TagPerformance Measurement

Rethinking The Use of KPIs In The Digital Era

Most companies do not deploy Key Performance Indicators (KPIs) rigorously for review or as drivers of change. This is the overall finding from a recent survey report, Leading With Next Generation Key Performance Indicators, published by MIT Sloan Management Review. The report is biased towards Sales and Marketing functions.

Changes in the business environment such as accelerating technological innovation, intensifying competitive pressure, significant emerging risks, increasing customer expectations, and complex regulations are influencing business models and causing tremendous shifts in the strategic direction of the company.

As a result, executives are struggling to balance tactical and strategic KPIs, including operational and financial KPIs that effectively capture the moment while anticipating the future.

Part of the survey findings include:

  • KPIs are not enjoying special status as either enablers or drivers of change in many companies. Instead of providing value added insight to guide and drive performance improvements, KPIs are more about “tick-box” compliance. Either that gives you a sense of the scale of key decisions made on intuition versus data-driven or it makes you realize that despite the critical role of KPIs in enabling informed decisions, many executives are still not aware of this.
  • Lack of alignment of KPIs with strategic objectives. Only 26% of the survey respondents agreed that their functional KPIs are aligned with the organization’s stated goals and strategic priorities. Such a huge disconnect explains why many companies are struggling to execute their strategy more effectively.
  • Customer-focused KPIs are increasingly becoming more important. Many companies are taking a more customer-centric approach to spur growth. As a result, they are seeking to understand customers in more holistic ways. 63% of respondents say they are now using KPIs (such as NPS, customer segmentation, customer lifetime value, brand equity, churn) to develop a single integrated view of the customer and understand the customer’s experience at each touch point including the aggregated journey.

Based on respondents’ answers to a specific set of questions on how well a company has aligned its use of KPIs, the report authors were able to categorize the companies into three – Measurement Leaders, Measurement Capable and Measurement Challenged.

According to the study findings, six behaviors are common to Measurement Leaders:

  1. Use KPIs to lead, as well manage, the business. Companies falling into this category treat their KPIs not simply as “numbers to hit” but as tools of transformation. KPIs are used to effectively align the organization (people and processes) and also provide predictive insight that help frame strategy and lead the company into the future.
  2. Develop an integrated view of the customer: Respondents falling into this category have shifted their focus beyond traditional financial and customer satisfaction metrics to including externally focused KPIs that enable them to better segment and engage customers. Such measures complement and build upon more internally focused process KPIs. However, an integrated customer view remains an aspiration for many businesses. For example, 41% of survey respondents are still managing digital customers separately from physical customers. Companies that are making progress in this space are experimenting with automation and machine learning technologies to develop a 360-degree view of their customers.
  3. See KPIs as data sets for machine learning: Nearly 75% of executives surveyed expect that ML/AI technologies will help them achieve strategic goals. Instead of viewing KPIs just as analytic outputs for business performance review and planning, organizations can take advantage of ML which empowers software and systems to learn from data-driven experience. This creates opportunities to use KPIs (individually and collectively) and their underlying data to teach ML algorithms to improve and optimize their performance and drive marketing activities. However, care must be taken that the KPIs used as data inputs for ML actually reflect business reality, otherwise the systems will learn from wrong inputs leading to garbage in, garbage out.
  4. Drill Down into KPI Components: Drilling down to a KPIs components is critical for effective KPIs. It helps executives see the underlying data or analytic components that are aggregated into KPIs, determine why specific KPIs have over or under-achieved and prioritize critical business issues. For example, the drilling down can be done according to different customers, segments, channels or different products. Legacy organizations with legacy IT systems and legacy financial reporting processes, however, generally lack this capability
  5. Share trusted KPI data: While it is true that the whole is greater than the sum of its parts, having shared KPIs facilitates effective cross-functional collaboration because managers can see the positive or negative impact of their own KPIs on others. This cause-and-effect relationship also enables opportunistic efficiencies and outcomes. Although transparent, shareable KPIs can create new dynamics, in some cases, conflict may arise within the organization due to overstepping of boundaries in turn affecting accountability.
  6. Aim for KPI Parsimony: There is no magic number of desirable effective KPIs for an organization. However, too many KPIs easily become unwieldy, unmanageable, and create unrealistic expectations. Too few might result in the neglect of critical business issues. In today’s digital world characterized by data proliferation, it is much easier to get carried away and succumb to “KPI creep”. Measurement leaders know what to focus on – a balanced set of vital and valuable KPIs that have massive potential to make a huge difference to their businesses. Instead of wasting resources on ordinary metrics or measures that promote bad behaviours and fail to influence the strategic priorities of the business, they understand that to be effective and account for business success, KPIs must truly be “key” performance indicators.

To obtain greater value and returns from their KPIs, the report recommends companies to identify their top 3 enterprise and top 3 functional KPIs, create a process for ongoing enterprise-wide discussion of KPIs, and treat KPIs as a special class of data asset.

Additionally, I believe company leadership should also:

  • Acknowledge that effective performance measurement requires a cultural shift. The fish rots from the head. If there is no executive sponsorship, chances are high that the use of KPIs to drive growth will remain relegated to the lower rungs of the ladder.
  • Integrate performance management with risk management. The former looks at KPIs and the latter looks at Key Risk Indicators (KRIs). Business success is also a result of making informed and intelligent risk decisions
  • Start with the WHY of data collection. While it may be true to say that data and analytics are the raw ingredients of KPIs, a company’s data needs must be supported by the key performance questions raised. It is therefore imperative to ask critical questions before accessing any new data.
  • Understand that technology is just a means to an end and not the end itself. A company does not necessarily need to invest in new technology to reap returns from its KPIs. Just because “experts” are preaching the gospel of ML/AI as the solution to modern business problems, first evaluate if your business is in dire need of such technology and cannot survive without it.

3 Common Pitfalls of Performance Reporting and How to Avoid Them

Recently I met up with a close friend of mine whom I hadn’t seen in a couple of years for a chat and catching up. He is a qualified accountant and finance professional working in the financial services industry in Zimbabwe.

On top of the social chatter, we started discussing the evolving role of finance, in particular finance business partnering and the impact of Industry 4.0 on the profession.

As our discussion continued, we shared experiences, what has worked and what hasn’t worked so far in our respective organizations, as well as the way forward.

One thing that intrigued me was that my friend didn’t by any chance try hard to hide his frustrations emanating from his every day job. Chief among the frustrations was the fact that finance wasn’t highly regarded within his organization as he would have loved it to be.

I probed further trying to understand why he had reached to that conclusion.

Although my friend mentioned that his organization has made reasonable progress in ensuring that finance transforms from the commonly perceived scorekeeper function to a trusted business partner, many business leaders still perceive finance’s role as that of balancing books and providing rudimentary analysis.

As a result, finance is not invited to the decision making table and asked for its contribution.

Keen to find out why business leaders didn’t see any value in engaging finance in the operational affairs, I asked deeper questions until we both agreed that his team was clogging business partners with too many performance reports, his organization lacked a clearly defined data management model, and finance personnel need to be empowered to collaborate with the business effectively.

Far Too Many Reports and Far Too Little Insights

As it turns out, it’s not only business leaders in my friend’s place of work who are constantly being weighed down by a mass of performance reports. There are plenty.

With the volume of both internal and external data increasing exponentially, the demand on finance teams to provide insightful, relevant and timely management information to support fact-based decision making isn’t going down either.

Because of this unrelenting demand for more information it is easy to succumb to the thinking that more is better, resulting in finance teams working round-the-clock to produce reports that neither meet the requests of stakeholders nor offer the business an informed, value-adding view of its performance.

The problem with having too many reports is that the business is forced to track and monitor far too many metrics which, in most cases, are in conflict with one another and offer far too little insight.

Additionally, the business lacks a clear line of sight to clearly analyse past and anticipated performance in order to make better decisions. In today’s exponentially growing data age, decision makers are looking for essential information to make more confident and effective decisions that focuses their attention on activities that truly matter, and provide a consistent view of performance across the business.

To avoid this common pitfall of repeatedly creating useless performance reports that no one dares to read, finance needs to regularly engage with business leaders and take time to clearly understand what information they actually need to achieve their strategic objectives and consequently drive value.

Delivering this information in an efficient and effective manner is key to finance generating business trust as well as empowering the business to proactively respond to emerging opportunities and threats.

Lack of a Robust Data Governance Framework

After seriously discussing the problem of too many performance reports, my friend further raised an important question. What if a business leader requests a specific report and we do not have all the necessary information to adequately support our findings? Before answering him, I fired a question back at him. How are you currently handling these requests?

To my complete surprise he responded, finance produces reports that we believe are correct and if we do not hear back from the business leader all is considered in order. At this point in time, I was quickly reminded of the expression Garbage In – Garbage Out. No matter how logical our thinking and analysis is, as long as the inputs are invalid the results will be incorrect.

The same applies to business performance reporting. In today’s data-driven and tech-enabled economy, optimized and appropriate use of data is central to helping the business make enhanced decisions, create competitive advantage and successfully execute its strategy.

Thus, data quality is imperative, requiring finance leaders to ensure that there is absolute trust in the information provided to the business.

From discussing with my friend, it became clear that a business requires the right data to support its integrated set of defined key performance indicators (KPIs) and to maintain the integrity of this data, it must be supported by a robust governance structure.

Today’s volatile and dynamic business environment means the organization’s strategic priorities are always changing, as well as its information needs. As a result, the reporting function also needs to keep pace with this constantly changing landscape.

Building a cohesive information and data governance framework ensures common KPIs linked to strategic and operational decision making are used consistently across the business.

KPIs, regardless of their focus are only as consistent as the underlying data, and poor data input will produce inconsistent measures, even if they are labelled as the same KPI. This is why getting the basic data structures and data feeds right is so fundamental in providing decision support that can be trusted.

Additionally, due to the fact that different functions of the business use data for multiple different information needs, a robust data governance framework leads to a single version of the truth via enforcement of consistent information standards, creates awareness of where the performance data is housed and how it can be accessed.

Since the main goal of performance reporting is to provide management with real-time information with proactive comparators, a constant review of the information requirements and data governance framework ensures that performance measures remain relevant.

What I also picked up from my friend is that despite significant growth in the potential use of external data to drive better decision making, many businesses remain predominantly reliant on internal data to drive key business performance decisions.

They are grappling to incorporate this type of data across different business processes, mainly because of the differences in the structure of internal and external data sets.

By incorporating external comparators in their decision making processes, management will be able to identify areas where the business needs to ramp up through investments, and often more prominently, where it is already ahead of the competition, but must continue to focus on to uphold or create a new advantage.

Without this crucial information at their disposal, it is impractical for finance teams to clearly understand the major drivers of their business performance, produce insightful analysis, partner with key decision makers and support strategic decision making.

Business Leaders Discounting Finance’s Capabilities

In order to become effective business partners and provide relevant decision support it is imperative for finance teams to get as much exposure as possible to business-wide decision making. Unfortunately, getting this exposure remains a distant dream for many capable finance teams.

Because business leaders see finance personnel only as gatekeepers and not strategic business advisors, there is little motivation on their part to empower finance to collaborate effectively with the business on a larger scale.

As we started discussing the promises and perils of Industry 4.0 with my friend, he was very much surprised with how far behind his organization is in terms of digital transformation and process automation.

My friend is not alone on this boat; many finance teams are still stuck with legacy financial systems, tools and processes; spending a significant portion of their time on low value-adding transactional activities such as arduous data extraction and manipulation or traditional month-end activities, and little time on positive analysis and decision support. This is detrimental to effective performance reporting.

Performance reporting will only succeed if finance teams are suitably equipped to deliver high-quality insights that support decision making empowered with deployment of reporting technologies.

Even if the business presents an opportunity to collaborate, time alone is not sufficient. There is also a need to create an environment that allows finance people to develop appropriate capabilities, some of which may not come innately to many technical finance people.

One way of fostering this environment involves running finance training programmes that focus heavily on softer skills such as leadership development, communication, change management and stakeholder management, as well as on-the-job training for traits such as commercial acumen, and less on the technical or transactional processes which are easy candidates for automation and do not constitute a large portion of finance’s everyday job.

As with any other form of investment, the organization must be able to reap rewards from the training programmes. It makes no economic sense to spend substantial amount of resources trying to boost finance function productivity and in turn get rewarded with mediocre results.

It is therefore critical that finance personnel sent out for training exhibit the right behaviours and have the confidence to work with the business to interpret reports and constructively challenge strategic decision making to drive more effective decision making.

This in turn will assist finance shed its image as a mere service provider, elude mundane tasks, enhance its reputation and become part of the decision making crème de la crème informing business decisions with deep insights and recommendations.

In addition to training programmes, the organization also needs to invest in appropriate enabling technology that help with data analysis and interpretation in real-time, providing the organization with the necessary speed and quality that it requires to stay ahead, as well as allowing finance to demonstrate their analytical skills and become more influential as business partners.

Addressing the above common pitfalls is key to streamlining an organization’s performance measurement and reporting processes, and ensuring that senior management regularly receive relevant, insightful and near real-time information necessary to improve strategic decision making and ultimately business performance.

What other common pitfalls have you experienced in delivering high-quality performance reporting?

Measuring What Matters Most

Almost every organization has some form of performance measurement system in place to measure, assess, evaluate and monitor short, medium and long-term enterprise performance.

Without reliable, relevant and informative performance measurement systems, organizations would find it difficult to determine their key drivers of success, measure these well, successfully execute their strategies and create sustainable value.

Today’s dynamic business environment requires organizations to identify, select and focus on those critical few measures capable of delivering strategic insights to management that aid improved decision making.

The starting point involves aligning strategy management processes with performance measurement and management. This is key to ensuring that the metrics selected link directly to the organization’s vision and mission. Measurement must reflect the performance goals of the organization as a whole. The selected measures must also be communicated properly across the organization to ensure buy-in.

Performance measurement involves utilization of various resources. By measuring what matters most and focusing on the critical few measures, wastage and value destruction will be avoided. If everyone is aligned to a set of integrated measures instead of focusing on disparate measurement silos, value will be created. It is therefore important that the organization’s business model and its performance measures remain aligned.

When the organization starts measuring that which matters most or in other words the key drivers of value creation, management will be better placed to make decisions that truly leverage its business model and strategy. For example, most of the value created in today’s organizations is driven by intangible assets.

Regardless of their positive impact on the company’s market value, many organizations are still not measuring intangibles. Focusing on measuring what matters most will help management divert attention from the generic measures and focus on emergent measures that are crucial to the value creation process.

Instead of measuring everything or what is easiest to measure, the organization will be committed to measuring only what is most critical. Relying too much on numbers often leads people to focus on what they can count instead of what counts.

However, it is important to remember that the use of more relevant, insightful and innovative measures does not come on its own. A cultural shift with regards to performance measurement is required. The organization must embrace new measures and new measurement systems.

At the same time, management must find ways of addressing resistance to change. Mimicking industry standard measures will not cut it through. This is because performance measurement is business-model specific. Measures that are regarded highly in one industry might not bring out the desired change in another industry.

Measuring what matters most should therefore be regarded as a learning process. Management must not expect their selected measures to be accurate from the word go. As the business evolves and grow, new measures will be identified through increased understanding of the major drivers of value creation.

Accuracy is achieved over time. What is important is that the measures selected are relevant. As long as the organization doesn’t lose sight of the goal, why it is measuring, progress will be achieved. The truth that the organization is seeking will be found, right actions will be taken and in turn positive change will happen.

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