The rock band Van Halen is legendary for its "no brown M&M's" contract clause. The band was the first to take huge productions on the road. It traveled with nine 18-wheeler trucks full of pyrotechnics, musical equipment, amplifiers and instruments. Its concert preparation contract was 150 pages of very specific and detailed stage setup instructions and electrical requirements; the contract also specified that there must be a bowl of M&M's backstage with the brown ones removed.
What sounds like a diva request by flashy, high maintenance musicians pushing the limits was actually an easily observable behavioral indicator. This was lead singer David Lee Roth's easy way of determining whether the technical specifications of the contract had been thoroughly read and complied with. When Roth arrived backstage, he'd check the bowl of M&M's: if there were brown ones, he knew the contract hadn't been followed; if there weren't any brown ones, he could feel confident that all the technical specifications had been met.
Like the canary in the coal mine that would alert workers of impending methane gas or lack of oxygen, we need simple observable indicators that the right behaviors and standards are met.
So, what's your bowl of M&M's? How do you know when you are doing well? What few, well-chosen data points do you keep on your dashboard and track daily, weekly, monthly?
To manage a laboratory well, measurements and monitors must be tied to the right standards and indicators. Most lab owners are likely to track sales, production per day, remakes and other traditional indicators of lab health and prosperity. These are, of course, important and core to our executive dashboard. However, I want to challenge the traditional metrics and management tools by adding three critical indicators of customer equity, which is the measure of the lifetime value of an account:
Customer Retention
When a laboratory owner seeks my help in growing his business or getting it back to the prosperity he once enjoyed, he often asks me to help him get new clients. Every business school teaches that it's far less expensive to keep existing clients than to replace them, so my response is to ask this question, "What is your client retention rate year to year and how do you track it?" You can't manage what you don't measure, so retention rates are seminal data points.
M&M For each client, compare current month sales to his three- or four-month rolling average. Celebrate with the ones that are significantly up and find out why someone is down 50% or more. You have a much higher chance of responding to a concern and keeping a dissatisfied client than one who has left for another lab completely. (Visit http://www.funktionalconsulting.com">www.funktionalconsulting.com and go to SEES for a tutorial on this report.)
Percentage of Chair
This refers to how much of the client's business you have and the dollar volume it represents. The average dentist uses just over three laboratories, according to the ADA's 2008 Survey on Use of Labs. What percentage of your clients' total restorative work are you getting? If the average general dentist revenue is $720,000 and laboratory fees represent an average of 6.6% of revenues, you should have an average of $50,000 in revenue for every client (assuming he sends you all of his work).
M&M To calculate your percentage of chair, divide your total revenues by the product of the number of active accounts multiplied by $50,000. If, for example, your total revenue for the year is $1 million and you have 60 clients, your percentage of chair is 33% (see box at right for the calculation).
Client Acquisition
The number one source of new clients is existing client referrals. Which customer is referring the most and what did you do to earn that level of trust? If you underwrite a golf tournament, study club, lecture or place a four-color advertisement, how many new clients do these get you?
M&M Tracking the sources, value derived and frequency of referrals and acquisitions will allow you to see where the best bang is for your marketing dollars. You might find some surprises in ROI calculations for various "favorite" marketing activities.
We've all heard "What gets measured gets done" and "You can't manage what you don't measure." I'm suggesting you must measure, monitor and manage the "right" things. Using the right standards and indicators you can modify your behaviors and time allocations to maximize results.
In future columns, I'll discuss how you can impact retention, percentage of chair and acquisition of new accounts but first, we have to be measuring these indicators. Doing things right only counts if they're the right things.
