How Quickly Can You Explain the Economic Model of Your Business, and What Drives its Success?

By Ron Leaf, Partner

This may seem like a simple question but too often when we assess companies, we find there is a lack of understanding of, and/or attention to, the key drivers of the business. The owner or CEO has done many things very well but cannot explain a clear business model and how past results are used to enhance current activities and future outcomes.

The focus frequently tends to be on sales, but without activity measures that directly contribute to the sales total (i.e. units of output per period  or direct labor hours). These activity measures will be the actual key drivers of the business. For example, in a service business where the service is billed hourly, revenue will be equal to the number of hours times the rate per hour. The number of hours will be a function of the number of workers and the productivity of the workers. The productivity of the workers is a key driver and contributor to the revenue total, and is something that should be measured and managed.

Sometimes we find that the business has plenty of good information or data to use, but is not using it. It may be a matter of combining two or more distinct data series to create a relevant measure. Productivity is a function of labor hours and output. When the client has not routinely measured this and managed it, we know that we have identified a key to improving performance.

Key drivers for managing operating performance can be grouped into categories. For example:

• Activity value drivers are measures that directly contribute to value creation such as labor productivity.
• Service level drivers provide indications of customer satisfaction, which impacts retention and referrals.
• Quality drivers focus on cost levels and variances that affect profit margins.

Once key drivers are identified, they can be tracked and reported periodically in a dashboard. This enables management to create actionable goals and incentives that will have impact. Sharing the report builds a common focus on the actionable goals that will contribute to achieving the desired outcome. The frequency of reporting, typically daily or weekly, enables management to respond to variances in a timely manner... MORE