives into Reality with the “Power of 3”, Red Book Solutions 2008