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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Don't worry about fixing seat 57D

Business owners often find it hard to give up micro-managing. They end up focusing on the little problems, instead of the big issues that are essential to the growth of the business.

As a business grows, the more moving parts it has, and the more difficult it is to keep an eye on everything that is happening. Then the balls start to drop. Does your business have as many moving parts as a Jumbo Jet? How do 747 pilots manage?

When a business starts up, because of the risk of failure, the owner has to watch everything. Fortunately, when you start up, there is not a lot to watch! But it is hard to get out of the habit. This is why so many business owners continue to micromanage the business as it gets larger.

Now if you could keep your eyes on every ball in the air that might be OK, but at some point it becomes impossible to maintain, with owners focusing on where they feel most comfortable, rather than on what is most important.

Studies have shown that there are limits to how many different things a human being can monitor and react to. This of course, varies from person to person, but everyone has a limit. For example, only the most skilled jugglers can keep more than six balls in the air. The world record is 12. So when we try to keep our eyes on everything we will start dropping balls.

So how do Jumbo Jet pilots keep an eye on everything? Funnily enough, they have six gauges in the cockpit, representing the key areas of the plane’s performance. Or in business speak the plane’s Key Performance Indicators. These are the most vital to keeping the plane in the air.

So if the seat 57D does not fully recline or the airline logo paint is starting to flake on the body of the plane, they do not know about it. They have the flight attendants and the maintenance engineers to worry about such problems. However, these personnel are highly trained to notify the pilots if there is something they should worry about. The pilot trusts these personnel to do their job and follow their procedures, and only let him or her know about things that affect the plane’s safety. So the pilots can concentrate on flying the plane.

However, most business owners would be down the back of their plane with a screwdriver trying to fix seat 57D themselves, or hovering over the mechanic to make sure it is done correctly. They would be doing this instead of being up in the front cabin, plotting the course for their plane.

What if there is an engine problem. The plane’s flight management system is set up so that any problem with a key part in the flight system will be evident on the high level gauges. So if there is a drop in airspeed, the pilot will query the system to determine which of the many cases may be responsible.

Drilling down

They are able to drill down from the high-level gauge that has moved from the safe area to investigate which of the plane’s subsystems may be a fault. In almost all cases, the pilot is able to identify and either correct the problem or take action that will enable the plane to land safety. If they worried about every little non-critical problem on the plane, the chances are they might only notice the big ones when it is too late to do anything about them.

In business, the owner might identify that their cash reserves are declining. (Cash at hand is one of the most important Key Performance Indicators for any business.) Having seen this, the owner might ask the accountant to look at their detailed reports to identify the cause. Is it due to slow sales, overdue payments by debtors, cost blowouts or overinvestment in inventory?

Having identified cost blowouts as the cause, the accountants might ask the operations manager why costs have gone up. She might advise that a maintenance problem has caused the over-run. When the operations manager speaks to the maintenance superintendents, she may discover the problem was caused by poor quality feedstock.

In other words, a cash problem was caused by a supplier quality control problem. Further analysis is, of course, possible. The owner has therefore uncovered a critical supplier problem by interrogating staff after a key performance indicator has moved from the safe zone.

The business owner therefore must identify the six gauges that they must keep their eye on. Having identified the high-level cockpit gauges, they must also determine what are the factors that will affect these high level gauges. In the example above, cash at hand can be affected by sales, debtors, costs, payments and receivables timing etc. This analysis should be done for each high-level gauge.

The second-level performance indicators will also have factors influencing them. For example, sales will be affected by the number of enquiries, sales staff activity, conversion rates, marketing promotions, and so on. These factors in turn will have other influences.

Tree of KPI indicators

The result of this analysis will produce a tree of Key Performance Indicators. The next step is to determine how you will measure these activities. Can your accounting software produce the indicators for all your financial key performance indicators? What reporting will your sales and marketing team be required to put in place? How will the operations team track their performance indicators?

This reporting will also be dependent on the cycle time for the business. A busy retail store might look at daily sales, but a builder who builds a dozen houses a year may only be able to make sense of their sales statistics on a quarterly basis. However, the builder’s cost control systems are likely to be a lot more sophisticated than those of a small store.

Having determined what needs to be reported, how it is to be measured, and when the reporting is to be done, the next step is to delegate the reporting responsibility to others in your business. They are responsible for managing on the basis of the second and lower level reports but you, as the business owner, receive the reports on the six gauges of your cockpit.

This does not mean that you never look at the lower level gauges. They are there for audit purposes, and for further detail as you need them. To give you confidence that the problems with seat recline are being managed. To check what was done in the event that there is any complaint from the occupant of seat 57D. The very fact that  these reports exist also ensure that those responsible for other parts of your business pay attention to detail, as they know if there is a problem that they have caused, it will be tracked back to them.

When you have done all this, you have created a Business Management System. This is not only valuable to you in giving you back control, but it also increases the value of your business since its whole operational performance will be transparent to a potential buyer.

By having a small number of key performance indicators which define the health of a business, and which are linked to other more detailed reports, the owner can fly their business using just a few gauges.

An owner who has an excellent business management system and is confident that they will identify problems in a timely fashion, can focus on flying their business towards their ultimate objective, which is their real job!

Dr. Greg Champman.
MY BUSINESS, MARCH 2008

 


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