A critical number is a measure that helps you focus on the critical activities aligned with your most pressing business priority with line of sight from that number directly to the income statement or balance sheet.
So, for example, a security installation company prioritised maintenance contract renewals and their critical number became “percentage overhead covered by maintenance contracts”. With this number in mind they could set a target and focus key departments on what they could do to achieve the goal. The sales department tasked themselves with selling maintenance packages with installations. The installers and engineers were tasked with booking maintenance visits when they were called out. The customer service department tasked themselves with rebooking maintenance contracts. The finance department with transferring all contracts onto direct debits for ease of collection, reduction of debtors and ease of renewal. And so it went throughout the business.
So how do you identify a critical number in your business?
First you must recognise the five strategic imperatives for any business: making money, generating cash, strategic growth and eliminating weaknesses. Finally, to paraphrase Peter Senge, the only sustainable competitive advantage in business may be learning faster than your competition, so teaching your employees how the business does the other four is the final imperative.
With those five ideas in mind, there are five places you can look to find potential focus areas: your financials, your management team, your employees, your suppliers and of course your customers. Surveying each will give you a short list, or sometimes a long list of issues, opportunities, wants and needs. You can then narrow this down to a list of critical issues.
Setting goals around each one will help you to determine if they are measurable (i.e. you can put a number on it) and if there is a clear line of sight to your financial statements. For example, increasing employee engagement from 35% to 65% or customer satisfaction from 40 to 55 are measurable goals but don’t have clear line of sight to the income statement or balance sheet (although they will undoubtedly impact bottom line results positively).
However, a goal of increasing subscription renewal rates from 20% to 50% has a clear, unambiguous impact on the financials. Activities for the business may well be to increase employee engagement and customer satisfaction scores, because they will help you achieve the critical goal of renewal rates but they are not the critical numbers themselves.
Finally test that the number is indeed critical to success, that it is based on reality (go back to your surveys), that it is a common goal across the business unit (with a stake in the outcome for employees), that it is attainable and deals with at least one, but ideally more than one strategic imperative.
This is an annual process. Even though the critical number may stay the same from year to year (although the target associated with it probably will not), the review needs to be carried out annually to ensure that it still does represent the strategic focus of the business. Things change rapidly: new technology, competitors, markets, political and economic shifts, so the critical number may also need to change to reflect these new priorities.
Defining one or two critical numbers like this allows you to focus everybody on the activities required to move it in the right direction towards your target. You can have other targets, but you don’t want to have too many “critical numbers” because it diffuses focus and that’s the last thing a business needs.