Posted by: DrAlanRae | February 23, 2009

Keeping Score – Part 2

So how does your business stack up against the Skandia criteria? Remember we’re looking at what the best practice boys call a balanced score sheet here.

Innovation

It’s important to catalogue formal production of Intellectual Property Rights (IPR) in a business including the growth of Research & Development. One way of accounting for this is to capitalise the value of salary spent on R&D and write it off over 2 years. We did this in the nineties when we were developing software. IPR by the way includes the value of Patents, copyrights and Trademarks. You can trademark a good name for a couple of hundred pounds.

Another useful measure in the innovation space is how much business comes from new goods and services. The UK median for all service companies is 8%. The top quartile figure is 22%. This gives you a quick way of establishing how well you are doing in comparison with your industry.

People

People is the next area to measure. You need to monitor their skills and how happy they are in their work situation. Fortunately for the smaller business, research shows that staff satisfaction correlates very strongly with absenteeism and accidents. These are normally measured as a legal requirement so tracking this becomes easy.  As a guideline the average UK employee pulls 2 sickies a year. Contrast that with what BAA had with their check-in staff – off the scale in staff dissatisfaction.

Skandia developed a human capital index that measured the people-based intangible assets in two of the group companies on a range of criteria. The results are reported in their annual report and accounts.

The amount of money spent on training or the number of graduates in a company is a good proxy for the growth of people skills in the business. In the UK, the number of graduates in a company has been found to correlate strongly with the degree of internet connectivity in the business.

Processes

Process measures generally concern themselves with efficiency and IT. A good business will make sure that its systems keep pace with its marketing activities. After all brand is basically about delivery.  Measures here need to relate to the operational realities of the particular business. Measures that Skandia used included contracts / employee, administrative costs / sales turnover and IT costs / administrative costs.

For most of us, it’s important to be able to focus on measures of business efficiency that we can readily track. We recommend that you measure Gross Value add per employee and the number of debtor days. These should come directly from your accounting system and will give a real handle on your operational performance and improve your cash flow.

Customers

Customer focus is where the real benefits from knowledge management for a small company can be gained. You need to have some measure of customer satisfaction, and this can be tracked by the number of complaints received per customer. After all, any prospective purchasers for the business will want to buy a secure income stream – based on happy repeat customers.

You need a systematic way of recording and analysing this information. An effective customer database allows you to manage this without great time or cost implications. We suggest you monitor the proportion of business that comes from new customers.

The Harvard Business Review estimates that natural wastage results in the average company losing half of its customers over a 5 year period. The average company just manages to replace this. So it’s critical to measure how well you’re doing.

To really be on top of your business, you should know what volume of enquiries you need to generate and what proportion of your business comes from new sectors, new products and new customers. It’s critical to be able to readily know which the most profitable areas of the business are and which the best types of customer are.

Finance

Getting to grips with this means setting up the chart of accounts in the financial system so as to easily highlight meaningful divisions of the company. It is a tragedy that in the UK, the vast majority of accounting systems are set up using the default chart of accounts that comes with the software.

Financial Focus is about how well the company is doing and concentrates on profitability and liquidity. Many ratios analyse profit and loss and balance sheet performance. Skandia companies tend to use operating profitability and return on capital employed. In our Benchmark sheet we suggest 3 measures, Pre-tax profit / turnover, Return on Capital employed and the Acid Test Ratio.

Acid Test is a balance sheet ratio which measures the degree of solvency of a company. It is a more critical version of the current ratio which divides current assets by current liabilities. The Acid Test Ratio divides current assets – stock value by current liabilities to measure how liquid the company would be in an emergency.

Cranfield also track cash in the bank as a % of company turnover. The median value for service companies in the UK for this indicator is 3% and for the transport sector is 2%. For top quartile companies it’s 14% and 6%.

So what should your score sheet look like?

The Cranfield Data, needless to say, aren’t arranged in this form. So I’ve rearranged them into a table that summarises what I think would be helpful to you so you can track the growth of value in the company.

metrics

So there you are that’s how I see it based on a combination of study, prejudice and experience. Let me know what you think about this. Is it useful, too complex, a flash of the blindingly obvious?  How could it be presented better.

FWIW I think doing this is critically important to the success of a business but I’ve always found it really difficult to get people interested. Is it just too boring? or what?

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