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Which Way is North? Understanding & Optimizing Operational Metrics

Understanding & Optimizing Operational Metrics

Operations is easily one of the least understood aspects of modern business.

The term itself–and how it’s generally thought of amongst the tech crowd–conjures up thoughts of assembly lines and factory plant floors, teeming with blue-collar workers that repeat a single, repetitive tasks for 8 hours per day.

But operations leaders know better.

Many of the tasks in modern, digital businesses may be automated and digitized (although not as many as you may expect). But that doesn’t mean that the logistical challenges of running a business don’t still play a major role in whether a firm sinks or swims.

As businesses grow, change, and evolve, they show wear. The systems and processes that once worked flawlessly to serve 2,000 customer start to burst at the seams when you reach 20,000 or 2,000,000.

The evolving role of operations is one that requires a broad base of knowledge across many different systems–both digital and analog. It touches both conversion-rate optimization and supply chain logistics. It’s a sprawling practice.

Operations is about measuring, understanding, and prescribing changes to the core business functions. And the metrics used to measure that should reflect this.

Developing Operations KPIs

Ultimately, the role of operations is about balancing efficiency, productivity, and costs.

So using the right metrics to measure the performance of the business operations is key to understanding how these many moving parts and variables are affecting the bottom line.

Operational metrics provide both high-level direction and critical insight into the health of a company and also allow firms to better understand the impact of changes in policy, procedure, or process.

Ideally, operations leaders should look at a range of metrics that provide high-level insight about the health of the company from various perspectives.

  • Efficiency
  • Capacity
  • Productivity
  • Quality
  • Profitability

Using multiple types of metrics allows the business to have a full picture of performance and also use the various measures as a way to pinpoint or triangulate any areas for concern. In order to develop the right metrics to measure, we must start with an understanding of what we want to know and then develop a framework for how we will measure it.

The role of your key performance indicators is not to tell you every detail about the business operations. It is to give you a high-level look at the direction the business is heading. Are the indicators moving (or staying static) as you would expect? Or are they out of whack?

Based on the answer, we only know that things are either going right or something is wrong--but we have no insight about what could be causing an issue.

We need to go deeper.

We need to look beyond the high-level numbers that indicate success or failure in order to understand and troubleshoot.

Troubleshooting Operational Metrics

While the high-level metrics make it easy for operations leaders to understand and share progress on the whole, the reality is that operations is deeply complex.

As such, behind each individual KPI are a range of factors that roll up to produce that final number. While we may view Gross Production as a high-level metric about the capacity and efficiency of business production, that figure is ultimately driven by several other metrics that determine our ability to produce goods.

In the case that operational KPIs appear to signal an issue or an opportunity for growth, it’s important to take a deeper dive into which subsequent components of that metric are involved. If there’s a production slowdown, was it caused by a bottleneck in labor? Lack of supply? Aging machinery?

Or, in a more-modern example, we could consider metrics of a company like Instacart.

As a marketplace, their ability to grow and generate revenue is measured by the number of orders completed. But, that number is limited (or driven) by both the number of users (buyers) on the platform and the number of drivers (sellers) being onboarded.

The team identified that contractor onboarding was a bottleneck and integrated the HelloWorks platform to accelerate growth by 270%.

This highlights the importance of not only setting operational KPIs, but understanding the metrics at a deep level and having an understanding for how those numbers are constructed.

It’s the role of operations to translate the heirustic KPI into a deeper understanding of problems or potential growth and then create an actionable plan for addressing problems or seizing opportunities.

In a modern world of smartphones, apps, and on-demand marketplaces, the tenets of operations management still remain. It’s fundamentally about analyzing and optimizing--we just have better tools at our disposal.

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