Welcome back to the newsletter after a six week hiatus. I’m back this week with my series of letters to a subscriber and client about building operational excellence within your company. This is part two. You can find part one here.
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Hey Ops-Focused,
I’m back with an answer to your second question:
What were some of the of the check engine lights you monitored as a more experienced COO that you would pass along to yourself when you were a newly-embarked COO?
I love this question because it’s as relevant to founders as it is to COOs. SOMEONE in leadership at your company needs to have a detailed pulse on metrics across the company at all times. Ideally having a key leader tuned into metrics at all times helps create a data-informed culture in which all leaders know their key metrics at all times.
Since you’re the one asking the question, you’re probably the best person to start acting as if it’s your job to know the numbers. You may have heard “thought leaders” talk about data-driven decision making.
In my opinion, data is one of a number of tools available to you to help you make better decisions and assess the health of your organization. But some things simply can’t be measured and you’ll need to stay in tune with your gut or emotions as well.
I don’t believe in data-driven decisions, but I do believe in data-informed decisions. What do I mean by that? I mean that while a fear-mongering ad might perform better than an honest one, that doesn’t necessarily mean you should ramp spend on the fear-mongering ad.
There is what the data says and there is what you value. Similarly, your emotions, your body, your relational awareness, and many other sources of subjective information are valid and valuable opportunities to better understand your business.
Still, having clarity on the baseline data about your business matters. That starts with making sure you have access to the data. If you only take one thing away from this letter, make it this: it’s more important to consistently track any metrics than to track specific metrics.
There are three groups of metrics here:
- Financial metrics — if you’re broke, you don’t stay in business long
- Growth metrics — if you don’t grow, you’re more likely to go broke
- People metrics — great people make growth and profit more fun and more likely
Financial Metrics
The first bucket of metrics consists of your financials. You would be surprised (or perhaps not) how many entrepreneurs have basically no idea how their business is doing financially. Many know that they are roughly profitable or losing money and that’s it.
You want to know the core financials of your business every month at a minimum:
- Revenue – how much money did your company generate this month?
- Expenses – how much money did your company spend this month?
- Profit – how much money was left after expenses this month?
- Tax liability – how much tax will you owe on your profit?
- Cash flow – if you’re on the accrual method of accounting, you’ll also want to track free cash flow. Did you have an increase or decrease in cash in the business at the end of the month?
- Cost to Acquire a Customer or “CAC” – how much money does it cost to gain one customer? This one can get quite complex when you start having to estimate which teammates and how much of their time is being used to acquire customers through different growth channels.
- Unit economics – for an average customer, how much you earn from them minus how much it costs to acquire and service them.
- Payback period – How long does it take you to earn your cost to acquire a customer back? You do earn it back, right?
So if we look at financial check engine lights here, there would be several key ones that come out of our financial metrics:
- Are you profitable? If you’re not, how much time can you afford to continue losing money before your runway is gone?
- Have you set aside an appropriate amount of money to pay your taxes? If not, what’s your plan to have that money ready when tax season comes around?
- Do you have positive cash flow? Same problem as profit if not — do you have enough cash to cover negative cash flows for as long as they’re likely to be negative?
- Are your unit economics positive? Your unit economics should almost always be positive. There are some rare exceptions in venture-backed companies, but generally speaking if your unit economics are broken, the more revenue you bring in, the more money you’ll lose.
- Given your payback period, how much money do you need available in order to grow at the pace you want to grow? If your cost to acquire a customer is $100, the number of customers you need this month is 100, and your payback period is 90 days, then you will spend $10,000 this month without getting it back. If you need 150 customers next month, you will spend $15,000. And if you need 200 the month following, you’ll spend $20,000. All of this BEFORE you start earning any of that money back. So you’ll spend $45,000 before you earn your first $10,000 back. Do you have the cash for that?
Growth Metrics
There are a number of different mental models for growth metrics. One of the easiest to remember comes from the software, or SaaS, world. These are known as pirate metrics, or AARRR.
- Acquisition – From where do you get customers and how?
- Activation – What actions do you need to take and how long does it take to convert or “activate” a customer”
- Revenue – How much do you earn and how long does it take to start earning money from a customer?
- Retention – What’s your churn rate? How long do customers hang around? What’s their lifetime value?
- Referral – What % of customers refer a new customer? What’s your k-factor?
This is great for software products but doesn’t always apply to creator-led businesses. So here’s my adaptation for creator-led businesses:
- Reach — how many people are you reaching across all non-owned channels every week/month/year. This could be measured by impressions or engagements or something else entirely.
- Traffic — this is how much traffic is driven back to your website. This might not be relevant if you’re a native-only // no-click operation.
- Conversion – Email — I’m biased, but I believe email list is the single most important asset for a creator-led business. How well are you converting from traffic to email and how big is your list?
- Conversion – Revenue — How well are you converting from audience to revenue? Of those conversions, which channels are driving revenue? Does every purchase come from email or are some buyers coming direct from social, search, or other channels?
- Churn — if you have recurring revenue, how long do your customers hang around? What percent cancel each month? What percent of revenue does that represent? What does that mean for your lifetime value and payback period?
- Referrals / Affiliates — how many and how often do customers send referrals? Does that have a cost associated (affiliates)? Who are your top performing referrers?
And importantly, you want to be measuring this by channel. What’s a channel? A channel is just a way that you reach people online. Social media could be a channel. Or you could be as detailed as “Instagram” as a channel.
Your list of channels might look like:
- Organic
- Search
- Direct Outreach
- Social media
- YouTube
- Podcast
- Speaking
- Etc
You want to track channel-based activity so that you know which of your marketing efforts are working for driving the results that matter. If you’re doing something that’s not working and costing you money, you should probably stop. Similarly, if you’re doing something that’s working, you should probably do as much of it as possible (until it stops working)!
The best way to do this is to set up an analytics tool like Google Analytics or Fathom and then develop a system for appending UTM parameters to every link you use in any of your marketing, no matter what.
The check engine lights in this growth section are:
- Are you generating the revenue you need?
- Where is that revenue coming from?
- What are you spending time and money on that is working?
- What are you spending time and money on that is not working?
- How can you do less of what’s not working and more of what is working?
- Are your customer and revenue churn going up or down? Do you know why?
- Do you have an automated process for generated referrals from current and past clients? Is it working?
People Metrics
The last category of metrics here is made up of people metrics. There are subjective people metrics that reflect how your team feels about their work and there are objective metrics that reflect their experience at work.
- Average salary, bonus, and total comp – measuring your compensation system per team, against your industry benchmarks, and comparing different populations within your team can highlight retention and equity opportunities.
- Team NPS – you may have heard of Net Promoter Score, which is a common customer happiness metric that encompasses all of your company’s activities. This is the employee version.
- Team pulse – using a tool like 15Five can give you a subjective weekly rating for how your team is doing at the individual and group level. On a scale of one to five, you’ll see how company events, world events, and other factors affect your team’s wellbeing.
- Degree of belonging – You can run a quarterly or annual survey with a number of tools (here are some open source tools from Berkeley Haas) to measure the sense of belonging your team experiences at work.
- Average days absent per employee – How many days total has your team missed for reasons other than vacation over a given period of time? What’s the average absentee days per employee?
- Average days of vacation taken per employee (and as a % of available days) – How many days are available for vacation per employee? What % of those days does your team actually take per year?
- Average hours worked per week – How many hours does your team work on average? There are high costs associated with detailed time tracking, but there are other ways to get a general sense of the time your team is working.
- What % of team would it be a big loss to have move on? – Ask your leaders and managers a question like “How painful would it be for this person to leave the org?” for every person on their team.
You can look at these metrics on a company-wide, per-team, and per-manager basis to get a detailed view on what’s going on in your org. This can help you identify teams and managers that may have strong or lackluster culture as a predictor of team retention.
The check engine lights here would be:
- Are certain groups within your company under- or over-paid relative to their market value?
- Are there people on your team whose managers have consistently said they’d be relieved to have them move on?
- Are there specific groups that feel a lack of belonging in your org? Why?
- Are any groups or individuals showing a combination of low NPS, low team pulse, and increasing absentee days? This can be a predictor of future turnover.
- Are any groups of individuals showing consistently high working hours and low vacation days? This can be a predictor of burnout.
Where to Start If You Have Nothing in Place
Alright, that’s enough for today. If this feels overwhelming, that would make sense to me. The goal isn’t to put all of this in place at once. It’s to have a roadmap of metrics you can work towards over time.
So, where should you begin? Pick the area where you think you have the highest potential ROI from improvement. Is it your finances? Your growth trajectory? Or your team? Then work to get the core metrics in place, refining them over 3-4 months. Once those metrics are systematized and consistently measured, move on to a new category.
Building a data-informed culture means committing to the effort long-term. Create systems that will instill the culture over time.
Much love and respect,
Barrett