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Canary Metrics – A New Thought Process

Originally published March 3, 2009

 "Centro’s credit problems may be canary in coal mine"
Ilaina Jonas, January 2, 2008

The credit problems facing Australia’s Centro Properties Group, which owns more than 700 U.S. shopping centers, may afflict others who also used short-term debt to finance their deals… “They’re not alone,” said Bernie Haddigan, Managing Director for commercial brokerage Marcus & Millichap. “I think the pain and suffering, you’re going see more of it going through the year. The positive is most of the savvy long-term investors are saying this is going to be one of the best buying opportunities of the last 10 years.”

Value Proposition

Even in the case of severe market disruptions, an organization with true canary metrics is positioned to capitalize on the market realignment to maintain or improve performance levels.

Finding Growth in Economically Challenging Times

Corporate executives are responsible for growing their businesses by identifying new products, analyzing merger and acquisition opportunities, and discovering new market niches. In a recession, these growth opportunities still exist; but they may be much harder to find, analyze and, most importantly, execute. Canary metrics hold the best promise for recognizing a market disruption early, while an organization still has time to adjust its focus, minimize performance risk and exploit the market opportunity.

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Canary metrics allow companies to minimize damage
due to market disruptions and exploit growth opportunities.

Astute businesses that recognized the signs of the 2008 U.S. recession and global credit problems early on had a unique opportunity to conserve cash for a later buying spree. Businesses that lagged by one to two quarters scrambled to conserve cash for operating expenses. Other businesses, recognizing the situation much later in the year, were forced to raise capital or, if unsuccessful, faced bankruptcy negotiations.

The following table summarizes the performance impact each type of metric can have on a business facing a market disruption:

 Metric  Visibility into Market Disruption  Performance Impact
 Canary Metrics
 Early warning with time to turn the ship  Minimal damage; cash conservation for potential buying opportunities
 Strategic KPIs  Real–time warning that damage is occurring  Damage control; cash conservation for operating expenses
 Transactional KPIs  Lagging visibility into disruption   Damage assessment and control; raise cash for survival
 No KPIs  No visibility into disruption  Maximum damage; raise cash for survival or file bankruptcy

  
Businesses can realize a significant performance benefit by using canary metrics to provide early warnings of market disruptions. This leading visibility into market disruptions can translate into unique opportunities to expand existing market share, acquire complementary or weaker competitors, and expedite transition to new market niches.

Canary Metrics to Drive Top Line Results

Although the concept of canary metrics is elegantly simple, “simple” should not be confused with “easy.” Because they are true derivatives of key performance indicators (KPIs), canary metrics generally require a new thought process. A few strategic examples may help with understanding canary metrics unique approach:

  1. Optimize Operations – Using inventory management, consider the difference between managing to a KPI for inventory turns versus managing to a canary metric for “order volatility by customers with largest share (top 25%) of inventory.” If you found that one of your largest customers by revenue was actually driving up your inventory cost because of order volatility, what would you do differently?

  2. Exploit Existing Product Growth – Consider the difference between managing to a KPI for “unit achievement” versus managing to a canary metric for “cross selling optimization based on purchase pattern recognition.” If you could identify the best contribution margin combinations for the most commonly co-purchased products, how would your marketing and sales activities change?

  3. Drive Innovation – Consider the difference between managing to a KPI for “revenue achievement” versus managing to a canary metric for “market segment change velocity.” If you found that your flagship product “segment change velocity” was significantly deteriorating, while a different segment was consistently accelerating, would you consider shifting your product mix?

As powerful as these scenarios are, it’s a moot question for most businesses. Even though they’ve invested in the latest transactional technology, their culture of analytics hasn’t matured beyond operational metrics. While transactional technology can provide valuable visibility into historical transactional data – and may even support some executive level KPIs – these businesses still lack visibility into growth performance and innovation opportunities. This canary just can’t sing.

In response, many businesses have invested in the “vanilla” data warehouse module provided with their ERP solution. Unfortunately, if the organization has a unique business model (and who doesn’t?), management quickly figures out that the vanilla metric is interesting, but not informative. Working with the vendor may yield a more productive metric, but usually leaves the timing lacking. The monthly reporting format just doesn’t allow the business to keep the canary signing at full volume. Nor is it easy to tie the vanilla metric to the KPIs that the executive team and board of directors are monitoring. In fact, chances are the vendor’s vanilla metric isn’t ever going to be a full-fledged canary metric. At best, vanilla metrics allow executives to improve damage control when, in fact, they should be focusing their attention on growth and innovation opportunities.

Businesses with an opportunity-centric culture need unique, sensitive canary metrics deeply tied to KPIs. As the second- or third-level derivative of a KPI, a true canary metric will include a “volatility” or “velocity” metric that changes often enough to signal early deterioration and opportunity (e.g., order volatility by customers with largest share of inventory). Alternatively, canary metrics may be created from unique triangulations of business metrics that exploit growth opportunities (e.g., contribution margin combinations for co-purchased products triangulated with existing customer purchases).

These metrics have the potential to provide exceptionally early warning of market disruptions while maximizing growth opportunities. Savvy executives armed with that information well in advance of KPI degradation are well-positioned to capitalize on the disruption rather than suffer through it.

  • Janet Kuster, MBA, PMPJanet Kuster, MBA, PMP

    Janet is the PM & Delivery Manager for Incisive Analytics, LLC. As the leader of the core delivery team, Janet ensures high quality delivery on all client projects. She is well known for pushing her client teams’ thinking forward while maintaining focus on the client’s integrated strategic priorities and, of course, the critical path. Janet’s collaborative and diplomatic style consistently enables her to deliver excellent product value and achieve superior knowledge transfer in organizations focused on innovation and performance improvement. She may be contacted at Janet.Kuster@IncisiveAnalytics.com.

    Editor's Note: More articles and resources are available in Janet's BeyeNETWORK Expert Channel. Be sure to visit today!

  • Christina Rouse, Ph.D.Christina Rouse, Ph.D.

    Christina is the Chief Architect at  Incisive Analytics, LLC. An improvement catalyst, Chris applies business intelligence strategy for performance improvement. Leveraging two decades of data experience on a broad range of technical platforms, she developed a technology-agnostic approach to business intelligence consulting. Clients rave about Chris' unique blend of business acumen, technical architect and trainer skills. She may be contacted at  Christina.Rouse@IncisiveAnalytics.com.

Recent articles by Janet Kuster, MBA, PMP, Christina Rouse, Ph.D.

 

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Posted May 20, 2009 by Anonymous

The reader has a strange way of reading. The sentence rythm is all wrong.

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