Can you describe business performance with one number?
If you ask a finance person, they would say "profit is king: no profits, no money to pay the bills." A salesperson might claim "sales: without sales, there is nothing in the room." A marketing professional could argue "market share: if we don't gain the market, others are winning our consumers." A supply chain expert might emphasize "product availability: if products are not available, nothing works." Meanwhile, procurement could point to "cost avoidance" (just teasing my procurement friends 😉).
All these measures are mission-critical, but in isolation, none provides a comprehensive indication of business resilience or future success. Profits and sales measure ultimate success but are weak predictors of future performance. Market share offers insights into consumer sentiment, while product availability reflects operational capabilities. Understanding all of these is essential. However, this leads to an information overload—the deeper you delve into each area, the more measures and details you need.
One approach to address this is a balanced scorecard, which provides a framework to select a limited set of indicators across four predefined dimensions. This forces a focus on the most important areas for a specific business and balances short-term performance with long-term objectives. I have implemented this tool in several companies, and it worked, but it did not solve the dilemma of having one number that rules them all. And that fuels continuous debates between CEO, CFO and other key functions on what is the underlying strength of the business. Moreover, selecting the appropriate measures is a painful and never-ending process, as changes in the business environment and strategies reopen the discussions repeatedly.
A great inspiration for a possible direction is the SDG Index, which ranks countries based on their performance across 17 sustainable development goals.
The index is calculated as a simple average of almost 100 indicators across those areas, normalized to ensure equal weight. This is an example of an approach that brings a very complex matter down to one integrated indicator. On the SDG Index website, you can navigate from the overall index down to a single indicator.
There is a robust beauty in equal weights
An important choice made by the authors of the index is the approach to weighting. Weighting based on past data can create inaccuracies in predictive quality due to future developments. Simplified, equal weights are less vulnerable to changes and easier to implement, avoiding complex discussions on weighting methods. Research in various environments has confirmed the better accuracy of equal weights. This simplicity is appealing, repeatedly proving to be the winning approach in multiple facets of life and business.
Each measure in the index has a clear target, and the report uses color coding to visualize and simplify interpretation. Normalization allows direct comparison of measures. The methodology section of the report is a mine of knowledge and best practice ideas on approaching complex data analysis.
Below, you can see the global SDG index in 2023. The results indicate the best performance of the European countries, but there are some important caveats. I will expand on this next week.
For now reflect on the following questions:
What is the single most important performance indicator in your business, and why do you prioritize it over others?
How do you balance the need for comprehensive data with the risk of information overload in your decision-making process?
If you had to create a single index to measure business performance, what key indicators would you include and why?
How do you ensure that your performance metrics are adaptable to changes in the business environment and strategy?
Sources
Kahneman, D., Sibony, O., & Sunstein, C. R. (2021). Noise: A flaw in human judgment.
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