Governance

Better goal-setting with ratios

I’ve been thinking about goal-setting  — partly in the process of writing my last blog post, and partly because I’ve been reading about the Beyond Budgeting approach to management. There are plenty of thought-provoking ideas in Jeremy Hope and Robin Fraser’s book, but I want to throw out just one of the smaller ones which caught my attention: the idea of using ratios as KPIs, targets, and limits. These seem a really effective way of getting things done.

Bicycle ratioIntroducing ratio metrics

The kinds of targets that I hear about are very often single-unit targets: We want to have 200,000 subscribers; We want to break 3m monthly unique browsers; We want to get to 1m comments on the website. These are measured in single units: subscribers, monthly unique browsers, comments.

But perhaps more useful are ratio targets. Hope and Fraser have a financial perspective and talk about return on capital, cost-to-income ratio, and cost per head. There are also some standard ratio measures in the industry I work in, such as average revenue per user (ARPU). But we’re not exploiting this kind of thing enough, and such measures don’t have to be industry standard — it’s often more useful if they’re specific to an organisation.

Let’s try to imagine some more. Take the example of Quora, which has just hired product lead Sandra Liu Huang from Facebook. What kind of measurements might we consider for her as she enters her new world? We might have cost to serve per unique user;  answers per question; questions answered per user; updates per user per month; and plenty of others.

Why they make a difference

What really makes a difference with these kinds of measures is that they provide people with more levers to make success happen:

  • Seeking to reduce cost to serve per unique user offers the chance to reduce the costs of our server infrastructure, or increase (presumably) the number of unique users, or (much smarter) manage our server infrastructure so that it costs less to flex it in response to changes in usage.
  • Seeking to increase answers per question suggests we might look at the user interface to emphasise answering, or make it more difficult for people to ask silly questions.
  • …and so on.

If people have more levers then they have more opportunities to make success happen. That means the measures can’t just be kept inside the finance department or put in the shareholders’ report — they must be exposed and explained to everyone who contributes. Then everyone in the organisation can work together.

And this needn’t just be about relative improvements. In the bullets above I’ve used the metrics in relative improvement targets (decrease this, increase that) but they could equally be used in absolute targets (we want this figure to be X) or limits (make sure this number doesn’t fall below Y).

Mixing financial and non-financial numbers

Picking up from my last post about innovation from trust, this becomes very powerful when we mix financial and non-financial units. So previously the board might have set a goal to “increase our userbase to 2.5m users by the end of the financial year”, and (if they were really organised) might also have set aside, say, £300k capital to achieve it. Unfortunately that doesn’t offer the team (the people who have to deliver) much opportunity to make it happen, because (a) it’s very unlikely that in the rush of the annual budgeting process £300k is anything but a guess, and (b) if the team know they have £300k they know they may as well spend it all.

But if our target was something like “increase our userbase for no more than 12p per user” then they’ve got much more scope for success. They may propose a large project or a small project, and in particular may experiment on a small scale to see which strategies are mostly likely to be successful before proposing anything. Either way it will be efficient. Where does the board get the figure of 12p per user? By thinking in ratios, and looking back to see historically how much new users have cost.

Summary

In the end these are the key points for me:

  • A ratio measure provides a team or individual with more levers for success.
  • Such measures can (and probably should) be specific to what’s important to the organisation.
  • They can be used for relative targets, absolute targets, or limits.
  • This really only becomes effective when the numbers are communicated throughout the organisation, so everyone knows what they’re working towards.
  • Mixing financial and non-financial numbers (cost per this, or revenue per that) generates better judged and more efficient outcomes.
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