Traditionally, businesses steered their progress by relying on regular reports. This is an inefficient process that takes time to prepare – think of the days spent by management preparing a quarterly report. And what they ended up with is information about the past quarter’s progress, not what’s happening right now.
We are entering the Age of the Customer. Businesses no longer can fall back on customer loyalty now that the Internet can deliver immediate information about lower costs or better service from other suppliers. To meet this challenge, businesses need real-time information about factors that could influence customer choices, and about the company’s readiness to respond to their decisions.
Compare today’s real-time business demands to driving a car: You have an objective to reach a certain place at a certain time, and you have views through the windshield, GPS screen, a rear view mirror, and a dashboard. The GPS that is telling you your estimated time of arrival is a key indicator, because it tells you how you are doing right now. But you can ignore the data coming in from the odometer, which tells you how many miles the car has already traveled (but that would become a key indicator if you were scheduling a service). If you see a traffic camera ahead, suddenly the data from the speedometer becomes key. If you see a sign saying “last fuel for 100 miles,” then the fuel gauge is suddenly key – while a flashing blue light in the rear-view mirror will change all of your priorities.
Such Key Performance Indicators (KPIs) are vital to help businesses, and especially CFOs, optimize performance. They provide insight into the here and now, and how it is directing what is to come – unlike a report on how you did in the past. As the example shows, these KPIs have a dynamic relationship – data from one set of performance indicators can suddenly draw attention to the key role of another indicator – so we need to access them in real time, not in a historical report.
The problem is that most CFOs still don’t measure KPIs, or are not sure whether they are looking at the right KPIs. Such uncertainty has a negative impact on business decisions.
What Makes a Performance Indicator a KPI?
How do you decide which performance indicators are truly key? Here are three principles to consider:
- A KPI must relate to business strategy. As a rule of thumb, limit your strategic goals to about five or six really important ones to allow a clear understanding without too many options. Then the data should correlate with that strategy. If your business strategy includes increasing the company’s value, then you may tie “revenue growth” into a KPI.
- KPIs must be measurable. A KPI must give a clear measure of business performance. Qualitative measures are too subjective. So ask this: could everyone in the organization read this KPI and see the same results without any interpretive error?
- KPIs must be actionable. A good KPI will have a clear threshold or target: Anyone who looks at it should see whether the company is below, on target, or above the goal. If the performance indicator is truly key, a poor result will trigger remedial action.
Once you know what to look for in a KPI, you can then start determining which KPIs to monitor. Here are six guidelines:
- Keep it simple. Tying KPIs directly to your business strategy means that a few solid, focused strategic goals will encourage a few solid, focused KPIs. The actual number will vary according to your business, but four to 10 KPIs is a good range.
- Be unique. Do not make the mistake of Googling “commonly used KPIs” and using them all. KPIs must be based on your business’ strategy and realistic performance. If you start with commonly used KPIs, choose only the relevant ones.
- Don’t settle. If your KPI doesn’t meet the above three criteria (tied to business strategy, measurable, and actionable), keep looking. There must not be any confusion about what the KPI is, where the data come from, and what is a good or bad result.
- Focus on business units. Generally, you should monitor separate business units with disparate functions, like retail versus services.
- Avoid limitations. If there have to be assumptions or limitations in the KPI data, make sure this is explained alongside the KPI.
- Integrate. KPIs bring together data from all parts of your business. You may need to integrate information from critical business systems, like ERP and CRM, and even custom systems too.
Reports play an important role. You need them to protect vital assets, ensure compliance, and close the books accurately – they help you run the business smoothly. But reports look backward, at data about what happened yesterday, or last month. And because reports don’t show your goals or how you are currently performing, they don’t provide insights or foresights to help a business decision or deliver pertinent, actionable information to other departments.
When it comes to measuring performance, you need to move beyond reports and adopt a KPI strategy based on real-time data to make decisions and understand what’s going on with faster, vivid clarity. KPIs are the means to make the transition from running smoothly, to running fast.
Shifting Gear to KPIs
Every company, team, and market will require a unique set of KPIs. To identify them, you should begin by interviewing the people who have been asking for reports to determine what they are really looking for. The challenge is to get them to articulate their real needs. These five questions can help:
What is the first thing you look at? Sit down with users and a copy of a common report and ask them to circle the most important data in the report. Nine times out of 10, they go to the bottom and highlight a grand total. Ask this question several times – there are often multiple performance indicators on a single report.
Why do you look at that? What are the business drivers that make this data key? Expect a response like, “If this number is high, it means…” or “If this number is low, I need to…” There always should be a business reason.
How do you know if that result was good or bad? This person has a sense that the data is good or bad. Your job is to quantify that for other users. If being good means comparing well with other data that are not in this report, you know that the useful KPI must combine information from multiple sources.
What will you do if it is bad (or good)? Look for items that are actionable. If a bad result means going to the department head to suggest changing the processes, this item could be a KPI.
When do you monitor this? If the KPI is difficult to calculate or requires a lot of data from different sources, it might not be monitored as often as a more straightforward KPI. For example, if you could monitor revenue every day instead of every month, you could put a process in place or try to change the behaviour to adjust the current trajectory.
The KPIs for every type of business and every team will be different, so I can only suggest some examples. If you have been running your business only on past financial performance, you might be surprised to find that your team is far more responsive to data from social media, such as the number of positive tweets on your services. If your business is selling umbrellas, then the long range weather forecast could be more important than last year’s sales to decision making.
As business pressures evolve, you need to re-assess outdated, inefficient processes, like financial reporting, that once dominated decision making. According to Bernard Marr: “Key performance indicators (KPIs) should be the vital navigation instruments used by managers to understand whether their business is on a successful voyage, or whether it is veering off the prosperous path.”
Every company holds a host of data that once seemed too diffuse, un-quantifiable, or hard to pin down. Experienced managers gain an instinctive sense for the measures they really need and what a good and a bad result looks like. The trick is to find some way to get that experience out of their gut instincts and into a well-crafted KPI strategy.
Paul Yarwood is the CEO of the Hubble® brand, a part of InsightsSoftware.com, a provider of business performance solutions, offering real-time reporting, analytics, and planning in a single solution for ERP. With more than 20 years of business experience in high technology, Yarwood has considerable experience running high performing companies in both Enterprise Resource Planning (ERP) and Enterprise Performance Management (EPM), having business leadership experience both in the United States and Europe. Yarwood began his career working at IBM’s prestigious International Education Center in La Hulpe, Belgium. Yarwood later joined US-based InsightSoftware.com in 2006. Yarwood is a graduate of the University of Salford in Manchester, England, with a BSc (Hons) in Information Technology.
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