Many financial and business analysts, both within and outside a company, end up spending too much time on financial numbers, which are merely lag indicators of various business decisions taken in the past.

To evaluate and drive performance from a forward-looking perspective, what really matters are the lead indicators.

These are not often reported in a company’s annual report, but that doesn’t mean they cannot be measured or quantified. Lead indicators are many in number and varying in nature and priority from one industry/company to another.

Great companies spend a lot of time identifying the right lead indicators for their industry and their company, given the strategic/tactical goals that they have defined for themselves over the short, medium and long terms.

There’s the famous saying that ‘what gets measured gets done’. Similarly, defining the right lead indicators to measure strategy is a job half done. The other half is implementation. There are readymade frameworks for identifying the right lead indicators, such as strategy maps, balanced scorecards and value driver tree, among others.

However, what I have found to work well in practice is to simply think of the critical success factors for the business in terms of Time, Quality, Efficiency and Risk and then define the metrics for them.

This is what I call the TQER approach to identifying lead indicators.

In a service industry, this could mean how soon a company is able to service its customer request. In manufacturing, it could mean the speed to bring to market a new product from the point of conception.

T for Turnaround Time

In the finance department, it could refer to the number of days it takes to close the books of accounts. In HR, it is the time taken to fill an open position, and so on.

Thus, end-to-end turnaround time is a powerful factor across various businesses and functions.

For example, C. K. Ranganathan of CavinKare fame once mentioned that his early success in business was made possible with a shoe string budget of Rs 15,000 (back in 1983) due to his ability to launch the first product (Chik shampoo sachets) within 10 days of conceiving the idea.

Being able to compress the product development lifecycle allows cash flow to start coming in early and saves significant amount of capital from getting locked waiting to see the light of the day.

Q for Quality

Quality has two dimensions — one is accuracy, the other is precision. Philosophically, accuracy refers to doing the right things, while precision refers to doing things right. It is better to be roughly right than precisely wrong.

Quality has wide-ranging applicability, starting from the quality of input to the quality of process and, finally, to the quality of output product/service. From an end-customer perspective, quality implies customer satisfaction at the end of the day and this begins with defining the target customer requirement right.

From a transaction processing perspective, quality also refers to the frequency of errors and iterations, which lead to rework and low productivity. Quality could also be looked at in terms of quality of internal measurements (MIS)/external reported numbers, quality of talent in the organisation, and so on. Programs such as Six-Sigma and TPM, help identify the key quality metrics within the organisation and improve them using a structured approach.

E for Efficiency

Efficiency is all about maximising output per unit input. The input can be any of the factors of production — natural resources, labour, capital or technology. Efficiency invariably has a cost implication. Businesses that possess poor differentiators or have low barriers to entry need to thrive mainly on efficiency. Programs such as ‘Lean’ help improve efficiency within the organisation by identifying value-adding and non-value adding activities to reduce waste.

R for Risk

Wikipedia defines risk as the potential of loss (an undesirable outcome, however, not necessarily so) resulting from a given action, activity and/or inaction.

In a simplistic sense, risk can be measured as the combination of probability of occurrence and severity of impact of potential risk events. But this is easier said than done since there are multiple types/categories of risk events with multiple combinations of known and unknown factors.

As Donald Rumsfeld said, there are known knowns (things we know that we know), there are also unknown knowns (things we know that we don’t know) but there are also unknown unknowns! This is what Nassim Taleb refers to as potential Black Swans, that is, rare, extreme events that can be rationalised in hindsight but not foresight. Getting the right lead indicators for risk is most difficult, but also vital in any business since it determines the very survival of the enterprise.

Turnaround time, quality, efficiency and risk (TQER) help to evaluate the performance of any business.