COO Performance Metrics: How to Measure COO Effectiveness

The C-Level executives at your company are responsible for either the success or failure of your company. As the CEO, it is your responsibility to ensure that you steer the company to success.

However, you can’t do this alone. You have to work hand in hand with other C-Level Executives and senior members of your workforce. One of the most important of these is the Chief Operating Officer (COO) of your company.

The COO is responsible for the day to day running of your company. As such, if your COO is not meting key performance goals, you might discover that your company is veering off course. In order to prevent this, you need to have important metrics you can make use of to evaluate the effectiveness of your COO.

If you don’t have an idea of these metrics, then you’re at the right place. At the end of this article, you’ll have a full grasp of the tools and metrics you can use to ensure that your COO is pulling his own weight and is performing at topmost efficiency.

What is the Role of the COO?

In order for you to measure the effectiveness of your COO, you need to have a full grasp of what your COO does. Defining the role of a COO 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.

You need to be sure of the role your COO plays in your company before you can confidently appraise him/her on the important metrics.

Top COO Performance Metrics

While there are a variety of COO performance metrics you can use to judge the effectiveness of your 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 your COO is your company’s Chief Operating Officer.

Here are the some of the top COO performance metrics you can use to appraise the effectiveness of your COO:

Employee turnover rate

Your employee turnover rate is the rate at which workers leave your company to either go to another company, or the rate at which you fire your workers. Employee turnover is inevitable as not all your workers would be at your company permanently.

Studies have shown that direct replacement of an employee costs 50% to 60% of the employee’s salary. If you include the costs of turnover, this increases to about 90% to 200% of the employee’s salary.

According to the US Bureau of Labor statistics average turnover rate is between 12% to 15% annually. So, you should use this as a benchmark to judge the efficiency of your COO. When making the assessment, you should also compare your company’s turnover rate with that of your industry.

According to LinkedIn, companies in the services, retail and software tech industries have the highest turnover rate. If your company falls within this category, then you should expect that you might have a turnover rate that is higher than the average.

The goal is to make sure that you do have a turnover rate that is lower than the industry benchmark for your company. To use this COO performance metric efficiently, you can compare the increase or decrease of the turnover rate during the period of your COO taking over.

If the turnover rate is decreasing, then your COO is doing a good job. If on the other hand, the turnover rate is increasing, there must be something your COO is doing wrong, and you have to get to the root of the issue.

Labor Utilization

The labor utilization rate of your company is a way for you to measure how efficient your company’s production process is. You can get this figure by getting a percentage of the ratio of your processing time and idle time plus processing time.

For instance, if it takes your workers 20 minutes to manufacture a product, and there is a 10 minute idle time, you can calculate your labor utilization in the following way:

Processing time Processing time + Idle Time = 20 20 + 10= 0.67

The above means that your labor utilization is 67%. To properly evaluate your COO, you should ensure that this metric increases — try to get it close to 100%.

Operating Margin

Your operating margin is a COO performance metric that you use to determine how much you make on each dollar after subtracting your variable costs. This is before factoring paying things like taxes and interests on loans.

You can get your operating margin by dividing your operating income by your net sales. You should aim to make this margin higher than the industry average. To measure your COO’s effectiveness, you can do a historical comparison of your operating margin. If you notice that that operating margin has been increasing during the period of your COO being in charge, then you can be sure he’s doing the right thing, and vice versa.

Operating Cash Flow

The operating cash flow is a COO performance metric you can use to judge how much money a company brings in. It would help ensure that your business can remain solvent for the foreseeable future. Note that your operating cash flow should be more than your expenses.

You also need 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 you should be worried about the effectiveness of your COO.

Cash Conversion Cycle

Your cash conversion cycle is the amount of time from injecting cash into your business and making sales. This time has to be relatively short, compared to your industry average.

To use this COO performance metric effectively, ensure that the cash conversion cycle is steady, or it’s getting smaller. If you notice that the cash conversion cycle has increased under your COO’s watch, then you know your COO has not been performing up to speed.

How to set / evaluate COO Performance Metrics

There’s no point in knowing about COO performance metrics if you don’t know how to set and evaluate the metrics.

It is very important that you make it known to your COO beforehand that you would be using specific performance metrics to judge his effectiveness. After agreeing to this, you need to set a schedule for evaluation.

You can do a quarterly evaluation followed by a yearly evaluation. The quarterly evaluation would help you and your COO know how things are progressing in the short term. You can then use the yearly evaluation to see if measures you have decided to improve on during the quarterly evaluation are bearing fruit.

What If You Don’t Have a COO?

You might be a startup looking for a COO to help oil the operations of your company. You may also need to replace your former COO or fill in the role if it was previously empty.

If you fall into any of these categories, you’re in the right place. Cowen Partners is an executive search and consulting firm that can help you find C-Suite executives and Senior Management for your company. Feel free to get in touch with us to get the ideal executive for your company.

Finding the Right COO for Your Company

If you are at the point where you are prospecting for a chief operations officer, then you are likely experiencing exciting times at your company. Organizations typically require a chief of operations to step in and help scale the management team to cope with exploding growth, or new opportunities.

However, these times can also be trying, due to the difficulty of filling the position. As experts agree, figuring out the role of a chief operations officer can be an elusive task, which makes 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 your management team, and when the position needs filling, before going on to the nitty gritty of hiring.

What Is the Role of a COO?

The position of the chief operations officer (COO) is one that is common to most growth organizations. Yet, this does not make the position any clearer, or its job description less opaque. The role was aptly described by the Harvard Business Review as one that admits of “no single agreed-upon description of what the job entails or even what it’s called.”

COOs in organizations have been known to hold several responsibilities, from production, to marketing and sales, research and development, and sometimes, even legal. In some organizations, their role is to understudy the CEO, while in others, the COO comes in to help execute on the organization’s strategic goals and assist in catalyzing long-term growth.

However, no matter what the COO is called in to do, there’s always one constant — the COO is often at the right hand of the CEO. They play the role of adviser, critic, enforcer, general, and more to the CEO. As a result, one of the most common reasons that a COO is hired is to come in and support the CEO, essentially forming one half of a management tag team.

A COO will typically be responsible for a large swathe of day-to-day operations within the organization. They are tasked with ensuring things keep ticking over nicely, thus freeing up the CEO to face the task of leading the company into the future.

When Should You Think About Hiring a COO?

There are many scenarios when it would be beneficial to consider hiring a COO. This includes where your business is enjoying a period of tremendous growth and operations are running beyond the capacity of the current management team. If your internal processes are stretched due to the demands of steadily increasing growth, then it may be worth your while to consider bringing a COO in.

These are just two of the wide-ranging circumstances in which this hire may be necessary or preferable though. Other circumstances where a COO may be brought in, as discussed by the Harvard Business Review, include:

• To lead the execution of organizational strategy developed by board leadership
• To catalyze specific change initiatives in the company, particularly with regard to an identified growth area
• To provide mentorship and guidance to a young, inexperienced CEO (usually a founder)
• To serve as a foil for the CEO, and complement their knowledge base, style, or experience
• To partner with the CEO in a relationship where they jointly produce the best out of each other
• To understudy the CEO while being groomed (or tested) for suitability as the next CEO
• As a way of retaining (and rewarding) a valuable leader that the organization simply does not want to lose

There may be circumstances where two or more of these reasons diverge, such as where a COO serves as both an executor and a foil for the CEO, which underpins the fluidity of these situations. Regardless, with the insight that these conversations will provide, it becomes easier to unpack what you expect in a COO and what the ideal candidate will look like.

Finding a COO: Hire from the Inside vs. Recruit from the Outside?

A word on internal vs external recruitment before we go on to discuss tips for effective hiring. Should your new COO come from within your organization, or should you be looking to recruit from outside? Pragmatic thinking suggests it makes sense to appoint an insider who already has the benefit of institutional knowledge, compared to an outsider. However, both options have their advantages.

An outsider may provide a fresh perspective, deeper skills and competencies, or simply a different outlook that freshens up your management strategy and vision. Although with this recruitment, you must account for the added time the hire will need to find their feet, build credibility with their downline, and achieve operational efficiency within their new position.

Likewise, hiring an insider means the COO can immediately get to work, and leverage on existing relationships to achieve a much smoother transition. However, this will crucially depend on being able to find the right candidate who fits your goals for the role, as well as your organizational needs.

Tips for Getting the Search Right

With a clear vision of what the COO should be doing for your organization, you should now be in a better position to identify the right candidate. At the outset, determine if you want to conduct the recruitment through an internal process (which can be lengthy and tasking), or if you want to outsource the process to an executive search firm.

As you consider how you choose to proceed on the recruitment, keep the following tips in mind for an effective hire:

1. Create a wish-list: Identify exactly what you want your COO to do for you, and how you expect them to provide value to the organization. Ensure the job description you create captures what you need now and where you want to go, both personally and as a company.
2. Consider personality and culture fit: Remember that the COO should ideally play the yin to your yang. Trust is critical to a successful COO-CEO relationship, and ensuring a personality and culture fit will be crucial to this.
3. Think about qualifications: The flexibility of the COO role means that setting qualifications can be a difficult quantity during hiring. Perhaps, it’s best to consider the roles you expect the COO to play, and what competencies will best empower the candidate to excel in this role. In addition, the ideal candidate should be able to display a proven track record of success in similar roles.
4. Be competitive: As a C-suite position, you can be certain that great candidates for the COO role will require great packages to turn their heads. Consider a mix of healthy yearly compensation and enticing benefits. It is typical for candidates in this role to demand $225,000-$300,000 a year and 1.5–2% equity.
5. Double down on references: Finally, you really want to drill down into the references your prospects provide. Although references are typically unwilling to do damage to the employment chances of candidates, there are ways to access great feedback from these sources. Consider leaving a voicemail or email with references asking for a callback only if they believe the candidate will be an exceptional hire. You may also be able to find other individuals at the referenced firm who worked with the candidate but were not provided as references. This can be a valuable source of information about the antecedents and track record of your candidate.

In all, the process of hiring a COO will likely take a considerable amount of time and effort. However, in the long run, most organizations find that the increased efficiency and operational effectiveness they gain as a result is well worth it. Should you require an executive search partner to assist in your COO search, Cowen Partners can help you find and retain the top talent you desire. Please contact us to learn more about our COO search services.

Cowen Partners has a strong record of identifying and recruiting Chief Operating Officers COO for public, private and non-profit organizations. Contact us if you would like to discuss recruiting an exceptional COO for your company.

Cowen Partners Executive search provides recruitment services to all major and minor industries including:

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.

Check out our industry-leading resources to see why Cowen Partners is a top executive search firm in New York City, Chicago, Seattle, Dallas, Los Angeles, and beyond:

Originally published at https://cowenpartners.com on February 3, 2021.