Performance Metrics/Benchmarking: What Does “Good” Look Like?26 Feb, 2008 By: Dennis LeStrange imageSource
Performance Metrics/Benchmarking: What Does “Good” Look Like?
Performance metrics have been a part of the imaging industry since the mid to
late ‘80’s. While many people and organizations have taken credit for their
creation, they were originally developed at Alco Standard by the company
presidents (former owners) in conjunction with the finance group in order to
create a common platform of measurements that provided consistency throughout
Alco Office Products. In addition to establishing uniformity within the
operating companies, Alco internally published these performance metrics in the
form of a monthly stack ranking, which sparked the competitive fire of the
company presidents as they didn’t want to be on the bottom of any ranking.
Remember, in this pre-IKON environment, Alco Standard was a holding company,
which drove performance through high expectation, entrepreneurial spirit, and a
healthy level of competition between its operating companies. The president of
the worst performing company in DSO usually called the president of the top
performing company to determine what specifics actions and strategies they
should employ in order to improve and move up the stack ranking. Sometimes a
visit to another operating company was warranted, which eventually fostered a
collegial spirit among the operating companies as opposed to a fierce
competition. Eventually, each overall performance metric was upgraded throughout
Alco Standard as companies fought to improve and stay out of the cellar. This
sustained progress in metrics led to a corresponding improvement in financial
performance—revenue and operating income growth at the operating company level
and as a corporation.
As we enter 2008, performance metrics/benchmarking will continue to play a
major role in continuous improvement and financial results. Benchmarking helps
companies understand how its performance compares to industry standards. Any
deviation from the standard metric provides an opportunity for improvement,
which will probably enhance financial results.
The Various Types of Metrics
I always break down metrics into two broad categories—financial and
non-financial. Financial metrics are the most common ones and they can be
further divided into the areas of income statement and balance sheet. The normal
income statement metrics include: product mix, revenue growth, gross profit,
operating expenses as a % of sales, contribution, operating income, income
growth, and margin %. These performance metrics should be reviewed by category:
equipment, service, supplies, FM; and in the case of equipment it can be further
dissected into black white copiers, printers, color, fax and others.
Contribution calculations, which include specific departmental expenses, should
be completed at the category level for equipment, service, FM, and supply.
Performance metrics for the balance sheet include: inventory turns, DSO, DPO,
and ROI. Inventory turns should be further disseminated to the level of
equipment, parts and supplies; and the various equipment sub-divisions can also
be analyzed for B/W copiers, color, printers, fax, etc. Drive down benchmarking
to the lowest feasible level to obtain the greatest level of detail.
Many professional managers who focus on benchmarking and financial review
tend to ignore the non-financial side which, I think, is a big mistake as this
is where productivity metrics reside. Non-financial metrics include:
revenue/employee, equipment revenue/equipment employee, revenue/ administrative
employee, service revenue/ service employee, copies/tech, leasing % of equipment
sales and market share. In addition, employee turnover by category, reps at
quota, and even some obscure measurements like square footage per employee can
be classified in this metric sub-category.
When is Good Too Good?
With benchmarking, one must realize that some metrics can be too good. For
example, a company can drive down DSO to a level of 10 days through stringent
credit extension and check with order requirements. And while that would be good
for cash generation, it would have an adverse effect on revenue and revenue
growth. Questions should also be raised when certain metrics are better than the
norm. For instance, why is equipment GP at 45%? Is there too much emphasis on
used equipment? Are we discounting the aftermarket too much? Is there too much
emphasis on margin, thereby eliminating the aggressive pricing situations? What
impact is this having on revenue growth? Performance metrics cannot be isolated
but must be reviewed in groupings—equipment margin, equipment growth, equipment
contribution and inventory turns; in order to fully understand the performance.
A broad based and balanced approach to benchmarking is the most effective
Performance metrics/benchmarking can clearly identify opportunities, and
provide a fact-based assessment of a particular area compared to a “gut” feeling
or a conclusion without the benefit of details. A review of industry performance
standards not only can identify the area of opportunity but it can also help to
dissect the problem into more manageable components.
For instance, a review of inventory turns may indicate a substandard
performance level, but the specific area of the issue cannot be determined
unless analysis of its components are examined. Those components are equipment,
parts, and supplies. Upon further examination, it could be revealed that parts
inventory is excessive, which drives the overall metric below the standard.
Therefore, the action items to correct this problem and improve the measurement
would focus to parts inventory. The more precise the performance metric is, the
more obvious the specific problem will become. A finite approach to metrics will
lead to more concrete root causes, a requirement needed to solve the problem and
take advantage of the opportunity.
When reviewing metrics, there is a tendency to dispute bad results by
challenging the calculation. After the correctness of the calculation has been
exhausted, the next type of denial comes in the form of rationalization. “We
can’t achieve that type of equipment gross margin because we sell the XYZ
product line” or “It is unrealistic for us to have a leasing percentage of 80%
because we sell to state and local governments.” Do not rationalize your
findings as it engenders the belief that a substandard performance metric cannot
be improved, and therefore, becomes a lost opportunity. Be realistic when
critiquing your performance against the benchmark, as this is the only way for
How to Get Better
Benchmarking and knowing your relative position versus your peers is only a
small portion of the exercise. Narrowing the gap can only be achieved through
the implementation of specific strategies and action plans.
Let’s assume that equipment sales growth is below the industry norm and your
company rightfully views this deficiency as an opportunity. First of all,
dissect the equipment results by segment to determine obvious shortfalls (i.e.
B2C, high volume, used mix, etc.) Second, assess your sales coverage strategy
through a comprehensive territory analysis on a representative-by-representative
basis. Territory changes and ongoing territory management must be well
documented, effectively timed and well communicated to the sales organization.
As part of territory analysis, you determined that your current coverage is
insufficient and you should hire two additional sales professionals. The cost of
those new reps must be included in the business plan along with the increased
equipment revenue they will generate, spread reasonably by quarter over the
course of a year. Action plans detailing current assessments, quantifiable
objectives and specific and action items should be created with precise due
dates, and individual(s) responsible. This Communication Action Document (CAD)
must be included in the business plan and used in sales review meetings with
management throughout the year.
Other corrective actions and strategies should be created for every
performance metric shortfall your benchmarking exercise reveals. But I caution
you to limit these initiatives to 3-5 specific items per year in order to
provide the proper focus and improve the metric and benefit financially from the
Benchmarking and the use of performance metrics are critical management tools
for any business, particularly in the imaging industry. But the value of the
benchmarking exercise will not be fulfilled unless the strategies are documented
and managed on a regular basis. That is the only way to narrow the performance
Dennis P. LeStrange is a principal of Strategy Development, a
management/consulting/sales training firm specializing in developing growth
strategies, controlling costs and profitable investing of resources. Contact him