Economic down turns affect us all. Small businesses often take the greatest hit. Increases in costs, reductions in revenue, and stagnant inventory often result from a slow-down in the economy. Lay-offs, mergers and consolidations, and bankruptcies dominate the news. With all of this, along with a government administration in flux, it is no wonder small business owners and their teams are concerned about the future. In the coming years, small businesses will face many challenges -- challenges which can be addressed with the use of metrics.

FACING CHALLENGES WITH METRICS

As small business owners we understand the concerns the current economic climate bring to the table. Based on our experience as well as observations of others through our work, we’ve identified four specific challenges that all small businesses will face over the next two years. Each of these challenges can be met by implementing a solid approach to using metrics.

Budget Issues

Most small businesses are budget sensitive. While many small businesses are very successful, much of their success is due to their knowing the inflows and the outflows. They plan for their spending based on expected revenue and expected costs. They budget according to plan. But during economic down turns, concerns about reducing budgets, justifying requested budgets, or maintaining budgets when other budgets are being reduced increase.

While it may be reasonable to expect all budget line-items to be proportionally adjusted, in reality, they are not. Managers reduce budgets in areas that are considered to be unnecessary or not absolutely essential. This situation sometimes positions support functions such as marketing, human resources, or information technology as targets for reduced funding. Questions are asked such as: How much budget is needed? Can the essentials be achieved for much less? Can others do it for less? These issues are on the minds of business owners and their management team. Without an effective metrics program the value of these functions are misunderstood if understood at all.

Studies showing the connection between projects and initiatives and staff satisfaction can be helpful in understanding how some activities impact employee engagement and ultimately the success of the business. Statistical relationships between job satisfaction and turnover; employee engagement and productivity (measured by revenue divided by the number of employees); and job satisfaction and customer satisfaction are classic measures used to make decisions about the direction of a project, process, or initiative.

ROI studies can be valuable to show the impact of specific projects and initiatives. For example, recent studies that have helped defend or justify budgets include:

• The financial payoff of a marketing campaign.
• The impact and ROI for a new leadership program.
• The ROI of a business coaching.
• The payoff of a new compensation strategy.
• The ROI of a new technology system implementation.

These and other studies provide convincing data that these projects make a difference and can often spare them from the chopping block. ROI studies not only protect the investments, but sometimes help make the case to increase investments during lean economic times.

Outsourcing

A typical reaction in slow economic times is to reduce costs. This often leads to discussions about outsourcing certain elements of the business. Most outsourcing is initially pursued with the hope of reducing costs and in fact, most seem to do that in the early stages. An effective metrics system can enable this decision in several ways. If the function should be outsourced, the metrics should confirm it. If the function should not be outsourced, the metrics will confirm this as well. Metrics on costs and efficiencies are critical, such as cost per hire, the time to fill the job, gross profit/marketing expense ratio, turn-earn ratio, and the cost of administering payroll and benefits. If we clearly understand costs and efficiencies then we can compare them to potential outsourcing opportunities. If the activity or process can be outsourced with much less costs, then maybe it is a good decision. If it cannot be outsourced with less costs maybe it should be left alone. If you do not have the metrics to show these costs and efficiencies, your ability to make a wise business decision is limited.

Too often, an outsourcing decision produces cost savings in the short-term and customer dissatisfaction in the long-term. If the stakeholders/customers of the outsourcing decision are dissatisfied, this can create serious problems for the organization. If we have excellent levels of satisfaction now then potential outsourcing may not be pursued because we have great levels of satisfaction. With no clear vision of the accurate costs, efficiencies, and effectiveness, including the levels of satisfaction, a function becomes a candidate for outsourcing, even when it should not.

In terms of reviewing outsourcing decisions, an effective metrics system can also help. A solid system not only tracks the costs, efficiencies, and effectiveness of the outsource process, but also captures the levels of satisfaction. This may also include the flexibility of using this system, the integration with other processes, and the level of support needed from all stakeholders. Sometimes what appears to be an economic decision in the short-term, turns into less flexibility, more cost, and less customer satisfaction in the long-term.

Employee Layoffs

Unfortunately, when revenues are down and costs are up, employees are often sacrificed. When layoffs occur, the question is raised: Who should go and who should stay? Here, a great metrics program can pinpoint who the talent is, where the key talent is located, areas where turnover will occur, and jobs where retirement packages may be successful. An effective performance metrics system identifies high performers, tracks the performance improvements of average performers, and shows the talent movement in the organization. Even the issue of offering buy-out packages to employees often goes astray because of the incorrect assumptions made. These incorrect assumptions are sometimes traced back to the ineffective metrics.

Image and Influence

The image and reputation of a small business is critical. When faced with lean times image and reputation can pay off. An effective metric system reporting measures such as linkages between customer perception and commitment to continue doing business; image within the community; supplier satisfaction; and customer willingness to recommend products and services to others can be critical measures in predicting the future ahead. Contribution and value translate into commitment, support, and respect. A metrics program reveals the contribution and value a small business brings to its customers, employees, and the community: three stakeholders that can influence the future of the business.

THE GOOD NEWS AND THE BAD NEWS

An effective metrics program can be one of the most helpful processes within a business during tough economic times. It can enable an organization to maintain budgets, build support, prevent unnecessary outsourcing, and trim the workforce in a rational, logical way. The bad news is that the time to implement an effective metrics program is before these issues are on the table. Now is the time to start working on this process quickly and deliberately, allocating time to put metrics in place. This often involves building capability and understanding of the team so that they will not only develop the metrics, but use them effectively. An effective metrics system will show how well the functions within a small business are operating and contributing.