Delivering Key Performance Indicators
2003 is predicted to be the year that many organizations will invest in executive information systems (EIS). Key performance indicators (KPIs) are the primary elixir for reinvigorating EIS. Indeed, EIS will be reincarnated with many other names. In fact, many vendors are shrink-wrapping KPIs as part of their business performance management (BPM), corporate performance management (CPM) or enterprise performance management (EPM) solutions. This alphabet soup of naming conventions for the same old solution is supposed to kick start a binge of spending on analytics’ tools and packages from software vendors. Why should business leaders buy something now that they did not buy before?
On the first pass at EIS, no one knew what to present to executives. Executives were not inclined to use the technology to define, communicate and execute business strategy. They preferred packages of paper reports presented by finance with the financial analysts’ conclusions as footnotes. EIS was introduced as a tool to a group of business leaders that were not IT savvy. Why should we expect them to use something now that they did not use before?
Given the challenges to successfully deliver an EIS, we will explore the value of KPIs, the way the target audience thinks and how to find just the facts they need to know. KPI is not a technical term for business analyst and systems analyst to banter about as they gather requirements. A KPI is a business calculation that allows macro-level insights into the business process to manage profitability. While there are any number of performance measures that can be derived at both the macro and micro level, we should assume that if it is key to the business, it is a macro-level measure. Business leaders want to know if they need to make changes today to improve tomorrow’s outcome.
Measuring business performance is not new nor is it a new idea for management to develop targets or budgets based on the expected outcome of the business’ performance. Business leaders have traditionally looked to finance to track the performance of the business in relation to its targets. For example, a key unit of measure is the profit. During a financial year, there are frequent periodic checks on the profit of the business as a variance to plan. Leaders have found essential value in being able to assess the business’ performance in time to make the necessary adjustments before the end of a financial period.
A clear challenge for businesses is identifying operational performance information that is key to their business. In order to create value, clear and understandable financial elements must be a part of any key business process measure. Toward that end, management of business activity expense can be achieved by businesses with cost accounting tactics to increase profitability. The complex business assumption of cost-based metrics for direct and indirect costs requires advanced yet flexible solutions. Organizational culture, especially finance and accounting, must be transformed in order to create value through automated KPIs with drill-down capabilities to transactional data.
Creating value with non-financial metrics is difficult. The value of financial performance indicators is that they ensure that internal behaviors support the achievement of measurable goals. For example, a fortune 1000 organization with an existing supplier scorecard started to measure warranty expenses as a measure of supplier performance. Warranty expenses declined as purchasing changed suppliers in order to improve the bottom-line performance. In fact, the colloquialism of the bottom line is one of the most widely known key performance indicators as it is the most important measure of business success. The focus on both revenue and profit metrics engenders the creation of strategies and tactics that will move the numbers.
Executives responsible for business strategy are the target audience and yet are not the primary users of information systems. In fact, intuition is the basis of some of their most strategic decisions. Research shows that higher levels of an organization use intuition as their primary decision-making approach. Alternatively, those at the lower levels of an organization use logic for certainty as their primary decision-making approach. The use of intuition is an invaluable skill for executives to make timely decisions and should be complimented by information systems. After all, many executives track their personal financial interests with Web-based tools and make intuitive investment decisions.
Often navigating a changing environment leaves business people with inappropriate information. However, existing KPIs can be used as signals to form the basis of perceptions. The combination of information and intuition often leads to the best decisions. In order to serve the intuition of executives, develop logical KPIs wherever data exists. Executives will then be capable of balancing logic and intuition in making decisions. KPIs, which are high-level facts and figures, will serve the nature of intuitive thinkers when little knowledge exists.
In order to find the facts that business leaders need to know, IT needs to start by partnering with finance. Finance leaders are already working with other business leaders using manual techniques to monitor and predict results and drive appropriate actions for improvement. Business targets are typically financial budgetary metrics with a few additional best practice operational metrics. In many organizations, finance summarizes all of the financials and key metrics before taking them forward to the next level of business leaders or external stakeholders.
Finance leaders are the ultimate authority for the measures that are reported to executives and investors. Business process owners are responsible for elements of the business that have operational performance metrics and financial metrics that are consolidated and rolled up for financial reporting. While financial adjustments are made based on non- operational data, each KPI should be reconcilable to a financial measure. Thus finance is the arbitrator of the facts.
Ideally each KPI should be automated to ensure its completeness and accuracy through an information supply chain that ends with an easy-to-use system (see Figure 1). Many businesses are revising performance expectations on a dynamic periodic basis due to monthly economic changes. This is a change from the annual or quarterly performance management approaches of the past. As a result of this business process change, there is a need for solutions that can roll in new targets and actuals more frequently.
Figure 1: An Information Supply Chain
Business leaders expect the KPIs to be reliable and verifiable, thus, it is advisable to automate the KPIs with financial controls. In order to ensure the quality of the information supply chain, work with finance to create an audit trail. Information that is not based on an online source system should be avoided as it creates breaks in automating the supply chain. As information flows through the supply chain, it serves as an input into analytical systems, aggregations and algorithms.
An information supply chain is the optimal way to derive the facts that are the inputs of a given KPI. The beginning of the information supply chain is a transaction processing system. At the end of the information supply chain is a decision- maker searching for a lever to improve business performance. With all of the information available today, it is difficult to avoid creating noise. In order to manage the clutter of information, use a data warehouse architecture to limit metrics to just the facts that your business leaders have defined.
Manual spreadsheet based activities are a staple of fortune 1000 accounting and finance leaders. An automated performance management system should provide drill down into the KPI based on an audit trail. Each KPI should be clearly defined so that the inputs can be used as performance metric as well. To support further drill downs, operational performance metrics need to be linked with relevant financial metrics. Drilling down on a KPI should be a reverse logistics’ flow along the information supply chain that supplied the metric.
Executives will now use information technology since it is so pervasive in other aspects of their lives. Business leaders are now ready to buy EIS, by any other name, in order to be a competitive digital business. Executives got it straight from the gut that automated measurement systems enable finance to contribute as a business partner, enable operations to increase productivity and enable executives to drive future profitability. Each point along the information supply chain will have a business consumer capable of analyzing and acting upon their performance measure. By maintaining a logical information supply chain, business leaders will be able to monitor the performance of each business process and adapt the execution of business initiatives.
Hubert Goodman Jr. is the director of Business Intelligence for a Fortune
1000 company. Goodman has worked in the data warehousing since 1998. You can
contact him at (812) 525-9539 or