“Staying the course” is important but only as long as a leader – and his or her strategy – remains flexible and can adapt as circumstances, or the competitive environment, changes. Even more important are the indicators a leader monitors to indicate those changes. This author calls these indicators “future signals,” dynamic, highly-valuable metrics that make a “90-degree right turn in strategy” the right turn.
To succeed in a high-risk, high-growth atmosphere, companies need not only to set a strong strategic course but also create a capability to alter that course as the competitive environment shifts and the companies themselves change. In a study of senior executives at 56 successful, high-growth enterprises, we found that leaders who change their strategy “on the fly” attribute their success to a new set of tools that flag the need for change and trigger action: future signals.
By “future signals” we mean leading indicators of company performance and efficiency that can be measured often enough to give you useful information for timely decision-making. Managers at all 56 high-growth enterprises credit their use of future signals for their ability to predict outcomes, weather transitions, and adjust strategies to succeed.
Why do we need future signals? Leaders of high-growth companies often mistake goals for real-time performance indicators. That is, many companies set ambitious goals and communicate them throughout the organization. However, they have no systems in place to track progress toward those goals. The problem is that goals are static milestones; they define ultimate success and failure but do not provide managers with real-time feedback about how to attain them. Managers may look back on past goals and fill in their scorecard, but this tallying exercise provides little guidance for implementing corporate strategy going forward.
The goal fallacy
Managers of high-growth enterprises cherish the practice of setting company goals. These managersoften view the enterprise itself as a collection of goals with varying time horizons and payoffs. Without doubt, goals play important roles. For example, goals can be strong motivators when compensation is tied to goal attainment. For early-stage companies, goals can define the pursuit of reality. Within the rapidly growing medium and large enterprise, goals can give disparate groups a common focus. But setting goals does not drive shareholder value. Attaining them does.
Goals represent static views of what the company should look like at some point in the future. The time between setting a goal and the deadline for achieving it is the goal horizon. Future goals are set with an eye toward past goals, accomplished or not, combined with new thinking and strategy. But goal-setting cycles are often annual, while management makes decisions and communicates with the board of directors much more frequently. Thus, the goal horizon is much longer than the time for management decision-making or communication with the board. This lack of synchronization highlights the need to review progress and make adjustments.
The goal fallacy, then, is that though the periodic process of goal setting is well entrenched in the management practices of a growth enterprise, the process of goal attainment-monitoring, then taking the day-to-day actions that lead to attainment-is not. In fact, by defining a specific goal, management often fools itself into thinking it has implemented an element of company strategy. “Strategy X? Sure, we have a goal for that!”
Avoiding the perfect storm
Without some way of monitoring the progress toward a goal, management has no way of knowing whether the necessary steps are being taken to achieve it. Consider this analogy. A senior executive we know recently sailed his new 55-foot ocean-worthy boat from the Canary Islands to its permanent berth on Cape Cod. To manage the Atlantic crossing properly, the skipper picked a weather cycle before the normal storm season and carefully plotted a six-week sail. Each day he set an intermediate goal, a target distance to cover. However, a major, unexpected storm arose, forcing him to change direction, run to quiet water, and generally regroup. Clearly, he missed several of his intermediate goal distances. However, by accessing a marine radio site that constantly updated weather conditions in front of him, he had signals of his own future conditions. Reading these signals allowed him to adjust his course and arrive safely.
The Need to Look Ahead
Like our skipper, sharp leadership teams use forward-looking information to guide their enterprises. They don’t wait until the end of the goal horizon. At that point, management can easily determine whether the goal was achieved or not, but by then it is too late. The operative term regarding goal attainment is forward-looking.
Unlike the rear-view mirror of that common management tool, the balanced scorecard, forward-looking signals can tell you where the company is likely to be in the next one to four quarters with respect to its goals. And it needs those signals delivered at a frequency that matches management’s decision-making processes.
Future signals: The leading indicator approach
To set goals and maximize the probability of attaining them, management needs a dynamic feedback mechanism that tells us whether the goal is likely to be achieved within the goal horizon. We call such quantifiable metrics “future signals”- leading indicators made up of timely information that gives a signal today regarding a goal that management hopes will be achieved in the future.
Future signals are quantifiable metrics, the compass and speedometer for the management of high-growth companies. In the words of the CFO of a 5,000-employee retailer: “Our goals stay fixed for the year. These metrics chart our progress.” A 200-employee communicationssoftware company set a goal of achieving a certain number of account wins within the current year. To track progress toward that goal, managers looked at the number of product demos that sales personnel gave.
This indicator is leading because product demos are a critical step in their customers’ decision-making process. The indicator is future because by signalling the number of customer demonstrations monthly, you can more accurately predict the number of deals that would close at some point in the future. But to make them work for you, you have to choose the right future signals.
Some of the challenges for entrepreneurs and managers include:
- Having the right indicators in place to track progress toward hard objectives
- Designing the right indicators to capture what’s often soft or subjective information-such as customer satisfaction or marketing “buzz”
- Modifying the indicators being tracked as your growing company takes on ever-larger goals and faces new challenges.
Flagging the right signals
Identifying the right future signals can require imagination and creativity. For example, the CEO of a financial services software company remarked that it needed an 80%+ renewal rate to generate the level of financial performance required to fund a high level of growth. Originally, it considered infrequent customer use of the help desk as an indicator of high product quality and likely renewal. Instead, they found non-use of the help desk to be a signal that the customer had not deployed the product. That is, there were no calls for help because no one was using the product. Needless to say, the renewal rate for such customers was dismal, well below the healthy financial benchmark. Now, one of the company’s customer-based future markers is exactly the opposite. If a client is not using the desk, the company makes a call to determine why not. Thus, they can correct a potential renewal-rate killer in time to save future revenues.
Kinds of Future Signals
There are about 90 unique future signals or leading indicators used by the 56 companies, with most companies tracking 10 or more regularly.
Successful high-growth companies track several future signals within each of these groups.
By far, the most widely-used set of leading indicators focus on customers. Nearly 40% of the 56 companies measure customer-related signals. This indicates how difficult yet crucial it is for managers of high-growth companies to understand the customer. The CEO of a media powerhouse and the leading supplier of stock digital images in the U.S. said: “If I could measure one indicator more accurately, it would be the external view-from our end-customers, competitors, and advertising clients of how we’re viewed in the marketplace against the competition.” The challenge is to create the right future signals that can best predict performance on customer-related issues. For example, at Jet Blue, an airline carrier with more than 1000 employees and revenues in excess of US$200 million, management focused on customer satisfaction with the company’s core offerings: low-cost fares on popular routes served by new planes. Jet Blue’s goals included expanding profitably into new transcontinental routes to connect its presently served markets on each coast. Tracking data on route-market share and marketing cost per revenue mile flown allowed management to assess which East-West market pairs were developing on-target and which were not.
Strategy and finance signals
Strategy- and finance-related future signals account for a combined 35% of the leading indicators we observed in use. In making strategic decisions, such as timing entry into new markets, managers often draw on readily measurable market share trend data; but they also use hard-to-measure indicators of company image and awareness. For instance, a small regional beer brewery developed indicators to gauge “buzz” regarding its products in geographic markets it was considering entering. The company founder said: “I will not enter a new market without ‘buzz'”.
Successful growing companies also use financial future signals consistently. They pull together views from all functional areas of the company to take a reading of overall company strength. Specific financial indicators can vary considerably by company size. Obviously, smaller firms tend to focus on financial indicators related to cash and cash-needs, while medium and large companies heavily use profitability indicators. The largest firms complement their profitability indicators with those of financial efficiency, such as return on invested capital and SG&A (Sales, General and Administrative expenses)-to-total expense shares.
Employee and technology signals
Future signals related to employees and technology accounted for 14% cent and 11%, respectively, of the indicators we observed in use. Especially prevalent among the service companies was the practice of tracking employee retention and training costs per employee. As the executive vice president of a mid-sized consulting company said: “As a specialized service company, having a strong staff all the way through the ranks is a vital indicator for us. Employee retention is a must.” Companies used technology-related future signals to track return-on-investment in software and equipment. Included were indicators on elements such as employee training hours and capacity utilization by machine or software application.
Customizing Future Signals
Driving Results: Using Dashboards
Future signals tend to be custom-designed. It’s best not to rely on pre-packaged reports from enterprise software to generate views on leading indicators. Instead, pull statistics related to key goals from disparate software systems into a spreadsheet view, or “dashboard.” The dashboards can then become the centrepieces of weekly and monthly management meetings. You can use them effectively to drive decisions on everything from hiring to allocating marketing dollars. For example, one systems company actively used five dashboards-one each for engineering, human resources, sales, and customer support, plus a fifth unifying financial dashboard (see Table 1). The heads of each department view all dashboards prior to monthly meetings. Company VPs present the dashboards quarterly to the board. The company CEO credits these dashboards with streamlining communications and decision-making among department heads about how to allocate resources to achieve goals.
Balancing conflicting objectives
Future signals can also help to balance potentially conflicting objectives. The pursuit of growth-in sales, employees, and market share-may conflict with the pursuit of productivity-measured in sales per employee or customer acquisition costs. And the pursuit of short-term objectives may crowd out management time devoted to medium-term goals.
About half the 56 companies we studied went through rapid growth at the expense of declining productivity in the prior three years. Growth drives shareholder value up to a point-only as long as growth continues. But the experience of growing enterprises, particularly high technology companies, shows that when growth slows down, it’s productivity that preserves shareholder value. So, refocusing the enterprise to achieve this becomes critical to stay competitive.
The 56 companies credited their use of future signals with helping them stay on track to achieve productivity goals as well as growth goals.
A case in point is a leading digital imaging company that used contrasting future signals for productivity and growth, rather than emphasizing one over the other. For example, to track revenue growth goals, managers monitored total images sold per day and web-hits per day. But to track productivity, they monitored marketing expense per customer, training expense per employee, and percent revenue online. They tracked these figures frequently as future signals of their productivity goals-to decrease SG&A expense ratios and increase operating margins and cash.
Weathering Growth Transitions
Companies that change and redesign future signals as they move through different stages of growth are more successful in attaining goals. For example, a small company growing into a mid-sized enterprise must move from hands-on/primary observations by C-suite executives to derived/secondary data gathered by others. In particular, the customer-related future signals become much more difficult to capture as senior managers become increasingly separated from the selling process. Enterprises that best weather growth transitions build and use the best customer-related signals earlier, before reaching that new threshold of growth.
Employee-related future signals also gain sudden importance as enterprises lose that “small company” feel. By monitoring leading indicators such as employee turnover, the cost of attracting and recruiting talent, and standardized employee review data, you can detect early alerts of organizational problems associated with rapid growth. Tracking such indicators also allows you to gauge how effectively you’re communicating the corporate vision and strategies to an ever-expanding workforce. The transition from mid-to-large-sized companies also often requires creating executive-level positions for managing company growth.
To be successful, the process of using future signals should be formalized right from the start and kept open to change going forward. It’s a mistake to simply let the tracking process evolve organically as the company grows. Mid- to large-sized companies need to augment their sets of future signals ahead of their growth curve to make their future clearly visible — and attainable.
Five Best Practices
Leaders of successful, high-growth enterprises use five best practices to stay on course to reach high goals.
1. Capture timely, future-focused data about customers, finance, strategy, employees, and technology to guide decisions that help your company stay on course and predict its future position. These are a new set of tools to leverage your entrepreneurial spirit. These future signals help you flag the need for change and trigger the necessary action.
2. Use future signals right from the start, designing them with your specific objectives in mind. As the company grows, take the time to periodically review which future signals are still giving you accurate views of the company’s progress toward goals, and introduce new indicators as needed.
3. The most effective indicators are home grown. These metrics or future signals rarely come from off-the-shelf systems or solutions. Use leading indicators for key management purposes-tracking progress toward goals, balancing conflicting goals of growth and productivity, and weathering growth transitions. But create your own future signals and customize them to your company’s industry and environment.
4. Listen to the signals. Be open to accepting the signals and acting upon them. The CEO of a large consumer products manufacturer described why it took so long to react to a deteriorating competitive situation: “We saw the handwriting on the wall, all right. We just didn’t believe it.”
5. Balance what you measure. A measure of the success of high-growth companies is achieving a balance between productivity and growth. All companies know growth is a great value-creating strategy. But it’s important to understand that when growth is slow, it’s productivity that preserves shareholder value. Use future signals to help track and balance both growth and productivity goals.
No question, high-growth, entrepreneurial enterprises are spirited organizations, full of kinetic energy, operating in a high-risk environment. Rather than constraining that spirit, future signals raise it to a higher level. Not changing course ignores today’s dynamic reality. Changing course too often and without a true rationale implies having no course at all. The trick to master is to set up future signals to anticipate shifting currents, and to steer your enterprise to success.