In this blog series we explore the world of Business Outcomes; turning what’s important to our business into actionable outcomes, consider outcomes as opportunities to experiment with and improve, and how we meet our outcomes best by helping our customers meet their outcomes.
Part 1: Looking Beyond the Profit Metric
Financial metrics are obviously crucial for any business; you can’t operate effectively if they’re out of whack. In fact, an overwhelming majority of business goals and metrics tend to focus on financial well-being – for example, return on investment (ROI), which we in the business world talk about all the time.
However, some of us in the Agile world have a tendency to downplay the importance of financial metrics. I’ve heard people say, “If you’re focused on profit, you’re losing sight of the big picture.” That makes me pause and think, “Wait. If you’re not paying attention to your bottom line, then it won’t be long before we’re having no conversation at all.”
I completely agree that running a business is about more than just profit, and you need to make sure your profit motives are grounded in clear vision and reasoning. You can go down a slippery slope if you toss profit or purpose out the window and can quickly lose sense of what’s actually valuable to your business.
Starting from that premise, here are some ways to rethink the relationship between financial metrics and business outcomes.
From internal results to external outcomes
Let’s look at a simple equation: profit equals revenue minus cost (P = R – C). That’s certainly a crucial equation to keep in mind – but a lot of businesses tend to get tunnel vision looking at Agile as simply a cost reduction model. The question you have to ask yourself is whether cost reduction is necessarily the outcome you want.
The answer might seem like an obvious “yes.” If you’re spending less money and your profit margin went up this quarter, what’s to complain about? The problem is that when you’re only looking at that one metric from an internal perspective, you’re losing sight of what you’re actually trying to achieve in the marketplace.
Focusing solely on cost reduction tends to come from an efficient delivery mindset, which, on the surface, seems great. However, if you aren’t delivering real value and getting a good return on those investments (cost), then you could simply be losing money more efficiently! Peter Drucker said it better than I ever could: “There is nothing so useless as doing efficiently that which should not be done at all.”
What you need is to grow and expand – so what you should really be asking is, “Did this cost reduction generate an increase in revenue?” If not, then you’re not improving your ROI, and you’re not growing. What’s more, cost always has a floor – whereas revenue has no ceiling. So instead of trying to cut cost all the time, you should be continually looking at new opportunities for revenue, which inspires growth and makes even more new initiatives possible. In other words, instead of just focusing on internal benchmarks, keep external outcomes in mind as well.
Turning metrics into outcomes
With that bigger picture in mind, let’s look at some other metrics. Take, for instance, the “Pirate Metrics” developed by Dave McClure: acquisition, activation, retention, revenue and referral (AARRR). All five of those metrics are very relevant, especially when you’re trying to increase your consumer base and market penetration.
But there’s an important underlying question here: How does a metric become an outcome? That’s a crucial distinction. If you’re tracking all these metrics, but don’t have any specific targets in mind, you can’t really say whether you’ve achieved your outcome or not – because outcomes tend to be bigger than what any single metric can give you.
Take a Pirate Metric like retention – the measurement of users who come back and use your product again. That’s a great metric, so it’s natural to assume you want to increase it at all costs, but why specifically – and to what end – do you want to increase it? In order to answer those questions, you have to dig deeper.
Say, for example, you want your retention to go up by five percent over the next year. Now start asking, “How much effort do we need to put into this, by when, and what specifically will we do to increase it that much?” As you look into that, you’ll start to discover what’s working, what isn’t, and what you need to adjust. So, instead of just focusing on tracking a metric, you’ve shifted into the mode of experimentation.
Thus, the metric becomes transformed into a S.M.A.R.T. goal – one that is specific, measurable, achievable, results-focused, and time-bound. Of course the flipside of that is, when you don’t have a S.M.A.R.T. goal, you tend not to make concrete changes, because no one owns responsibility for anything in particular. Unless there’s a time constraint on a goal, and it’s actionable in a specific way, there’s no point in setting it in the first place.
Now you’ve turned your metric into an outcome that you can take action on through the empirical process. Next, we’ll talk about understanding that the means by which we reach our outcomes should be viewed as assumptions that need to be validated, and how viability is an assumption we can turn into a risk mitigating outcome.
Read Part 2 of the Agile Business Outcomes series here.
By Michael Moore, Enterprise Agile Enablement Lead, Cox Automotive