In every business there is a jugular metric that has unreasonable importance.
Some observers believe the stock market hinges on one metric, Mr. Shiller’s CAPE ratio. The ratio CAPE is the cyclically adjusted price-earnings ratio. It’s based on 10 years worth of earnings of the S&P 500, to help smooth out the outliers of any one unusual year. As reported in the recent WSJ article by Justin Lahart – “Today that ratio stands at 27. The 50-year average of the ratio is 20. Every time it has gotten this high, markets crashed and financial mayhem ensued”. Check out the article for the flaws in the argument. But there is no denying the power of that ratio and it’s track record.
So what’s your Jugular Metric?
It’s the metric that when it goes south or weakens, “spells tears before bedtime” for the CEO!
In an age of big data and the ability to measure anything that moves, are we in danger of missing the blindingly obvious? I’m talking about a ratio that fundamentally measures the direction of the business. Up or down. Good or bad. It can be a big simple number like sales but rarely is that the right Jugular Metric. It’s way too late for most businesses to be deciding how healthy the business is based on sales.
Examples include:
High-tech manufacturing business: Trend line of the order book in terms of month’s of production. At what point do alarms go off? 3 months? 6 months? 2 months? What happens next if it drops past a baseline number? What happens if it rises past a ceiling number?
SaaS: Net New Monthly Recurring Revenue/Annual Contract Value. What is causing it to drop? Cancellations accelerating? Discounting affecting contract values? Jugular Ratios force urgent, fundamental questions.
Healthcare Practice: Appointment numbers by location. You can’t practice with no patients. You know as appointment numbers continue to drop, there is no way the income line can look good in six months, right?
Investment Banking: Proposals Volume & Expected Yield. You can swing for the fences. You can hope you get to sell Twitter with a $500m fee or you can build an operational model that measures proposal output from your rainmakers.
Contract Recruitment: The unexpired $ amount of all your contracts. Contract recruitment will always have a series of deaths. Contracts die. Can you renew them? You want to be continually pushing that cliff face out as far as it can go.
A new iPhone launches to great first week sales, a new movie releases delivering a blockbuster weekend, a new album comes out at #1 or market share figures are released in the auto industry, demonstrating further gains by GM.
The secret is to recognize the Jugular Ratio in your business and align all your efforts, to ensure you maximize the odds of the right result.
Metrics management is a key skill of scaling any business.
Comments welcome below or email me at Ian@TPPBoston.com.
