Impact by the Numbers
Discover outcomes that matter by connecting business goals and results to concrete and measurable system actor behaviors
Strategic goals can sometimes feel fuzzy, complex, and overwhelming — no matter how SMART they are. Translating them into concrete actions that people are aligned on within and across teams often turns into a tedious and cumbersome endeavor. But it doesn’t have to.
Read on and learn how you can utilize metrics as indicators to break down goals into a logical model that allows you to tell the story of how your business results are produced. Use this understanding to align your organization and identify high-leverage opportunities that clearly connect to your goals.
Key Takeaways
- Metrics used to measure business results usually are lagging indicators and provide little guidance for concrete and effective action.
- Most business-relevant metrics are ultimately driven by the behaviors of people. Identify the people and the behaviors and find metrics to make them measurable through metrics that you can use as leading indicators for your business results.
- Connecting leading indicators to behavior like that allows you to formulate outcomes as measurable changes in system actor behavior. Use this as a starting point for identifying opportunities to effectively drive business results.
- Impact your business results by focusing on changing the underlying behaviors that drive them.
This article touches on and reiterates concepts and ideas introduced in the following previous articles:
- Thinking in Circles
Why Stephen R. Covey’s concept of concern, influence, and control serves greatly as a fundament for a Product mindset - The Power of Outcomes
How aligning your actions toward measurable behavior change guides the development of effective and maybe surprising solutions
January. It’s this time of year again when organizations get busy with strategic planning and setting their ambitious goals and business results to be achieved in the new year. No doubt, this work is important for providing a basis for alignment and progress. But you probably experienced it yourself: More often than not we find ourselves deep in the second half of the year and realize that we’ve been carried away by busy work and initiatives that barely connect to what we originally set out to achieve. Ultimately, we need to acknowledge that what moves us forward is not the ambitious goals we set but the actions those goals inspire. Metrics and indicators are crucial tools for us to measure progress toward our goals and evaluate the effectiveness of actions taken. But let’s also talk about how we can additionally utilize them to identify promising opportunities that clearly connect to our goals and could really move the needle.
A Numbers Tale
Let’s work with an, of course, over-simplified example and assume that we are managing one of the product teams in a still young and small e-commerce company. We have established our product in the market during the last two years but our plans are bigger than that. The founders have decided to raise another round early next year and want to optimize results for achieving a good valuation.
In the next leadership meeting the question on everyone’s mind is: How are we doing? And what do we need to achieve to improve our valuation? The CEO presents a slide deck and guides the team through the facts in the form of the company’s business metrics like Revenue, Gross Margin, or Customer Acquisition Costs.
Let’s pause here for a second and take a closer look a the term metric. A metric is a quantitative value that reflects a specific aspect of its subject of measurement. Derived from one (e.g. Revenue as the sum of money earned) or multiple measures (e.g. Gross Margin as the difference between Revenue and Cost Of Goods Sold) we utilize them to monitor the performance and effectiveness of our organization and its processes, products, and services. Through its measures, each metric is linked to and directly reflects facts about actual things or events, like Revenue is a metric of the actual amount of money generated from its regular business operations.
Back in our meeting room, the CEO, based on the metrics at hand, suggests focusing on optimizing the customer acquisition costs and increasing the revenue in the new year. While marketing will focus on CAC, our team is tasked to support the goal of increasing revenue by 25% till the end of the year. So, for this year, Revenue will be our team’s first Key Performance Indicator or KPI. But wait, what does this actually mean?
The word indicator roots in the Latin verb indicàre which means to point to, to mean, or to mark. Suddenly our Revenue isn’t just a metric of money made anymore but, for our team, its value points to something else: our progress toward the achievement of our goal. We know that we need to support making 25% more revenue this year than in the last one and keeping an eye on the current revenue will give us an idea of how close we are to delivering. In that sense, when used as an indicator, a metric as an observable fact serves as a proxy to get hold of something rather intangible, like “progress”, that can’t be directly measured. In our case, Revenue as a metric of money made serves also as an indicator for our progress to achieve a revenue goal.
Lagging Or Leading — A Question Of Context
So the team will monitor the development of Revenue to see, in comparison to the previous year, whether we are en route to achieving the desired 25% increase. But as soon as the conversations in the team started on how we plan to support the revenue increase, we became aware that, while the metric allows us to track our progress toward our team’s goal, it only cumulatively reflects the past performance of the actions and processes that resulted in the revenue generated. It would be quite hard to connect changes in the metric clearly to our team’s changes in the product. That makes it difficult to derive insights on whether our contributions are effective or require adaptation. Because Revenue increases or decreases in reaction to what happens up the stream, it is considered a lagging indicator in this case.
Lagging indicators are great for keeping an eye on and evaluating the actual results produced. But because they tend to react with a delay to changes in the processes and activities that drive them, they are far less useful for informing more time-sensitive tactical decisions and actions. As a team that needs to allocate its limited resources effectively to achieve the desired impact on the company’s business results, we’d love to have something that, as early as possible, will give us an idea of the future performance of Revenue.
You can’t measure the future, you might say. And you are right: A metric can exclusively measure what has happened already. But we can use metrics to point to the future and how it will likely unfold. In such a case, a metric or combination of metrics takes the role of a leading indicator that, through inference, allows us to reason about how things might turn out. Leading indicators, as we’ll see demonstrated in our scenario, are more actionable because they give us timely feedback on our actions and reveal effective points of leverage to impact the results they drive.
Before we take a look, though, to uncover leading indicators relevant to our endeavor, it is important to understand one thing:
💡 Being lagging or leading is not a property of the indicator or its underlying metric but describes the relationship of the indicator to its context.
Consequently, when used in a different context, this relationship changes. In our concrete example, Revenue is a lagging indicator in the context of our team’s goal to increase the current year’s total revenue by 25%. But remember: This goal was set to optimize the valuation for the next funding round. So the company leadership considers Revenue a leading indicator to predict a future performance that will manifest in the final valuation of the company.
Identifying Leading Indicators That Matter
Revenue results from a multitude of activities and processes in our organization. Increasing it, consequently, is a rather complex task to achieve. Identifying relevant leading indicators that can provide guidance and feedback requires our team to break down this complexity into more manageable pieces. But how? There is one fundamental truth for you to internalize that will help us going forward:
💡 All business results are ultimately driven by human behaviors.
It all boils down to the decisions and actions people take who directly or indirectly participate in the processes that feed into an organization’s business results like, in the context of our scenario, the generation of revenue. In the end, a business is a system that is shaped by the behaviors of its system actors like customers, salespeople, or even the members of our team who decide on what features will be rolled out to our customers. That leads us to a second important truth:
💡 You can’t change business results but the behaviors that drive them.
Therefore, the key to defining meaningful leading indicators that drive our Revenue KPI lies in understanding the decisive behaviors of the relevant system actors.
We schedule a little workshop with our team to identify and agree on a set of leading indicators as complementary KPIs. For preparation, we’ve been analyzing existing data and have been talking to colleagues to tap into our organization’s expert knowledge to get a first idea of what factors influence the revenue our business generates. We learned that, on the customer side, the relevant levers to influence the future development of Revenue are:
- How many customers we have (customers as users who made at least one purchase)
- How often those customers order over time
- How much they spend per order
Based on this, we construct a rudimentary logical model to visualize the causal relationships between these factors and our revenue. Starting from the Revenue, we go through each of the three and ask ourselves: What customer behaviors influence them? How many customers we have, for example, depends on how many new customers we acquire and how many existing ones we retain. The team agrees to define a customer as a person who has placed at least one order. Consequently, acquisition here is directly driven by one decisive behavior of not-yet-customers: placing the first order. Great, but can we measure it? Yes, our website analytics provide us with the data to calculate the conversion rate of website visitors to first order. After the first session, we added the following behaviors with their corresponding metrics to the model:
- Behavior: Not-yet-customer makes a first order
Measured by:
◦ Conversion Rate (website visitor to first order)
Feeds into:
◦ Customer Growth by adding new customers (How many) - Behavior: Customer places orders repeatedly
Measured by:
◦ Repeat Purchase Rate
◦ Repeat Frequency
Feeds into:
◦ Customer Growth by retaining customers (How many)
◦ Frequency of customers placing orders (How often) - Behavior: Customer adds things to their cart and checks out
Measured by:
◦ Average Order Value
Feeds into:
◦ Revenue per order (How much)
So what did we just do? First, we identified key factors that feed into our Revenue KPI. Then we mapped the underlying observable customer behaviors to these factors. Finally, we defined how to observe those customer behaviors through concrete metrics. If any of those metrics significantly goes up or down, it will show in our business result. That fact makes them leading indicators in the context of our goal to increase Revenue. For our team, they are valuable as complementary KPIs to monitor. But there lies even more value in what we did above.
Discover Your Circle Of Influence
In case you’ve read the previous article on The Power of Outcomes, some of the things might seem familiar to you already. Our leading indicators we derived from the metrics of customer behaviors we consider to have a high impact on the development of our main KPI. A change in one of those customer behaviors will become measurable in its metric and update our indicator. Exactly that makes it an outcome according to the definition:
💡 Outcomes are the measurable changes in system actor behaviors in a given system context.
Our system context, in this scenario, is defined by our team’s goal. It’s the processes and activities, as well as the actors who perform them, that lead to our organization generating revenue. The system actors here are our existing and prospective customers. And the measurable changes are the ones we expect to see manifest in the metrics we chose to observe our actors’ relevant behaviors.
Earlier we learned that we can’t directly change results but the underlying behaviors that drive them. Let’s take a look at the steps our team took as described above through the lens of Stephen R. Covey’s circles of concern, influence, and control: We agreed with management to make the increase of revenue by 25% our goal. So the future development of our Revenue KPI defines our outer circle of concern. The measurable change, the increase of 25% to a business result, is our desired impact according to the definition:
💡 Impact is the measurable change in system behavior in a given context resulting from our outcomes.
We desire to change the system behavior to generate more revenue. Our team realized early on that we can’t change Revenue directly but needed to identify the customer behaviors relevant to the process of generating revenue. By deducing a logical model of influential and measurable system actor behaviors from our lagging indicator, we successfully pulled our challenge from our rather abstract circle of concern into our far more tangible circle of influence. It’s those customer behaviors that present us with the levers to effectively impact our main business result.
At the end of the day, though, it is on our team to decide on, do, and build the things required to specifically affect those behaviors and actually produce the desired impact. It is in our circle of control where we can take action. But impact grows from our circle of influence. By making us focus on measurable behaviors, we got ourselves a great starting point for deriving actions and interventions that clearly connect to our strategic goals and will allow us to evaluate their effectiveness on the go.
Our first list of behaviors and leading indicators are still pretty high-level. While they are good for monitoring general progress, it is worth exploring our circle of influence in more detail by further deconstructing those customer behaviors by, for example, looking at specific segments of customers, different scenarios those behaviors can appear in, or even identifying other system actors that do or could influence customer behavior. This allows us to identify a great variety of very concrete and narrowly scoped areas of influence that can be addressed by the team.
How to fully close the gap from your circle of influence to your circle of control in a structured way, and confidently prioritize the most promising opportunities, will be the subject of my next article.
(This article was originally published in Decoding Product.)
