This article originally appeared on October 1st, 2012 in Business Finance.
Market-Proof Your KPIs
Leading organizations rely on key performance indicators (KPIs) to inform their most critical decisions and gain competitive advantage. In response to changing business conditions, organizations often become distracted and lose focus on KPIs that are central to their businesses. To achieve peak performance, executives must rethink how to use KPIs to drive crucial insights — no matter what the market demands.
Consider the example of the CFO of a leading consumer products company who is under pressure to provide actionable performance metrics to her leadership team. She receives a monthly 60-page PowerPoint three weeks after the close that consists primarily of budget to actuals variance analysis. Moreover, if the CFO requires additional information, she must contact each specific department owner for insights. She is concerned about the time sensitivity of the data needed to support her decisions, and feels her finance team is spending too much time collecting data that does not drive decision making.
This story is a familiar one — especially during times of change. Organizations begin with the best of intentions by creating new performance metrics to measure and assess impact. However, unintended complications almost always arise: data collection consumes the reporting process, leaving little time for forward-looking analysis; reports are created to meet the needs of the moment and persist despite few internal consumers; KPIs become buried among the host of “key” performance indicators and bevy of reports; and personnel at all levels struggle to interpret how performance measures relate to their business functions and, more important, to the company’s bottom line.
To market-proof KPIs, executives must consider three strategies revolving around process, technology, and people.
1. Focus on the Few
Base KPIs on the company’s core business and strategy, and eliminate the rest. By boiling down KPIs to a core set of performance metrics, organizations eliminate noise and enhance focus.
Reduce the number of metrics. Organizations must periodically assess and refresh KPIs. During any strategic change, KPIs must be reviewed and those that no longer tie to the core business strategy should be shed. Simply put, more performance metrics do not necessarily lead to more — or better — insights. Too many KPIs can cloud leadership’s view of what is most important to the business.
Align with company strategy. KPIs should focus on the core of the business and overall business strategy, as well as what propels the value of the business long term. Core strategic long-term drivers that deliver value are typically related to: enhancing product or service quality, developing new products or services, managing strategic customers, and creating repeatable revenue models. Review the organization’s strategic plan and identify key business drivers, then design and select KPIs that measure these business drivers. Any measures that are not tightly linked with a company’s strategy should not be considered “key” metrics.
Leverage leading and lagging indicators. Take inventory of KPIs and assess effective use of both leading (forward-looking) and lagging (backward-looking) indicators. To glean valuable insights from KPIs, executives must understand likely future outcomes and measure and assess performance to date. For example, a company may use a leading KPI such as “on-time product delivery” as a measure of client satisfaction to help predict likelihood of product return. Conversely, a company may use a lagging KPI such as “product returns” to assess client satisfaction.
2. Align Processes and Systems
Once metrics are linked to company strategy, align data collection processes to associated technology. Integrating processes and technology with strategy promotes transparency across the organization and enables executives to focus on core business drivers.
Align process first, then technology. To facilitate timely and accurate KPI reporting, organizations must align technology and reporting processes with KPIs. Leading organizations first define the reporting processes and then focus on technical solutions to support the processes. Companies that build KPI reporting around technology rather than processes are at risk of process breakdowns, which lead to data integrity concerns and delayed reporting.
Manage data. Data management is often an overlooked aspect of KPI reporting. Without quality real-time data, KPIs can mislead. To realize the full potential of KPIs, data underlying the metrics must meet established governance and quality standards and exist within a well-structured data architecture and integration framework. Establishing a standardized, enterprise-wide data management approach will enable management to compare and contrast KPIs across businesses and geographies.
3. Instill a Culture that Matters
Processes and technology enable performance management. However, organizations must engage their most valuable assets: people. Link compensation and performance recognition to KPIs across all levels of the organization when possible. It is Economics 101: Align incentives to the behaviors the business is trying to achieve.
Communicate. Clearly articulate which KPIs the business will be measured against. Periodically communicate the KPIs to employees and explain how the metrics are calculated, describe why each one matters, and stress the importance of the KPI data management and reporting process. When KPIs change, take time to communicate the new list to employees and indicate why change is necessary.
Challenge conventional wisdom. What the organization did yesterday may not be important today. Think creatively and continually seek ways to do things differently. Do not fall into the trap of continuing to use drivers out of tradition or habit. Executives must avoid latching on to KPIs solely because they are familiar or routine.
Reward success and create accountability. Hold business line and regional executives accountable for KPI performance and data management. Align incentives and reward performers who deliver results. When reviewing and updating KPIs across the organization, involve business owners in the process to further refine measures and appropriately set expectations.
In the case of the CFO, she was able to improve her organization’s decision-making capabilities in three steps:
1. The CFO challenged her finance team to justify the specific metrics being reported in the monthly management reporting package. Those that did not easily tie to key revenue or expense drivers were eliminated. She also determined that a large quantity of analysis was being performed on low-dollar cost and revenue drivers. The CFO was able to immediately reduce the volume of metrics by 75% through this effort.
2. Once the reporting metrics were rationalized, the CFO empowered her leadership team to revisit the existing finance processes and supporting technology environment to determine if changes were required to improve the speed and accuracy of reporting. The team found that a number of key performance drivers were being collected at the transaction level, but there was no system in place to easily consolidate these drivers into the appropriate management layers. A new consolidation and reporting tool was implemented to automate the collection and reporting process. The CFO was then able to view key performance drivers in real time.
3. Finally, the CFO worked with her leadership team to align employee performance incentives with key business drivers. The existing incentives were geared toward budget management. Those who could consistently keep costs within the budget and accurately forecast those costs were rewarded. The CFO decided to minimize those types of incentives and instead increase incentives that were tied to collective revenue, cost, and overall profitability targets. Once the new compensation program was implemented, the CFO found that the organization was operating in a more collaborative manner, as managers were making decisions based on overall company profitability versus individual department budget targets.
With each passing day, organizations rely more heavily on data and performance indicators to drive critical insights, shape decisions, and gain competitive advantage. And rightly so. Evidence continues to mount that data-driven organizations outperform their peers. Executives who market-proof their KPIs position themselves to lead their organizations through complex change and achieve peak performance in the marketplace.
MorganFranklin senior consultants Chris DeSimone and Lindsay Scholtz contributed to this article.
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MorganFranklin Consulting (www.morganfranklin.com) is a global management and technology consulting firm that works with leading businesses and government. The firm helps organizations solve their most pressing challenges and address critical finance, technology, and business objectives. MorganFranklin is headquartered in the Washington D.C. area with regional offices in Atlanta and San Francisco, and supports clients across the globe.
MorganFranklin Consulting is the brand name referring to the global organization of MorganFranklin, Inc. and its subsidiary MorganFranklin Consulting, LLC.