One report commissioned by KPMG on Business Intelligence revealed that ‘the execution of business strategy is often hampered by a lack of reliable information’. Today’s business environment is so turbulent and unpredictable that it’s now more important than ever for organisations to gain market insight and have the agility to react quickly.
Monitoring and improving operational performance should make it on the executives list of strategic agendas. Many top decision makers are so consumed with other agendas of the business that they neglect measuring and improving organisational performance and leave it at the bottom of their to-do list. They are out of touch with the day-to-day operations and performance of their business.
Strategic Performance Management is all about establishing formal procedures for identifying Key Performance Indicators (KPIs) or performance metrics that align with company strategic goals. The idea is not to have a long list of metrics to measure just for the sake of measuring but to measure what is really important for driving and sustaining business performance.
Performance management frameworks such as the Balanced Scorecard and the Performance Prism play a very critical role in identifying and assessing specific areas of the business that need improvement and hence implementation of operational management initiatives. The aim is to measure both qualitative and quantitative performance metrics. For example, instead of focusing only on financial metrics such as increase or decrease in sales revenue, periodical level of expenditure, operating margins and ROI, companies are poised to perform much better by measuring non-financials too.
There is a direct relationship between an increase in sales revenue and customer retention and satisfaction. Monitoring such metrics help identify factors that drive customer retention. They could be the quality level of products/services offered, number and frequency of complaints or returns. This will allow corrective actions to be taken when necessary in turn leading to an increase in total revenue.
Organisations therefore need to be able to meet the challenge of defining, measuring and reviewing KPIs that drive business performance. To achieve this best-in-class organisational performance, companies need to:
• Understand the key business drivers that affect performance. Not only will this help you identify performance metrics that are relevant for your company, but will also enable you put in place structures that support your organisation’s particular needs. Using performance management tools such as Life Cycle Costing and Activity Based Costing/Management (ABC/M) often help identify drivers of operational costs and how they can be managed. They also help calculate the profitability of certain products/services or other investments and provide information which forms the basis for sound decision making.
• Build a KPI library which will act as the source of information about the KPIs in use within the organisation. These departmental KPIs should be aligned with the corporate strategy.
• Having a KPI library only is not enough. In today’s volatile economic environment, business information needs are constantly changing. Information for decision making that can be relied on today could prove to be a recipe for disaster next week or the following month. There is therefore need to continuously review both internal and operational performance metrics.
This helps identify performance metrics that may no longer be useful to the organisation, or which have been replaced in general practice by others. In other words, since quality decision making depends on up-to-date information to link metrics with corporate objectives, companies need to gather, track and act timely upon information and data that has the tendency of changing throughout the business day, week, month or year. There is need to improve timeliness and accuracy of operational business decisions.
• Develop a performance management focused culture. This involves putting in place regular communications to establish a performance-driven culture. Operational staff and other managers should frequently be reminded of the benefits of measuring and improving business performance. Tying personal or team-based incentives to specific KPIs could also prove beneficial in the future.
• Improve accessibility of performance data to both senior management and employees within the organisation. Performance data should not be restricted only to the sales or accounting and finance personnel. Allowing operational performance visibility across the enterprise enables the organisation to be responsive to changing business conditions thereby allowing them to address challenges and capitalise on business opportunities as they emerge.
By incorporating business intelligence systems, executive and operational dashboards into the performance management strategy, managers will be able to monitor business performance against key performance indicators and take corrective action when necessary