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Who Knows Your Critical Numbers?

By John Case

At the Framingham, MA, plant of Web Industries, every work crew gets a daily report showing the team’s revenue-per-labor-hour to date. "That's our critical number," explains team leader (and NCEO board member) Rob Zicaro. "We know that revenue-per-labor-hour has to be at least $50 if we're going to make money."

Smith & Co., an engineering firm in Poplar Bluff, MO, posts charts on the wall every day, showing each professional's total hours, hours billed, and dollars billed, all compared to monthly targets. The company is profitable when people hit their goals for billable hours, says founder Sam Smith.

Pool Covers Inc., an installation company in Richmond, Calif. has been working to reduce the time installers spend each day getting ready to go out on a job. "Shop time has always been a critical number with us," says owner Bill Pickens.

Every company has its critical numbers. They're the numbers that determine the business’s success. In a manufacturing plant, the critical number might be throughput or production efficiency. In a hotel or airline, it might be percentage of rooms or seats filled. If you’ve been managing a company for a while, chances are you have a good intuitive idea of your organization’s critical numbers. They're the ones that keep you up at night when they aren't behaving the way they should.

But most owners and managers don't take full advantage of critical-numbers analysis. They watch the numbers that were important last year (or five years ago) but aren't so important right now. They watch company-wide numbers such as profits but forget about the shop-or-office-floor numbers that drive those results. Worse, they keep all the figures to themselves, which means that they can't tap the power of their people to make the numbers move in the right direction.

This Year's Numbers

Some critical numbers must always be on track. A professional-services firm like Smith & Co., for instance, always has to bill a certain number of hours. But if your company is running smoothly, keeping those basic numbers within acceptable limits may not be a problem. Rather than concentrating only on them, you need to be focusing on this year's strategic objectives. Maybe you're looking to diversify by expanding your product line. Or maybe you have a recurrent problem with quality that you’re finally able to address.

If so, create critical numbers that reflect those objectives. Watch the percentage of revenue attributable to the new products. Chart defect rates and warranty costs, not just production. Pickens, of Pool Covers, is focusing on shop time not because that's his company's only critical number, but because that's an area he wants to improve right now.

A Cascade of Critical Numbers

An overall objective for a company or business unit will usually spawn critical numbers for every department and work group within that unit. Take an organization such as Commercial Casework, an architectural cabinetry manufacturer in Fremont, Calif. The company has recently been setting annual goals for sales volume, gross margin, and backlog.

To hit the goals, Commercial Casework’s sales department has to sell aggressively, yet without compromising too much on price. Designers and purchasing people have to keep costs relative to revenues under control. Production and installation crews have to complete jobs on (or under) budget. Managers at the company have to watch all those metrics—the numbers that drive the overall results—as well as progress on the objectives themselves.

Getting People Involved

In most companies, nobody other than managers knows the critical numbers, which means that nobody can help move them in the right direction. Companies practicing open-book management take a different approach: they make a point of publicizing the numbers, making sure employees understand them, and enlisting everyone in helping to hit critical-number targets.

One tactic is to produce regular scoreboards. Web Industries' daily reports show exactly how each crew is doing on that critical revenue-per-labor-hour number. At other companies, the scoreboard is a thermometer, a chart on the wall, or a sophisticated intranet system that anybody in the company can call up on their computer. The scoreboards remind people how they’re doing, they can also serve as a starting point for brainstorming sessions ("How can we improve this number?").

A second method: playing games around critical numbers. Games are simply short-term initiatives designed around a particular goal, with some kind of (low-cost) reward if people "win." At Pool Covers, the game earlier this year was to bring down that shop-time number. Three teams competed to see who could get their hours lowest; the winning group got to go out to breakfast with the general manager on company time. (And brag.)

A third tactic is to establish a bonus pegged to critical numbers. Smith & Co. pays a bonus based on hitting billable-hour targets. Commercial Case- work’s bonus is tied to the company’s annual objectives for sales volume, gross margin, and backlog. In employee ownership companies, successfully hitting critical-number targets should raise the value of everyone’s stock.

Critical numbers get everyone in a company focused on the same metrics and working toward the same goals. They’re one of open-book management's most powerful tools.

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