Managing the Operational Metrics of a Startup
Founders spend a lot of their time trying to understand how to deal with potential investors. They try to understand the various techniques that need to be deployed in order to ensure that prospective investors view the startup company as a compelling proposition. In their quest to project their startup company as the best, founders often neglect the operational part. However, not paying enough attention to the operations turns out to be an ineffective strategy in the long run. Founders must ensure that they have an effective system in place which allows them to manage the day-to-day operations of the firm.
In this article, we will have a closer look at how the operational plan of a startup company works as well as how it needs to be managed.
Why Are Key Performance Indicators Important?
Key performance indicators are the operational metric that allows the start-up founder to gauge the performance of their company. They are considered to be a barometer for the company’s success. Hence, if a company undertakes a marketing campaign that results in the key performance indicator going up, it is considered to be successful. On the other hand, if it has no impact or the indicator moves in a negative direction, then that strategy is considered to be a failure.
It is not difficult to see why key performance indicators are of strategic importance. Key performance indicators allow companies to choose their strategic direction. This means that if a company chooses cost control as its key performance indicator, its actions will be very different as compared to a company that chooses to maximize revenue or maximize usage as its key indicators.
Indicators are powerful and therefore if they are chosen incorrectly then they can lead the company in the wrong direction.
Primary and Secondary Key Performance Indicators
It is important to ensure that all decisions in the startup company are data-driven. Hence, the operational plan of the company should also be data-driven. This is the generally accepted practice in the start-up community. Hence, choosing the right operational metrics is a very important part of the operational planning for any startup.
Over the course of time, companies have realized that if they choose a very different or specific metric, they get less interest from investors. This is because investors compare companies with one another based on operational metrics. Hence, a company would be better off choosing a standard primary metric. Over the years, startup companies have come up with some standardized metrics.
For instance, some startups measure their performance by the revenue that they generate. On the other hand, some other startups measure their performance based on the average daily, weekly, or monthly usage by their users. Other business-to-business-based companies will measure revenue based on the number of deals signed. If the start-up is still in the product development stage, the time taken to reach important product milestones can also be considered to be a metric. These metrics are relevant to every startup and hence they should be used as a primary metric.
However, companies do not need to restrict themselves to primary metrics. They can also use a series of other performance indicators. These performance indicators help in predicting how the primary metric will move. For instance, the revenue number might seem like a black box if looked at in isolation. However, secondary indicators can be used to demystify the process. Numbers such as average inventory being held by the company, average price as well as website metrics such as time taken to complete the sale can be used to predict the revenue number for future periods.
Start-up companies should use a pyramid structure wherein they have one or two primary key performance indicators but at the same time they can have five or six secondary performance indicators which help them explain the performance of the top two primary indicators.
Objectives and Key Results (OKRs)
There are many startup founders who believe that key performance indicators have now become outdated. Hence, they use the more recently created system of objectives and key results (OKRs). OKRs are more comprehensive as compared to performance indicators. This is because the OKR framework is based on breaking down the larger goal into smaller measurable goals which can be accomplished and tracked on a regular basis.
The benefit of OKR is that they allow companies to turn a large mission into smaller goals that are more actionable. Companies can then use these smaller goals to track their performance on a daily or weekly basis. Another important characteristic of OKR is that it can be cascaded throughout the organization. It is possible for the company to develop OKR for each individual person and then measure their performance accordingly. This helps the start-up company align the goals of the entire team which helps them move faster towards success.
The fact of the matter is that the operations of the startup firm often get ignored. This is because they are not as glamourous as multi-million-dollar valuations. However, the fact remains that the cash flow to justify the billion-dollar valuations are created by operations. Hence, an entrepreneur must have a good understanding of the important metrics in an operational plan.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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