Is Your Enterprise Platform Still Aligned With Your Strategy?

To ensure that business functions are performing in alignment with strategy, organizations rely upon key performance indicators (KPIs) to provide timely assessments of potential problems and opportunities. Without such clarity, CEO decision-making is compromised.

Managing performance with spreadsheet-based KPIs was the way to go for a couple of decades. Now that business is global, extensive supply chains feeding manufacturing and commerce are conducted on tablets and smartphones, and KPIs must be delivered to business owners faster and more accurately. These metrics must be as dynamic as business itself, altering and evolving to adjust to new opportunities and competitive threats. Otherwise, CEO decisions will be based on outdated, inferior and possibly inaccurate performance data.

It’s a small wonder that only 54 percent of CEOs in the 2014 CEO Global Survey by consultancy PwC are satisfied with their ability to execute on their strategic visions, impeded in steering the business forward by what PwC calls “alignment gaps,” the misalliance of plans, forecasts, performance data and strategy.
<div style=”float: right; width: 240px; margin-left: 15px; padding-left: 10px; border-left: 3px solid #eb9522;”>

<span class=”pullquoteRP”>“KPIs must be as dynamic as business itself, altering and evolving to adjust to new opportunities and competitive threats.”</span>

</div>
Without real-time business intelligence, CEOs risk making foolish decisions. One problem is the vast number of key performance indicators in many organizations. A consultant quoted in this article cites a client company that tallied more than 400 KPIs. Making credible sense of so many performance signals to confidently allocate corporate resources is simply asking too much of business leaders. And it’s daunting to business managers to prioritize the vast volume of KPIs to know which metric is more important than other metrics—the “marketshare” KPI or the “profitability” one.

Another snag is that KPIs often are written in stone and not regularly reassessed and refreshed to address new initiatives or new threats, thereby ensuring the business is on track with strategic objectives. Sticking to the same game plan when a competitor has just unleashed a disruptive technology is no way to respond quickly to the resulting market upheaval. The solution to these challenges is, in large part, technological. Modern, cloud-based enterprise performance management (EPM) systems offer the means to gather wide-ranging data to compile up-to-the-minute KPIs. These metrics inform on which tactics are working and which are not, rolling up in real time to a small set of KPIs that assist senior business decision-makers to craft informed and fast course corrections, if needed.

“The CEO’s job isn’t to peruse all the organization’s KPIs, just the most important ones relevant to strategy,” says Scott Brennan, managing director of the enterprise performance management (EPM) practice at Accenture. “For example, someone needs to be looking at working capital KPIs like ‘days sales outstanding’ and ‘days inventory outstanding.’ But those KPIs then need to cascade upward and be tied to the company’s strategy.”
<!–nextpage–>
A handful of vendors of EPM solutions have designed their software to provide this cascading effect. “KPIs need to be cross-functional with each department assigned a particular KPI or set of KPIs that then roll up into a corporate scorecard, so the CEO can get a complete perspective of the most important activities across the business,” says Paul Turner, senior director of product marketing and strategy at Adaptive Insights, a leader in the cloud-based EPM market. Such a cascade of KPIs is in place at Merchant Cash and Capital.

“I have a master dashboard that pushes to me each day the consolidated KPIs drawn from each business owner or unit operator responsible for managing their respective KPIs,” says Stephen J. Sheinbaum, founder, president and CEO of the NewYork-based alternative financing company, which has loaned more than $600 million to merchants since its founding in 2005, purchasing future revenues from the companies at a discounted rate.
<div style=”float: right; width: 240px; margin-left: 15px; padding-left: 10px; border-left: 3px solid #eb9522;”>

<span class=”pullquoteRP”>“There are an enormous number of KPIs companies can leverage to measure performance—so many that business leaders are compromised in understanding where the business is today, much less where it is going.”</span>

</div>
“I can drill down into the consolidated KPIs to get more granular detail, if needed. But, the important stuff for me to ensure our performance is aligned with strategy is in place.”

<strong>Information Overload</strong>
Before enterprise performance management technology even enters the picture, a company needs to define the KPIs that best tell its tale from a strategic standpoint. Consultants advise starting with buckets like financial performance, customer satisfaction, operational performance, marketing effectiveness and employee performance. Then, they can devise a set of pertinent KPIs within each of these buckets. MerchantCash and Capital follows this approach, parsing its KPIs across four buckets—sales, customer retention, underwriting performance and financial performance. Within each category are specific metrics used to gauge performance. In the sales bucket, for instance, are “cost per acquisition” and “revenue per acquisition.”

As mentioned, there are an enormous number of KPIs companies can leverage to measure performance—so many knobs and gauges that business leaders are compromised in understanding where the business is today, much less where it is going. Such was the case at Retale, a Chicago-based shopping provider platform that aggregates and publishes daily and weekly retail deals and discounts from local area businesses from its six offices on four continents.
<!–nextpage–>
“In the beginning, we were tracking way too much data, had too many KPIs,” says Christian Gaiser, Retale founder and CEO. “This led to information overload. We decided to narrow that down.” Among the company’s most important current KPIs are “sales bookings,” “active mobile users,” “usage patterns” and “content engagement.”

This winnowing process depends on the type of business a company is in, its strategic goals and the various tactics pursued to achieve these objectives. In the “financial performance” bucket, a company may want to measure net profit, gross profit margin, economic value added, return on assets and the cash-conversion cycle. To gauge the success of “marketing efforts,” KPIs like conversion rate, cost per lead, market share and website page views may provide the answers. To ascertain “employee performance,” revenue per employee, average employee tenure and employee engagement scores may provide the insight.
<div style=”float: right; width: 240px; margin-left: 15px; padding-left: 10px; border-left: 3px solid #eb9522;”>

<span class=”pullquoteRP”>“KPIs must be as dynamic as business itself, altering and evolving to adjust to new opportunities and competitive threats.”</span>

</div>
Brennan says roughly 50 KPIs are a good sum to feed no more than a dozen KPIs on the CEO’s dashboard. The challenge is determining which KPIs are right for the organization. Turner advises that companies steer clear of metrics that are not forward-looking—information guiding the company into the future. “KPIs must be proactive, tracking where the company is going, not where it has been,” he says. “Tracking historical sales doesn’t tell you much more than how you did last quarter or last year. Measuring ‘days sales outstanding’ today and then comparing it to your DSO forecast for the quarter is information you can act upon.”

Karen O’Leonard, vice president of benchmarking and analytics research at consulting firm Bersin by Deloitte, shares this view. “The bottom line is to ensure [that] the KPIs track the criticality of where your organization is this moment and where it needs to be,” she says.

To select among the hundreds of KPIs to garner such actionable information, Accenture encourages the use of scenario-based exercises. “You create a scenario in which you examine, for example, a competitive threat like the impact of a disruptive technology introduced by a competitor,” Brennan says. “If the impact is thought to be substantial, you might elevate ‘time-to-market’ as a key KPI—how long it takes to get a product off the drawing board and into the marketplace. You then watch this KPI closely.”
<!–nextpage–>
Robert Mittelstaedt, dean emeritus of the W.P. Carey Schoolof Business at Arizona State University, agrees that the purpose of KPIs is to “have managers keep their eyes on specific things to identify early warning signs of trouble—areas you might need to look at in more detail,” he says. “To do that, you have to decide what are the most important things to watch for in the first place. These are the KPIs that will deliver truly strategic benefits to the business.” Other management experts agree. “The organization’s focus, capital and talent need to be pointed toward the critical elements that matter,” says Casey Kirkpatrick, principal partner (strategy) at PwC.

He warns that selecting KPIs without carefully understanding the related business priorities can result in a misalignment between the overall business strategy and management behavior.
<div style=”float: right; width: 240px; margin-left: 15px; padding-left: 10px; border-left: 3px solid #eb9522;”>

<span class=”pullquoteRP”>“The purpose of KPIs is to have managers keep their eyes on specific things to identify early warning signs of trouble. To do that, you have to decide what are the most important things to watch for in the first place. ”</span>

</div>
At Merchant Cash and Capital, “customer retention” is a KPI bucket, in which metrics include measuring the data on customers that have not received funds in 10 days, five days, three days and two days. At Retale, key buckets, such as “sales bookings” and “usage patterns” are informed by metrics like “booking amount per client” and “volume of active mobile users,” respectively.

Just as companies parse KPIs into different buckets, the KPIs themselves can be fragmented into insightful silos of information, says Leonard. “Many businesses use ‘employee turnover rates’ as a key metric, but we suggest you break down this KPI into more meaningful components like the turnover rates for critical roles—the high performers [who], were you to lose them, would cause significant business and financial damage,” she explains.

Sheinbaum has pursued this fragmenting approach to great success. “We used to have a single metric describing our media spend against our sales, which was instructive to a point,” he says. “We then broke this down into ‘number of deals per spend.’ Then, we went further, developing metrics for number of deals per digital marketing spend, per direct mail spend and per call center spend. We’ve recently broken it down even more, measuring, for instance, the number of deals per call center spend using a particular script and the number of deals per digital marketing spend using a particular type of art work.”

Kirkpatrick concurs: “A KPI needs to bridge the gap between the strategic intent and operational execution.”
<!–nextpage–>
<strong>Fast Forward</strong>
Since the world of business is not static, occasionally, KPIs must be refreshed to address external market events like a major merger in the industry vertical, as well as internal events like a leadership change. “We’ve found that KPIs are not a once and-done affair, but [are useful as part of ] an evolutionary process,” says Sheinbaum. “As you gain further insight into your business, you will find different trigger points that alert you to what is happening performance-wise. You then turn those trigger points into KPIs.” Sheinbaum’s dashboard rolls up all the company’s KPIs into a set of metrics relevant to his needs as CEO. If he has a question about a metric, for example, “media spend against sales,” he can double click on the KPI to dig into the data informing it for a more complete narrative.

Mittelstaedt says EPM systems offering these drill-down capabilities have become a decision making necessity. “The science of how performance data is displayed is crucial to being able to understand and act on the information presented,” he explains.

Many EPM dashboards present KPIs with red, yellow and green lights, directing viewer attention to urgent matters. If a CEO sees a red light illuminating the “employee turnover” KPI, he or she can double click into the reasons why this is so, right down to the manager in HR who noted the loss of a key software engineer in her region. “You want to make it incredibly easy for everyone to see their KPIs, ideally personalized to their specific responsibilities and updated constantly,” says Turner. “The whole goal here is to make quick, informed decisions when vital performance information rears [up]. If the DSO (Days Sales Outstanding) metric indicates sales are down this week in a particular geography, you can discount the price on products in that area to sell more.” Leonard shares this view. “You want a system that provides accurate, timely business intelligence that tells you where you need to be investing your capital in [the] future,” she says. “Focusing on the red flags is important. More important is having a plan in place to act upon [them].”

<hr />

<strong>Key Takeaways</strong>
<ul>
<li>Identify the handful of core performance indicators vital to CEO decision-making</li>
<li>Determine the various metrics that provide insight into each of these performance indicators</li>
<li>Assign ownership of each metric to an individual who is responsible for its timeliness, accuracy and continuing usefulness</li>
<li>Invest in a cloud-based Enterprise Performance Management system that offers cascading, drill-down capabilities and visually arresting graphics</li>
<li>Refresh this EPM system constantly with new key performance indicators.</li>
</ul>