Setting Goals, Step-by-Step
Setting Goals, Step-by-Step
Strategic Preparation continues
Let’s continue with Strategic Preparation, aligning organizations to solve complex problems together, repeatedly over time. If goal setting pisses everyone off, why do it? Unfortunately for leaders, you have to lead. Goals clarify your company’s purpose, indicating which direction to move your organization. When working with organizations on goal setting, they typically start with a list of tasks, projects and goals mixed together, often couched from the perspective of individual functions within the organization. Good organizations will attempt to quantify and negotiate the list, trimming and prioritizing by some frustratingly inadequate and overly rigid ranking system. There are winners and losers and the functional leaders retreat to various quarters to divide and conquer and once again not get that much done. Those are the good companies. Bad ones will try to do everything on the list at once and fail even faster. So what to do with the unruly list? Let’s find out, step-by-step.
Step 1: Understand your business
No matter how complex your business might be, it can (and must) be reduced into a very simple visualized equation to set goals that advance your organization:
Revenue - Costs = Profit (or losses!)
While this simple framing is the essence of business and crucial to remember, factoring this equation further will yield incredible insights into how your business actually works. Let’s take a simplified example of a complex business: at-risk Medicare Advantage primary care. Like high school physics, we are going to leave out some details so you can actually understand what’s going on. Forests, trees, etc.
Revenue - Costs
(#Patients * Retention * Risk Adjusted Rev) - (Medical Cost - Prim Care Cost - Operating Costs)
With this breakdown, you can see that you have 3 levers for revenue (within this business line): recruit more patients, keep patients that you recruit, and optimize your risk revenue to the appropriate amount. Similarly you have 3 levers for cost: reduce system medical expenses, reduce the cost of the primary care service you provide, and/or reduce the rest of the company’s sales, general and administrative costs. Perhaps most importantly, you can visualize the relationship between these factors.
Further clarifying these dimensions by measuring current performance (surprise!) will allow you to understand which combination of improvements will best yield the rewards you are after, and how much ground needs covering. We’ve established that getting these numbers can be hard. Consider it the basic infrastructure required to run your business. Invest and maintain it and it will pay dividends forever. Fail to do so and you will be constantly flying blind. Once you have your numbers in place, perhaps you can already see where you ought to focus.
As an aside, I have a natural affinity for the CFOs with whom I work, because they are great at keeping score without too much thumb on the scale. This is crucial, especially if things are not going well as everyone else might just try to delude themselves into believing.
Let’s go one level deeper, and break down these dimensions into their putative drivers to further our understanding of what needs improvement. This becomes complex fairly quickly, so let’s for now just focus on the number of patients, which could be driven by: # of locations, physician count, advertising spend, # of payor contracts, broker relationships, etc.
We are now entering linear regression territory so I’ll get off the math bus, but even a list of related drivers of patient count (bonus if measures are in place!) can reveal interdependencies that allow you to understand where to begin in improving performance. As you learn more about cause and effect in your business, you should continue to iterate and refine this set of factors and drivers, proactively communicating it to the entire organization so that everyone can understand what the company does, what matters, and how they can contribute.
Step 2: Understand which reward matters, based on stage
In his fantastic article, What Should Be on the Roadmap, fellow product traveler Roman Kudryashov keys us into 3 types of rewards that a company can seek:
Let’s marry these rewards with the Stages of Maturity to help you understand exactly which reward you should be working toward.
If you are in the Concept or Product/Market Fit stage, you should be aiming to increase existing revenue, ideally doubling it until you can barely keep up. Short of running out of money, costs and margin matter less until you are sure you have a market. Once you have found Product/Market Fit, your close attention to costs in pursuit of margin will lead you to rebuild your organization for Growth & Scale. Finally, when your Mature business yields predictable results, it is time to diversify into new business lines, restarting the cycle.
A word of warning, do not “diversify” a company that is not profitable. Either you should recognize that you are pursuing Product/Market Fit or appreciate that mounting distractions and costs will hasten your demise.
Understanding your stage will guide you to the appropriate reward. Understanding your business will help you focus your effort, necessary for victory. If you are feeling overwhelmed, just know that it is possible. It usually takes 2-3 days to get great qualitative clarity with the companies that advise across stages.
Step 3: Setting the size of your goal(s)
With the factors and drivers of your company visualized (and measured?) and clarity on the reward you are pursuing by stage, it is time to decide the magnitude of change you are after.
Referring back to target setting (worth a quick re-read), decide if you are looking for a small or big change. Usually “goals” represent big changes, so let’s assume you want to majorly improve one of your three rewards. When it comes to the due date or allowable time horizon for goals, if the goal is crucial, you should not stop until you succeed or die trying (or external factors render the goal irrelevant). The only time for due dates are true external events: days of cash remaining, RFP due dates, regulatory deadlines, etc. While your company pursues these goals, set up frequent iteration cycles (progress, monitoring and course correction) in which case a “year” is way too long, and you should look for more like, every 1-2 weeks.
When setting the size of your goal, you can either choose the top line reward type (revenue, profit or new revenue) or, based on your factors and drivers, choose a more concrete goal such as “increase patients to increase revenue.” But how do you know on which driver(s) you should focus? You have to find the constraint!
Step 4: Focus goal setting on “the constraint”
The Theory of Constraints, best explained in The Goal, may be one of the most useful theories for leadership as it is a reliable method of determining focus amongst all the noise, fear, distractions and politics within an organization. It marks the transition point from goal setting to goal achieving.
In (very) brief, every flow of activity, such as your business or service, has one point of constraint. Consider a water pipe with a narrowed segment as an example. As your organization generates a flow of customers from top of funnel marketing the tortuous customer journey such as patient care, determined by the factors and drivers of your business, there will be a place where things get “stuck.” You can usually find it quickly by looking for the place that work is piling up in your organization (long delays, huge backlogs, etc.).
When you’ve found your constraint, you’ve found where to set your goal– improving flow through that constraint. Improvements everywhere else in the system are an illusion, so you don’t need multiple goals. Similarly, once the current constraint is improved, it will shift elsewhere requiring new attention, so “goal deadlines” are similarly irrelevant.
And that’s it for goals– few, quantitative and upward, keyed to the right reward, focusing on the constraint with maximum focus and effort across your organization.
But once you’ve set them–how to actually achieve them? Stay tuned!