Lean Management and Performance Metrics

Since late 2007, I have had the good fortune to consult with a number of businesses in all types of industry groups about efficiency and effectiveness.

Overall, most business leaders have a good handle on how to deal with shrinking revenues and the potential of rising costs. However, many managers are completely unfamiliar with using key performance metrics to demonstrate, predict and manage to their results. These key performance metrics are a needed management tool in all environments but more necessary than ever in the current economic climate.

As a 101 level overview, performance metrics are most commonly expressed in the terms of a ratio that compares results to the needed resources to generate results. They are also compared historically and many industries can compare to organizations of the same size and type.

Below is a brief description of the most common and easiest to use performance metrics:

FTE Ratio

This efficiency ratio compares your core business deliverable to the number of people required to produce the product or service. This is an easily created and compared number. In it's most simple form, it is the the number of widgets produced (gallons of water, training hours, cars serviced, parishioners in church, et. al.) divided by the number of people working for you.

If the ratio is improving, your organization is producing more with less. If the ratio is shrinking, you need to look at trimming staffing levels to remain competitive.

Efficiency Ratio

This ratio is more financial in nature but a great tool to manage working units. It is comprised of total revenue divided by total recurring expenses. Simply stated, it measures how much it costs you to generate revenue. As with the FTE Ratio, need for improvement is easy to see.

Service Ratio

Like the FTE and Efficiency Ratios, this formula measures how many people your organization serves and how many people it takes to maintain this service level. This ratio is especially useful when revenue information or revenue itself lags from the point of customer contact or revenue matures over the life of a customer relationship.

As with all management tools, key performance metrics can vary greatly over industry types and sizes. The importance is in the discipline to define, report and manage to the key indicators your organization decides upon.