In striving for profitability, companies often rely on key indicators of organizational performance. Common indicators like sales growth, customer loyalty, and earnings per share often guide strategy decisions and resource allocation. But sometimes key indicators may not be that “key” after all. They may have little or no true connection to profitability. Organizations might not be aware of this and continue to rely on these same measures because they feel as though they matter. Their intuition overrides everything else and as a result they don’t do the due diligence to determine what actually leads to profit.
This article focuses on identifying indicators that serve as true statistical predictors of value. The author emphasizes that for an indicator to be truly connected to value it must be both predictive and persistent. Indicators that are predictive demonstrate a statistical link to value; a link strong enough that we feel confident saying there is a connection that has meaning and is not due to chance. Indicators that are persistent stand the test of time; they reliably show that an outcome is controlled by applying skill or knowledge, and is not random.
The author advocates several steps in selecting the best indicators of organizational performance. These steps include defining a clear business objective, developing theories to determine what measures link to the objective, and statistically testing the relationship between the measures and the objective.
Mauboussin, M. J. (October 2012). The true measures of success. Harvard Business Review, 46-56.
Image credit: Unsplash+