CEO Thoughts People & Culture Private Equity

One metric I always refused to give my investor.

I wrote this article for the Tenzing website where I work as Entrepreneur in Residence. 

Investors are data and metric junkies. But as Einstein said, “Not everything that can be measured counts and not everything that counts can be measured”. I think there is one commonly requested metric you should think carefully before using.

Refusing to give an investor what they want may not seem like good business sense. But when it comes to numbers, just because you can measure something, doesn’t mean it’s useful.

When you put a metric in place, you have to think, what is the goal? What are you looking for? What figure tells a good story, and what does the opposite?

That’s why there’s one number I’d never put in my board pack for investors – and that’s employee turnover. Simply, the ratio of people who’ve left your company in a given period, divided by the number of people you have.

Seems like a reasonable piece of information for investors to ask for, right? And surely it’s your job to keep them happy?

Well first, let’s look at why they want it – then why (and how) you should decline.

Why do investors sometimes ask for it – and why do they care?

Investors want to get a measure of company culture and early visibility of whether there is a problem with a business that can’t hold its staff.

Staff turnover can be expensive and feels like a waste of money. When somebody leaves, there might be a recruitment fee to attract a replacement, who may also need training and time to perform to their full capacity. This feels like a cost that should be minimised – that’s why investors care.

But it’s a surprisingly dangerous metric, for many reasons…

When you look at a small company with say 150 staff, four people leaving in a quarter is 2.6 percent. Then next quarter, you might have six people leave, so the number jumps up to four percent, which is 50% higher. But it’s only two more people, and it might be for very good reasons. If you have 25,000 staff, such a percentage might be more useful.

What you need in a fast growing, ambitious, successful company is the right people, in the right jobs, at the right time. So sometimes, it’s absolutely right that someone moves on from your business. They might have done a fantastic job for you for the last three years and they want the next step in their career, and you haven’t got the next role for them. You should celebrate that, rather than be disappointed. People leave for all sorts of good reasons all the time – it’s not an indication of how lucrative your business is.

Another reason staff turnover is a dangerous metric is that it is astonishingly blunt, and as a barometer, can be inaccurate and encourage the wrong behaviour.

Imagine if you were a team leader in a PE-run business managing 20 people, and you know that one of the things measured is staff turnover. It might make you less likely to exit somebody who is performing averagely, because you don’t want to damage your staff turnover figure – even though the right thing to do would be to change that person out. Tolerating average performance is not what you want.

Another mechanism to minimise staff turnover is to pay people a lot and have low performance standards. But that doesn’t make for good business. If you pay people the right amount, have tough performance standards, and a great place to work, you will get a level of staff turnover – but also a better business.

Saying the right kind of ‘no’

Staff turnover was requested several times by both my previous PE investors. Once we discussed it, they both agreed it wasn’t helpful. You can open a positive, productive dialogue by asking, ‘Why do you want to know that, and what do you think it will tell us?’ Then you can explain, ‘Actually, no – I don’t think it will tell us that’ – and offer data that’s more meaningful.

What’s more important is how people are performing, and whether you have the right people, with the right fit, for the company’s needs over the next 18 months.

If you’re growing quickly, especially from a small size, having staff turnover will be essential. You will need different people at £10 million revenue than you did at £5 million. You will outgrow people, and they might outgrow you. You will also be able to attract different people as you grow and that’s important.

A much better indicator is how happy and engaged people are at work. The simplest metric I like for assessing culture is an Employee Net Promoter Score.

The survey is simple, just two questions:

  1. ‘On a scale of 0-10, how much would you recommend working here to a friend?’
  2. How can we get you closer to 10?’

Employee NPS can be implemented on simple technology and the survey is small and unobtrusive enough that you can ask it every month giving you real time data and rolling average for your business.

Keeping your board pack lean

Another issue is that, if you’re not careful, your board pack becomes huge. I’ve had that problem in my business where at one point it was about 75 pages. You’d get it the night before the board meeting and you wouldn’t know where to look, even though there was bound to be an interesting story in there somewhere.

This is why I’d suggest that every quarter, you should have a look at what could come out of your board pack. What’s important? All your financial information of course. Your P&L. Key sales metrics. Sales activity. Your sales and product pipeline. How customers are feeling.

If you’ve just been through a crisis, you might also talk about how you’ve adjusted your cost base, revenue mix and product line, how you’ve changed how you sell to and service customers, and how you’ve recovered lost revenue. You want to show how resilient your business is.

Why saying yes isn’t always right

Going against investor expectations may seem unnatural, but I certainly don’t spend all day advising our businesses to do exactly what investors want. Just because your investor asks for something, doesn’t mean you should go ahead without thinking.

There are situations where disobeying your investor is the right thing to do – and this is one of them. Ultimately, we don’t want an army of yes people as CEO’s. We expect our entrepreneurs to stand up for what they know is right – and that isn’t always by saying yes.

Additional COVID-19 note

Right now, the metric is completely blown out anyway. It’s not going to tell you much about the past few months as people are adjusting their workforces drastically. So the metric is completely corrupted. 

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