Inspiring Indicators of Performance
Use RPIs: Relationship Performance Indices
The most valuable metrics for your business are those which power decision making and inspire innovation. When the front line people in your organization, those who talk to your customers every day, are aligned and inspired by the same performance metrics as the executives, innovations, both big and small, will occur regularly at all levels.
A long-standing and entrenched belief floating around the business community, is that the ultimate business metric is profit. Eliyahu Goldratt popularized the concept, in his book “The Goal.” Many, including Milton Freidman, would argue the very reason a business exists is to make a profit. Goldratt’s parable describes a manager’s relentless pursuit of resolving the bottlenecks which reduce the profitability of your business. His “theory of constraints” has been a widely used management philosophy for good reason. When we invest in a businesses, we expect to get a return on our investment.
Profit is to business as oxygen is to life on earth.
All businesses require profit and free cash flow to operate. My business partner, Ralph Dandrea, likes to say profit gives your business investment choices in the future and I couldn’t agree more. In the short-term, our organization may be heavily financed with outside money. If we are really lucky, we may have the opportunity to run a hobby business by leveraging the family fortune. The rest of us, however, need the free cash flow derived from profit to keep the business healthy. Profit can be used to pay dividends and attract more investors, to make investments in innovation or investments in employees. Profit is an extremely important metric and I am not arguing against it in any way. However, there are a few problems using profit as the ultimate, guiding or north star metric for a firm.
Profit does not get our people out of bed in the morning with a spring in their step. If you are using it, or some variant of it, like earned revenue as your carat or stick, you will find it is hard to use to motivate your team. You might make an argument around their “fear of not having a job tomorrow” being motivation enough, many leaders have presented this argument to me. However, fear is a very low quality form of “extrinsic” motivation according to our friends who study motivation. Making a profit does not sustainably motivate employees. Profit-sharing may play a strong role in helping to manipulate people in the short-term. However, using profit sharing as a “carrot” must be maintained indefinitely for it to continue to motivate people. When times get tight or a crisis occurs, you will see how this pans out for your leadership team. Once you start providing it, it becomes an expectation and you can never stop or it will work against you. Believe me when I tell you, employees don’t get excited by business profitability as much as the folks who own the majority of the business. Consider treating profit sharing as a “thank you” bonus for a job well done, after the profitability has been achieved and as a one-time event.
But I digress. The important question is this: Do you want employees who are only there for the paycheck and the profit-sharing or do you want a team who is persistently and relentlessly mastering their craft. Do you want a team who creatively checks out at the end of each work day, or a team who is thinking about the value they are creating while inspiring your customers every day because they love what they do and are there with the intent to achieve something great together? Profit doesn’t provide any guidance about the company’s vision or how the company is making the world a better place through its products and services.
Another problem with using profitability as a business metric is it is a lagging indicator. It tells you how good the organization did after you have marketed, sold, serviced and squeezed out all of the unnecessary costs from your business operations. It is, in fact, the ultimate lagging indicator which tells you how efficient and profitable business. It doesn’t help you make the operational decisions which will impact your long term success until it is too late. It may help your employees make decisions about efficiency in the short term, but does nothing for effectiveness. In fact, it will cause distortions in behavior when you try to use it to influence your employees to generate more of it at the cost of long term effectiveness. For clarity, I using the word effectiveness to describe the companies ability to earn authentic and measurable trust, loyalty and advocacy from its consumers. I am using efficiency to describe the firm’s ability to do it profitably.
There are many other metrics which are important for keeping things running smoothly for our customers. Metrics like those we use to monitor our marketing or sales funnels or our “work in progress” can be critical for optimizing profits and throughput and if implemented well, they will result in behavior changes which improve top-line numbers, efficiency and productivity. These metrics are leading indicators to profit, but they are still lagging indicators to your customer’s behavior. Marketing metrics, for example, may tell you how many leads you have in your pipeline or how well your piece of content is being shared, but they do not tell you much about how your real customer’s relationship with your organization is developing. These KPIs (Key Performance Indicators) are important because they give you clues about how to be more efficient and help you manage the business. They are also helpful in helping you to predict future profit.
In 2003, Fred Reicheld wrote a Harvard Business Review article titled “The One Number You Need To Grow” describing some funky math and customer sentiment scoring system called the Net Promoter Score. It ignited a tsunami of corporate “NPS” initiatives around the world. The one question asked by firms using this metric is “How likely are you to recommend {Firm Name} to a friend or family member?” This is a customer sentiment metric. You can collect some interesting and actionable data with it over time. In fact, you can use it to interrupt your customers at almost any point in your sales or delivery process. But it is still a lagging indicator. You must choose the point in the process to ask ask the question and you only have the chance to ask only after the event has occurred. NPS, or any survey instrument, does not, however, give you anything actionable about how your customers actually behave.
“What people say, what people say they will do and what people do are three very different things.” — Margaret Mead
Even worse, any sort of customer sentiment scoring system must be delivered through an interruptive survey. When was the last time you got excited to receive a survey? Asked a different way: When was the last time you were annoyed by a survey? Surveys are a step down the loyalty ladder most of the time. They are simply annoying. Even with only one question. No matter how you cut it, you are interrupting your customer when you ask them to take precious time from their day. Jared Spool wrote an outstanding piece on NPS which describes, in detail, the deficiencies of using NPS to derive value.
There is a place for surveys, but you should be thoughtful about the experience your customer is having with them and you should use them judiciously. I have found your advocates are much more willing to invest in your future and fill out surveys honestly. If you knew who your advocates were, this would be the place to judiciously deploy surveys.
So where do we find metrics which will help us keep our people aligned, unleash their creativity and give us a leading indication of how good our business is going to do in the future? We must measure the actual customer behaviors occurring in the wild. These are the earliest possible indicators we can get from our ecosystem which will give us a reasonable degree of accuracy. We need long-term indicators which describe how our relationships with our customers are evolving through their actions and we need to look at them over time. I call these RPIs.
RPIs: Relationship Performance Indicators
Great organizational metrics will have these things in common:
- Measure customer behaviors
- Improve business decision making
- Improve empathy for your customer
- Motivate your team to achieve improvements in the metrics
- Elicit creativity from our teams which result in innovations which move the metrics positively
- Demonstrate how your organization’s relationships with your customers are trending
- Provide leading indicators which allow teams to act earlier and make better decisions to impact outcomes.
- Connect to long-term profitability
For this to work, we have to be playing the long game in our space. We have to be thinking about our customer relationships beyond any one transaction or sale. A shared and motivating vision must be in place for our business aligned with building long-term customer relationships. When we spend the time to map out what behaviors we expect from our clients on their journey toward becoming an advocate, this will lead to measurability.
The Loyalty Ladder, as I mentioned earlier, is what our organization uses for our client’s to measure our success. It helps us to define our customer’s journey in a measurable and simple way. It looks like this:
We have to gain their Trust, earn their Loyalty and win their Advocacy.
We must have a clearly articulated vision for your organization which includes, amongst other things, alignment to some form of a “Loyalty Ladder” over the long-run. When you have clearly aligned your Relationship Performance Indicators (RPIs) around how you are moving your customers up the “Loyalty Ladder”, it sparks innovation and elicits a greater degree of motivation from your teams. The three behavior RPI’s which will serve your organization’s long-term health are your:
Trust RPI (tRPI): What percentage of your known customers have demonstrated they Trust your organization by investing time, information or social capital?
Loyalty RPI (lRPI): What percentage of your known, trusting customers are regularly demonstrating Loyalty to your organization by engaging at a regular interval?
Advocacy RPI (aRPI): What percentage of your loyal customers are regularly demonstrating Advocacy to your organization by investing in your firm’s future?
I’ve drawn it to look like a rocket ship on purpose. The relationships you build with your clients provide the thrust which leads to long-term sustainable profits. If you define trust, loyalty and advocacy in a measurable way, it will serve to motivate your people to search for not only the macro-innovations, but micro-innovations as well. It will be these innovations that cause a sustainable impact on these three metrics. If you do it well, these three relationship measures will meet all of the parameters above. Imagine how powerful your culture will become when everyone is aligned, confident and committed to improving these metrics, every day.
References:
The Goal, by Eliyahu Goldratt: https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0884271951
Fred Reicheld, The One Number Thing You Need to Grow: https://hbr.org/2003/12/the-one-number-you-need-to-grow
Jared Spool, On NPS: https://blog.usejournal.com/net-promoter-score-considered-harmful-and-what-ux-professionals-can-do-about-it-fe7a132f4430
The Loyalty Ladder: https://medium.com/@TheSeanFlaherty/the-loyalty-ladder-46797835f2b8
Milton Freidman: https://en.wikipedia.org/wiki/Milton_Friedma
Unleashing Creativity and Innovation: https://medium.com/@TheSeanFlaherty/unleashing-creativity-and-innovation-276f2140c793
“The Handbook of Self Determination Research by Edward Deci and Richard Ryan
