Key Performance Indicators

The second session of the Sunrise Sip Club, sponsored by Expandable Software and Mirador Software Group, convened on June 20th, 2024, focusing on Key Performance Indicators (KPI’s).

Why do we Measure?

This is the fundamental question – why do we create and monitor KPI’s? There are several answers to this question – 

• Businesses have Fiduciary responsibilities and Legal requirements to fulfill
• Business leaders and investors want/need to understand the state of the business
• At the highest level, Business Leaders want to know Are we winning or losing/Are we making money?

Measurements drive behavior, and things that get measured get better. We’ve all been indoctrinated by this in years of school – if we’re getting graded (measured) and we care about the outcome, we tend to  perform better (or at least work harder).

Balanced Scorecards

Balanced Scorecards were first introduced by Kaplan and Norton in 1992 in The Harvard Business Review. The Balanced Scorecard is a framework that claims to incorporate all quantitative and abstract measures of true importance to the enterprise. 

The earliest Balanced Scorecards were comprised of simple tables broken into four sections – typically these “perspectives” were labeled “Financial”, “Customer”, “Internal Business Processes”, and “Learning & Growth”. Designing the Balanced Scorecard required selecting five or six good measures for each perspective. This is an interesting concept, but can anyone really internalize (or even remember) 20+ metrics? Businesses can be incredibly complex and hard to completely understand, but at the same time, Employees need to be able to focus on a few, critical measurements. And are “Financial”, “Customer”, “Internal Business Processes”, and “Learning & Growth” the right categories for every business at every stage in the business life cycle, from Start-Up to multi-million-dollar business?

As it turns out,  most Balanced Scorecards AREN’T.  Industry survey data tells us 

• 50% of companies surveyed use some sort of balanced  scorecard that compiles and tracks both operational and financial measures ¹  
• But 75% of performance measures are financial in nature, and 
• Companies without balanced scorecards rely on 82% financial measures¹ Why? Because we know how to compute them and what they mean.   

Key Points on KPI’s

First, and foremost, KPI’s tell you status, not what to do. Your training, experience, interpretation and insight must drive your actions. Think about a Doctor; he takes your body’s vital signs – pulse, blood pressure, weight, etc. – but his course of treatment is driven by his interpretation of those indicators.

Second, it’s important to stay focused with your KPI’s. Some basic rules of thumb: 

• Only 4 KPI’s per function. FOCUS: Executives (and Employees) have a hard time remembering more than 5, and four graphs are easily presented on one page
• Why 4 graphs per page? The “Old Brain” is Visual ²: Many Executives think in graphs rather than numbers. Know your audience. 
• Which indicators and Why? Select a combination of Financial and Operational indicators, leading and lagging indicators that are important to your understanding of your business, and KEEP IT SIMPLE – items we know how to measure and that people understand. You may have the perfect metric, but if no one understands it or its relevance, it’s useless.

Key Performance Drivers 

In the last 15 years there has been more and more discussion around Key Performance Drivers (or KPD Metrics) — an important concept for improving operational performance and hence business results. A KPD is a measure that directly affects a business outcome or achievement of a KPI.³ Think about your car – the speedometer tells you how fast you are going (KPI) but the pressure on the accelerator or brake determines your speed (KPD). Tracking the KPD may be more beneficial (and predictive) than the KPI.

KPD Metrics can be

• A leading indicator or early warning that a situation exists that if not addressed will lead to a poor result
• A performance metric that is associated with a preceding step in a value stream or business process
• A metric that contributes directly to a KPI and may be a component in the way a KPI is calculated

KPD metrics must be actionable to positively impact business outcomes, and 

• Measured against a goal or best practice
• Monitored frequently so issues can be identified and corrected quickly
• Assigned to an Owner that is RESPONSIBLE FOR RESULTS and has the AUTHORITY TO TAKE ACTION

Best Practices 

• Top performing companies are able to strike a balance between external and internal information, non-financial and financial measures, and leading and lagging indicators⁴ 
• With a balanced scorecard that focuses largely on historical results, companies are certainly missing current or potential problems and opportunities that could be brought to light by also including more internal and external operating measures ⁴, aka “Driving Looking Into The Rear View Mirror”    
• Leading edge companies are realizing that information that is predictive of what will happen to your business is far more important than information that is reportive of what happened ⁴    
• The focus here must be on delivering the right information at the right time, not just more information all the time⁴        

Lessons Learned

• Keep it Simple: If it’s there, it’s there. If no one understands your metric, how does it help?
• If it’s not easy to measure, is it the metric you want? Can you benchmark your metric?
• Stay Focused: No more than 5 per function – Executives and Employees have a hard time  remembering more than 5 things
• Measure Consistently: Items that can be measured consistently across organizations (i.e., percentages vs. target) can be better/more effective than absolute measurements.
• Visual is Better: People tend to relate to graphs better than pages of numbers. Trended data provides context – which way is the metric moving (and why)?
• Computers don’t think; people can. Don’t eliminate thinking from your decision making process⁴ 

Some companies are going back to the old-fashioned approach, with  analysts supporting senior management, selectively adding to information that precious commodity called insight ⁴

Dashboards – Make or Buy?

Many ERP Platforms now come with embedded Dashboard capabilities. Should you use them?

• They are Automatically integrated with the Core ERP BUT: Is it Data overload? Too much data, not enough information?
• Integration provides automatic dynamic updates BUT: Is it too much Dynamic Interface? Is it too confusing for Executives?
• Many Standard Metrics are readily available BUT: Are they relevant to your Business? Do they confuse the issues?

Executive Information Systems (EIS): The Next Generation

What are the challenges going forward?

• Dynamic Reporting, not passive SOLVED
• Systematic Combinations of Current and Future transactions SOLVED 
• User Configurable: Individual configurations and/or menu selection versus multiple Dashboards SOLVED
• Predictive Measures: This may be the biggest challenge. Will AI help or hurt this?
• Source transaction integrity is a continuous challenge

¹ Hackett Benchmarking|Solutions AnswerThink Consulting Group Inc. 2000

² “Selling to the Old Brain” Patrick Renvoise and Christophe Morin

³ © myDIALS Inc. 2009

⁴ “Collecting More Data But Gaining Less Insight”   David A.J. Axson

Jeff Osorio is a Consulting CFO with over 30 years of experience in operationally oriented  companies ranging from pre-Revenue to $4B with 40 ERP implementations in his portfolio.