It is easy to get lost in a sea of data if you have too many.
Running a business using metrics as a guide has been around for a while. The rise of practices like the balanced scorecard and lean manufacturing is an example of companies using key metrics to drive decision-making.
Now that our companies are awash in data, it’s more tempting than ever to use business metrics to guide our decisions. I have seen impressive dashboards executives use to track dozens of numbers related to business operations. It can feel like you’re inside the cockpit of a spaceship awash in data.
But there’s a catch to employing such a wide net when tracking metrics, especially at the executive level. Focusing on too many metrics can be counterproductive, as you lose sight of the critical factors that determine your business’s success.
My rule of thumb is that you need to track only five to ten key metrics—not dozens—to assess your company’s health accurately.
But what metrics should you track? When you answer this question, real magic can happen.
Let me explain how you can identify the metrics that matter most to you and your executive team.
What Really Matters
In many companies, the best metrics to measure internal performance remain a mystery. Part of that is because the answer depends on the kind of business you run. For example, service businesses may have different factors than manufacturing companies.
Regardless, your goal should be to boil down the metrics you and your executive team track to the most critical ones tied to your strategy or the point of constraint holding back your growth. That way, when you identify the right metrics to track, you can often address multiple other issues simultaneously.
When it comes to choosing the five to ten critical metrics you should be tracking, I’d suggest picking one or two from the following categories:
1. Financial
You could consider factors such as growth rate, revenue, and gross margin when tracking your business’s financial health. You could also look at something like profit, but since that’s backward-looking, you might find that gross margin gives you the necessary information. Again, your strategy should drive your decision, and the metric that most closely aligns with it.
2. Operational
Operations are often where people think you need to track twenty different factors. Yet, there are often one or two metrics that tell you everything you need to know. For instance, if you’re running a professional services firm, the time your consultants bill gives you a comprehensive and telling picture of the business. If the number is too low, you have people on the bench who aren’t billing, which means you need to acquire new customers. Conversely, if the number is too high, you might be raking in the profits. But that might not be sustainable because your team might complain about being overworked.
3. Quality
Having at least one quality metric often makes sense. That might be the number of returns or the cost of poor quality. The goal should be to identify a metric that determines your performance against standards.
4. Customers
Another critical area to look at is the health of your customer base. Is it growing or shrinking? If you run a company with a recurring revenue model, such as a subscription business, you certainly want to track your customers’ renewal rates. When that rate is low or falling, you know you have an issue and must do something. You know you’re operating in a good place when it’s high, like over 90%.
5. Forward-looking Metrics
It’s good practice to have one or two metrics that show how well you’re executing your growth strategy and whether the business is moving in the right direction. These should be actual leading indicators and not tied to financial results. It’s about identifying early green shoots rather than fully grown trees. For example, a business I was running aimed to expand into Europe. So, we began measuring how many customer demos we gave monthly. We knew that the more demos we provided, the more quotes we could write, which eventually led to revenue in the following months. If our demo rate began to fall, we knew we had a problem.
Less is More
The lesson here is that high-quality companies focus on a limited number of metrics—between five and ten—that accurately tell the story of their business’s health. When any of these factors begin to trend in the wrong direction, it’s time to step in and dig deeper into the upstream factors that could be causing issues.
It’s important to note that this doesn’t mean you should stop collecting as much data as possible inside the business. You’ll need those when you deep dive into a troubled area. Instead, you and your executives should focus on the principle that less is more when monitoring the metrics inside your company.
