2nd Wind CIO: Exercising Measurement Options
The relationship between financials and technology isn't lost on most corporate executives. But connecting the two worlds and introducing metrics that matter can prove challenging. Tom Kelly, who until March served as chief financial officer and CIO at 2nd Wind Exercise Equipment, in Eden Prairie, Minn., has the unusual perspective of viewing things from both sides of the fence. And when it comes to creating metrics that count, that situation pays dividends.
2nd Wind doesn't have the luxury of a huge budget and deep IT resources. It's a small company (approximately $27.2 million in 2008 sales, with just under 300 employees) that competes against industry giants such as Nautilus and Life Fitness. This means that 2nd Wind must be strategic, agile and adaptable. "Metrics play a very important role in defining how we do business and how we approach key issues," Kelly explains.
The company has built a "business alignment model" that uses a Balanced Scorecard approach to identify key metrics and map out cascading metrics that reach far into the organization. Once Kelly identifies an overarching metric--2nd Wind currently has two dedicated IT metrics and 11 overall performance indicators in place--executives develop benchmarks and key performance indicators that offer data about the company's success in achieving its goals.
One metric that 2nd Wind focuses on is IT cost per employee. In order to understand the world beyond straight income and expense ratios, Kelly sends out a quarterly survey to employees. It examines how individuals use technology and tools such as Google Apps (2nd Wind switched from Microsoft Office about a year ago), and how they view various systems, solutions and services. Kelly charts and graphs the responses to home in on user trends and problems. 2nd Wind was able to trim $300,000 from its annual budget by making the shift to cloud-based applications.
The survey results also help Kelly define a strategy for boosting productivity. This might translate into additional training for employees, e-mail updates or hands-on assistance from IT.
"It doesn't matter how great the technology is and how much money it saves us up front if it doesn't improve productivity," Kelly explains. "We're constantly looking for ways to bring the cost per employee down while also retaining or boosting productivity."
But the process isn't only about crunching numbers. It's essential for management to make sense of the underlying trend. For example, in late 2007, 2nd Wind had more than 375 employees. Today, the number is down to 290. "The problem is that certain IT expenses are fixed," Kelly says. "If the denominator changes, then the cost per employee goes up." Armed with such information, Kelly established a relationship with vendors so that the firm could negotiate licenses on a quarterly basis.
Another key metric that 2nd Wind relies on is cash-to-cash cycle time to measure supply chain efficiency. In order to better understand how the company is moving its products, Kelly scrutinizes inventory days of supply, adds day sales outstanding and then subtracts the figure from the average payment period for inventory. The resulting figure gives 2nd Wind a good idea of how efficiently the company is moving products from manufacturing to delivery. "Like any retailer, we don't want to have large amounts of inventory sitting around," he says.
On the front lines of business, the result is an ability to dynamically adjust pricing, purchasing terms and accounting strategies. Various departments share the data and, working together, are able to identify the best approach at any given moment. "We understand the impact on cash flow, and we understand the impact relative to what our sales are projected to be," Kelly explains. "So we're able to take advantage of a good deal when one appears."
Actionable metrics are paramount to success, Kelly says. Success, he believes, requires that management and employees internalize and understand these metrics. "If you don't accomplish these two things, you can come up with the best metrics in the world, but it's not going to lead to any improvement. Everyone in an organization must understand what's truly important."