HOW TO OPTIMIZE METRICS
Most of the time, you’ll find that by fixing your people problems (i.e. increasing value where it is low) you have, without even trying, improved problem areas across your business engine. So, once you’ve done everything you can to optimize the work of your employees (i.e. you’ve achieved a mostly green people model), the next step is to go back and reassess your metrics and money models. These models should be more green and yellow than they were at the start. But if you’re still seeing red, the next thing to work on is optimizing quality.
Given that your business may have more than one area of high friction (the red lines in your metrics model), the first thing you’ll want to do is figure out which are the most important to fix. There’s an easy way to do this. Just look for the places in your models where the biggest gears (at left) are associated with the longest lines (at right). This is where you have the most money connected to the worst quality, which makes these the areas with the biggest room for improvement.
For each gear-line pair, multiply the diameter of the gear by the weight of the line (as always, green=1, yellow=2, red=3). Then sort the resulting numbers in descending order: the higher the number, the higher the optimization priority.
Let me demonstrate.
Suppose I buy Lisa’s lemonade stand. The way I’m running things, water costs $.01 per 100 cups. Lemons cost $10 per 100 cups. The water is muddy, so the quality is bad. The lemons are rotten, so the quality is bad. I want to know what I should fix first—the water or the lemons.
The diameter of my water gear equals $.01. Since the line representing the quality of my water is red, it is weighted at 3. I multiply these numbers together and get .03.
Water
.$.01 x 3 = .03
I do the same for my lemons. The diameter of the gear is $10. The metrics line is red, which equals 3. Multiply them and I get $30.
Lemons
$10 x 3 = 30
Obviously, the number for lemons (30) is greater than that for water (.03).
Lemons > Water
I fix the lemons first.
In the event that I end up with more than one number at each priority level, I would work on these from left to right since fixing problems upstream might naturally eliminate downstream problems.
After determining the order in which you’ll optimize, the next step is to look at each metric that needs work and ask yourself these two questions: What is the cause of the friction here? And, Can I fix it?
Just as there are myriad reasons why your employees might not be contributing their highest value work to your business, the possible sources of high friction (or low quality) in your business engine are innumerable.
Some of the causes of friction will be external factors that you can neither predict nor control, things like weather, recessions, natural disaster, or geopolitics. Often these factors will have negative consequences for metrics that, unfortunately, you won’t be able to do much about. For instance, maybe it’s been a bad season for lemons and the only ones you can find to buy are rotten. If they are hard-hitting enough or last long enough, situations like these can put huge financial stress on your business. In such cases, cash reserves are sometimes the only fail-safe. The more money you have in the bank, the longer you can last—regardless of the circumstances.
There are, of course, exceptions to this rule. Take, for instance, the email below, from the VP of a 1-800-GOT-JUNK sales center that managed to pull through a power outage unscathed:
What happened with this sales center proves that it is possible to keep your metrics green despite external challenges. It’s also a reminder of the benefits of keeping your business machine well oiled. The better-optimized your business system is to begin with, the better the chances that it will continue running well whatever outside circumstances present themselves.
With that in mind, let’s focus on the friction in your business that is controllable and fixable. In my experience, the friction that occurs within a business system is almost always caused by disorganization. Now, I’m not talking about people’s messy desks. What I’m talking about are:
- missing processes
- missing systems
- missing business functions
If any of these gaps exist, it can cause a bottleneck in the part of your business engine that directly affects money.
Want to reduce friction? Get rid of disorganization. Establish processes, systems, and functions where they are missing. Let me give you a few examples.
THE CASE OF THE MISSING PROCESS
When I first started GOT JUNK, my onsite cancellation rate was about 25%, meaning 1 in 4 people cancelled when the crew showed up to do a job. This was, of course, frustrating, not to mention bad for business. After thinking things through, we realized that the problem was a missing process, namely, we weren’t calling people the night before to confirm the job. To correct the problem, we instituted “The Welcome Call”. The Welcome Call reminds people that we are coming, allows us to gather intel, and helps us handle special circumstances, such as elevators, loading docs, the need for tools, etc. After implementing this process, my onsite cancellation rate went down to 20%, or a saving of 5%. In real dollars, this simple phone call produces about $175k a year in additional sales.
THE CASE OF THE MISSING SYSTEM
At Doody Calls, another business I owned, we had a customer service issue. Customers would give field techs specific instructions about their vacation schedules with the intention that we should skip service those weeks. Now the techs only came into the office once a week to relay the information to a manager. In addition, they were frequently switched around, meaning there was no guarantee that the same tech would service the same yard on a regular basis. The result was that information did not get relayed and every week people would call to complain: “I told your tech I was going on vacation last week and someone else came anyway. I’m not paying you.” I never fixed this problem, but there was an easy solution. All I needed to do was set up an automated call-in number for field techs to report any scheduling changes, a capability that was already supported by my existing phone system.
THE CASE OF THE MISSING JOB FUNCTION
In my early days operating GOT JUNK, we didn’t have a way to reconcile credit card transactions. If someone forgot to run a credit card in the field, we had no way to know. This created a difference between the revenue from Jobs and the revenue from Customers. In other words, we charged people $100, but we only collected $95 and I had no way to figure out where the missing money went. After a few months of scratching my head, we switched around our merchant credit card process and job functions, so we can now reconcile the batch deposits against our receivables. We do this on Mondays, Wednesdays, and Fridays and we are now missing $0. This probably saved me $20k a year over 12 years—an additional revenue of $240K!
Now, I’m not saying it’s easy to identify the exact cause of friction in a business engine. In fact, the longer you’ve been running a business or doing a certain job the blinder you often are to the real problems. I don’t claim to have all the answers for eliminating the causes of friction either. But what I do know for certain is that if you know where the friction is (and you do thanks to your metrics model) and you know to keep your eyes open for the missing pieces—missing processes, systems, job functions–you’ll be that much closer to optimization. I also know that the world is not lacking for clever people who can help you figure out the causes of friction in your particular engine if you can’t figure them out for yourself. These people are called consultants. You’ll have to determine what kind of consultant you need based on your industry, but I’m sure they exist. Another strategy, if you prefer not to work with consultants, is to look at your successful competitors and analyze their processes—maybe even map them out visually. A comparison between their processes and yours might help you see where you have missing pieces and give you ideas for how to remedy those gaps.
All right, so let’s say that you’ve done all this—you brought in consultants, compared your processes to other successful businesses, identified the causes of friction in your business engine and worked to improve quality—and you are still seeing red lines in your model. Now what? At this point, you might want to consider adjusting the standards for your metrics to more realistic levels or lowering the weights you’ve assigned to certain metrics so that they have less impact on the overall system. After all, if you try your best and still can’t improve something, there’s no sense stressing over it. No business is perfect. Move on.
After the metrics are optimized, the next step is to take a look at the money.
- After looking at the behavior of people, the areas for the biggest improvement in your business are the areas where most money is attached to the lowest quality.
- Some causes of low quality, or friction, in your business are external and uncontrollable, e.g. weather, economy, etc.
- Causes of friction that can be controlled usually come down to disorganization and can be fixed by establishing new processes, systems, and functions where they are missing from your business.
In the next section you will learn ways to optimize your profit.