The C-suite executives at any company are responsible for either the success or failure of the organization. For CEOs, it is their responsibility to ensure that they steer the company to success.
However, they can’t do this alone. They must work hand in hand with other C-Level Executives and senior members of their workforce. One of the most important of these is the Chief Operating Officer (COO) of their company.
The COO is responsible for the day to day running of their company. As such, if their COO is not meeting key performance goals, they might discover that their company is veering off course. In order to prevent this, there are some key metrics CEOs can make use of to evaluate the effectiveness of their COO.
The COO executive recruiters at Cowen Partners have put together this helpful guide of tools and metrics CEOs can use to measure COO performance and efficiency.
What is the Role of the COO?
Measuring the effectiveness of a COO requires a full grasp of the COO role, which is not so straightforward. Each company has different roles for its COO.
In some companies, the role of the COO is to serve as the heir apparent to the CEO. In other companies, the COO is brought on to handle a pivotal shift in the operations of a business. A COO can also be the person tasked with the day to day running of the company while the CEO handles external affairs like getting funding, meeting investors, managing shareholders, and so on.
Unlike roles like the Chief Marketing Officer, Chief Financial Officer, and other C-Level positions, the role of the COO is quite malleable.
A CEO need to be sure of the role their COO plays in their company before confidently appraising him/her on the important metrics.
Top 5 COO Performance Metrics
While there are a variety of COO performance metrics a company can use to judge the effectiveness of their COO, there are some metrics that would apply to a COO regardless of the company or the industry where the COO operates.
These are usually metrics that generally deal with operations, as their COO is their company’s Chief Operating Officer.
Here are the some of the top COO performance metrics CEOs can use to appraise the effectiveness of their chief operating officer.
1. Employee Turnover Rate
According to the US Bureau of Labor statistics average turnover rate is between 12% to 15% annually. So, a CEO should use this as a benchmark to judge the efficiency of their COO. When making the assessment, CEOs should also compare their company turnover rate with that of their industry.
The goal is to make sure that a company has a turnover rate that is lower than the industry benchmark. To use this COO performance metric efficiently, CEOs can compare the increase or decrease of the turnover rate during the period of their COO taking over.
If the turnover rate is decreasing, then their COO is doing a good job. If on the other hand, the turnover rate is increasing, there must be something their COO is doing wrong, and a CEO will have to get to the root of the issue.
2. Labor Utilization
The labor utilization rate of their company is a way for a CEO to measure how efficient their company’s production process is. A company can get this figure by getting a percentage of the ratio of their processing time and idle time plus processing time.
For instance, if it takes their workers 20 minutes to manufacture a product, and there is a 10-minute idle time, the labor utilization can be calculated in the following way:
Processing time Processing time + Idle Time = 20 20 + 10= 0.67
In this example, the labor utilization is 67%. To properly evaluate a COO, a CEO should ensure that this metric increases, trying to get as close to 100% as possible.
3. Operating Margin
The operating margin is a COO performance metric that can determine how much a company makes on each dollar after subtracting their variable costs. This is before factoring paying things like taxes and interests on loans.
A CEO can determine their operating margin by dividing their operating income by their net sales. The aim should be to make this margin higher than the industry average.
To measure a COO’s effectiveness, a CEO can do a historical comparison of their operating margin. If the operating margin has been increasing during the period of their COO being in charge, the chief operating officer is likely doing the right thing—and vice versa.
4. Operating Cash Flow
The operating cash flow is a COO performance metric that can underscore how much money a company brings in. It would help ensure that their business can remain solvent for the foreseeable future. Note that their operating cash flow should be more than their expenses.
A CEO also needs to take note of the source of this cash flow. Is the cash flow from sales or the liquidation of assets? If it’s from the liquidation of assets, then a CEO should be worried about the effectiveness of their COO.
5. Cash Conversion Cycle
The cash conversion cycle is the amount of time from injecting cash into their business and making sales. This time has to be relatively short, compared to their industry average.
To use this COO performance metric effectively, ensure that the cash conversion cycle is steady, or it’s getting smaller. If a CEO notices that the cash conversion cycle has increased under their COO’s watch, then a COO has likely not been performing well.
How to Set & Evaluate COO Performance Metrics
There’s no point in knowing about COO performance metrics without understanding how to set and evaluate the metrics.
It is very important that a CEO specifies beforehand the performance metrics that will be used to evaluate the COO. Then, there needs to be a set schedule for evaluation.
A quarterly evaluation can be followed by a yearly evaluation. The quarterly evaluation would help a CEO and a COO know how things are progressing in the short term. The yearly evaluation can measure improvement from the quarterly evaluation.
Finding the Right COO for Their Company
When it’s time to prospect for a chief operations officer, companies are often experiencing exciting times. Organizations typically require a chief of operations to step in and help scale the management team to cope with exploding growth and new opportunities.
However, these times can also be trying, due to the difficulty of filling the position. Experts agree that figuring out the role of a chief operations officer can be an elusive task, making it even harder to determine who will be a good fit for the role and how they will perform.
In addition, due to the varying roles and backgrounds that operations officers typically bring to the position, it can often be unclear exactly when a COO is needed, and what they are expected to bring to a company. Therefore, it is critical to understand how a COO fits within a management team before going on to the nitty gritty of hiring.
What If a Company Does Not Have a COO?
A startup may be looking for a COO to help oil the operations of a company. A company may also need to replace a former COO or fill in the role if it was previously empty.
If these situations, companies and CEOs can turn to Cowen Partners, a leader among the nation’s best executive search firms. Cowen Partners helps companies find C-Suite executives and Senior Management. Get in touch with us to find the ideal executive.
Cowen Partners | Top COO Executive Search Firm
Cowen Partners has a strong record of identifying and recruiting the top 1% of talent for the role of chief operating officer for public, private, and non-profit organizations. “Contact us if a company would like to discuss recruiting an exceptional COO or any other C-suite role.”
As a top marketing executive search firm in New York City, Chicago, Seattle, Dallas, Los Angeles, and beyond, Cowen Partners is known for excellence in executive recruitment and diversity recruiting across all major and minor industries.
This includes (and is not limited to) accounting, advertising, aerospace & defense, biotechnology, banking, board and CEO services, computer hardware, construction, consulting, consumer products, computer software and hardware, education, energy & utilities, entertainment & sports, finance, financial services, food products, government, human resources, health care, hospitality & tourism, insurance, industrial, internet & new media, legal, journalism & publishing, marketing, manufacturing, medical device, non-profit, pharmaceutical, real estate, retail & apparel, sales, technology, telecommunications, and transportation.