Founder and Managing Principal of DBP Institute. I consult companies on how to transform technology and data into a valuable business asset.
Delivering successful data analytics solutions that have a strong business impact is dependent on numerous factors such as culture, literacy, governance, technology, quality data, leadership and more. However, one key component that acts as a lynchpin in data analytics — i.e., the pivotal element that is the coherent source of support and stability is the key performance indicator (KPI). What is a KPI? Why does it hold such a significant position in data analytics? Finally, what can organizations do to design and build a robust KPI framework and deliver improved business performance from data analytics?
First things first. What is a KPI? A KPI is a quantifiable measure used to evaluate the success of a measurement entity in meeting its performance objectives. The entity could be the entire enterprise, a business function such as procurement or finance, a line of business (LoB), a product category, a team and so on. A KPI is a way of measuring the leading (predictive and prescriptive analytics) and lagging (descriptive analytics) effectiveness of the measurement entity and its progress toward achieving its goals.
Basically, KPIs are a reflection of a company’s strategic objectives in driving business results. If a business is using KPIs to measure its performance, those KPIs typically drive business behavior, results and the organization’s culture.
Why do KPIs hold such a significant position in data analytics? What is the business impact of KPIs? In other words, strong performance management rests on the fundamental principle that “what gets measured gets done.” The business value of data analytics is to offer visibility through the KPIs to measure and manage business performance.
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By mapping business goals to the questions and to the KPIs, organizations can derive an accurate and holistic picture of the business performance. Basically, a well-designed KPI framework holds the key to providing the right feedback and track business performance. Aberdeen Group examined the use of KPIs in more than 350 enterprises and found that the best-in-class companies derive performance improvements, including a 10% increase in the time-to-decision making, a 9% increase in both profitability and revenue growth and customer performance improvements of 9% in both net-new customers gained and customer satisfaction.
So, what can organizations do to design and build a robust KPI framework? Fundamentally, the most effective KPIs are closely tied to strategic objectives and help to answer the most critical business questions. In building a solid KPI framework related to data analytics and ultimately to monitor business performance, three foundational elements should be considered.
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1. Robust Insights
Measuring business performance using KPIs is an expensive and time-consuming process. While there is a natural inclination in every business and in every individual to know more, one needs to evaluate how these insights or knowledge will be used for making decisions.
Albert Einstein once said, “Not everything that can be counted counts.” So, while designing the KPI framework or dashboard, ask these important questions related to the insights. Why do you want to know? How much do you want to know? What is the value of knowing and not knowing?
All of this begs the question of the recommended number of KPIs in the framework. Cognitive science researchers believe that human beings can normally cope with just five to nine pieces of information at a time, and this figure is popularly known as the “Magic Number.” This means 7 +/- 2 KPIs (leading and lagging) is the recommended count of KPIs in the KPI framework.
2. Accountability
While designing and implementing the KPI framework is complex, more challenging than that is realizing the change; integrating them into a business’ operating model is very difficult. While change is inevitable, it can often be uncomfortable. How effectively can we use these insights and bring change in operations, compliance and decision-making? How can KPIs be an active part of an organization’s daily management?
Successful change initiatives are often correlated to accountability. This means having clear expectations from the individual on how to achieve goals and helping one determine the gaps between expected and actual performance. In addition, one strategy to identify the accountable leader is to select the person who is close to data and the measurement entity being tracked for performance. For example, if the KPI is on “Daily Sales Outstanding (DSO),” it is advisable to have the account receivable (AR) manager track and improve the DSO KPI.
3. Quality Data
Finally, reliable KPIs are dependent on quality data given that most businesses are plagued with quality data. Research published in Harvard Business Review says that just 3% of the data in a business enterprise meets data quality standards. While quality data in business is contextual and multidimensional, defining the context and selecting the pertinent data quality dimensions will help decision-makers trust the insights offered to them through the KPIs and ultimately help them make better decisions.
While many data analytics projects do a great job in identifying the consumers of the insights or KPIs, unfortunately, the goals of the insight consumers are often not very clearly defined and do not align with the larger objectives of the enterprise. Research advisory firm Gartner reported that 80% of data analytics insights do not deliver business outcomes. One effective solution is formulating a good objective statement by asking powerful questions, formulating a strong hypothesis and defining the performance KPI framework based on the three key elements discussed above.
Management guru Peter Drucker once said, “You cannot manage what you cannot measure.” KPIs offer the insights by offering the right visibility to measure performance. Basically, insights from KPIs offer performance visibility, and visibility provides business value.
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