Monthly Musings

February 2010

Jim Harter
Sigma Pi Consulting, LLC

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Volume 1 Number 2


My Three Cardinal Rules of Business

When was the last time you did a trend analysis?



My Three Cardinal Rules of Business

I always joke that I could have quit my MBA after my first lecture and saved $25,000.  That was because I learned two of my three cardinal rules of business in that lecture. 

Obviously, I didn't quit and in the process learned a lot more.  But so much of the rest of the MBA curriculum really was just teaching skills needed to implement of the three rules. 

So what are they?

  1. The best predictor of future performance is past performance.
  2. What gets measured gets done.
  3. What gets rewarded gets repeated.

If you apply these rules consistently, you will be successful.  Let's take a simple example.

  • If you look at your business and you don't like what you see but don't do anything to change it, you are going to see history repeat itself.  (Rule 1)
  • If you want to make a change, then find a way to measure the outcome you want to see.  (Rule 2)
  • If you really want the impact to last, find a way to reward those who make it happen.   (Rule 3)

But be careful what you measure and reward.  If you measure the wrong thing, you will get dysfunctional results. 

Measuring the performance of your sales force by revenue alone will result in a lot of low profit sales. 

Measuring production on the shop floor without regard to quality can be a disaster. 

If you grade your customer service personnel on the number of calls they handle, you may be missing the important task of satisfying your customers. 

You need to have a balanced set of metrics that prevent your staff concentrate on a single task to the detriment of others.

Rule 3 is even more important because any incentive plan that is not tied to increased profit is a gift.  Salesmen are particularly good at working their comp plan to maximize their income.  If the plan doesn't have a tight relationship to profit, you should rethink your plan. 

But good metrics for each individual must also include a least one measurement with a dollar sign.  You set the benchmark for a target dollar level.  Then you measure the profit impact of performance above that benchmark.  Incentive plans are based on rewarding those who increase profit. 

This is a simple examination of my three rules.  We will certainly examine corollaries to these rules and more subtle applications in future newsletters.

But I want to give special recognition to Dr. Dennis Slevin of the Katz School at the University of Pittsburgh who got me off to such a great start in my MBA.  

Let me know what you think.  Drop me a line at

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When was the last time you did a trend analysis?

A trend analysis is a powerful tool to quickly identify trends in your business over a period of time.  You examine several years of financial data to identify operational trends in your business. 

  • Is your gross profit slipping?
  • Are your AR days going up? 
  • Is your overhead percentage staying the same? 

These and many other important questions are answered by a trend analysis.  They point to places in your business that you need to address.

The key to a trend analysis is to convert all dollar figures into percentages of annual revenue.  This enables apples to apples comparisons from year to year. 

If you don't know how to do this, call me.  This is part of my standard quick-start business analysis that will give you a clear picture of the state of your business, identify problems and prescribe what you need to do to fix it. 

Most people are surprised by the results.  But conversely, they are also surprised by how quickly problems can be turned around.

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I am always interested in your feedback.  Please email me at


Sigma Pi Consulting, LLC
1248 Rolling Meadow Rd.
Pittsburgh, PA 15241
Phone: 412-576-2685
Fax: 954-206-1184

(c) 2010 Sigma Pi Consulting, LLC

Sigma Pi Consulting Newsletter - February 2010