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| By Macon Albertson President, Tatum Professionals |
Call it serendipity but if you flip around the acronym for key performance indicators (KPIs), it could also stand for the age-old mantra “knowledge is power.” Coincidence or not, the truth is that knowledge IS power for the modern CFO, and KPIs can effectively reign in the right knowledge and data that will drive corporate performance. The challenge is the amount of data that today’s enterprises generate can make choosing, finding and measuring relevant KPIs much more complex and difficult. Get KPIs right and corporate performance will improve; Get them wrong and you will be focusing on indicators that have no overall positive impact on your business.
As the business environment continues to radically change at lightning speed, the way in which CFOs need to view KPIs has also evolved. With more data comes hundreds of performance indicators you could capture, but do you know exactly what to look for? Data is just information, and on its own doesn’t offer the valuable insights you need to drive performance. So how do you go about transforming your KPI strategy to meet the needs of the modern enterprise? We have several strategies to begin the process.
Start With The Basics
KPIs give CFOs the ability to communicate the mission and focus on the organization to key constituents – investors, executive team members and the management team. If all stakeholders aren’t on the same page with KPIs and moving together in the right direction, it will be difficult to deliver value to the company.
One major pitfall that many CFOs experience is not understanding the difference between a measure, a metric and a KPI. Not everything that is measureable means it is a metric, and all metrics aren’t necessarily a KPI. A performance-driving KPI begins with a relevant measurement, which in turn creates a metric from which KPIs will derive. For example, a measurement may be the number of customers, number of sales or total revenue. But these numbers become a metric when they are compared to one another and typically uses two or more measures, such as the number of customers relative to the number of sales.
A metric only becomes a KPI when it is applied to a specific company and industry, its customers and its staff, and provides deeper context to the metric in the form of ratios, percentages, etc. Most importantly, KPIs must meet three key criteria in order to be effective:
- They must be connected to business strategy. You can’t determine the most relevant and profit-driving KPIs without first understanding your own business strategy and how it may evolve over time. Generally speaking, you should have no more than 5-6 KPIs developed at an executive level, which is why it’s critical to identify only 5-6 strategic goals that are the most vital to corporate success. Once identified, tie KPIs that measure data that correlates to that specific goal.
- They must be measurable. This may sound obvious but you must be able to quantify what drives the performance of the business. Quantitative measurements also remove ambiguity and misinterpretation. Everyone in the organization ought to be able to read the KPI and walk away with the same exact results.
- They must be actionable. In order to take action, there must be a target or threshold tied to the KPI so you have a clear picture of whether the company is below, on target or exceeding the goal. And, it goes without saying that when the organization falls below a specific target, this should inform action to address the poor result.
Evolve Your KPIs to Address Non-Financial Aspects of Business Performance
Albert Einstein once said, “Not everything that can be counted counts, and not everything that counts can be counted.” This adage rings more true to CFOs today, even more so than any other C-suite executive. The reality is CFOs no longer solely focus on financial data, such as net revenues, accounts payable or working capital. Today’s environment requires CFOs to expand their focus to include non-financial data – from talent management to brand perception – aspects of corporate profitability that are now the responsibility of CFOs to measure, grow the value of and invest in.
In fact, intangibles now comprise 84 percent of corporate valuations on the S&P 500 index – up from just 17 percent in 1975, according to the Digital Finance Imperative study. However, traditional financial KPIs aren’t very effective at measuring non-financial initiatives such as, talent engagement. Thus, new generation KPIs are required to dependably tie non-financial measurements to bottom-line financial performance. And, the need to collaborate with management teams across many functions of the business is imperative.
According to the Digital Finance Imperative study by AICPA/CIMA, high-performing CFOs tend to focus on five key areas:
- Talent pool: “Agile finance leaders have identified the lack of talent or skills as the biggest obstacle to finance transformation,” the AICPA/CIMA study found. And more than 80 percent of agile finance leaders surveyed measure their organization’s talent pool. By partnering with HR leaders, CFOs can identify workforce KPIs, and together, help drive the company’s differentiated strategy.
- Customer experience (CX): More than 80 percent of agile finance leaders include customer experience KPIs in their own suite of metrics, according to the report. Measures include customer satisfaction, net promoter score (a gauge of customer loyalty) and industry benchmarking. The goal for CFOs: demonstrate the connection between customer experience and financial KPIs, then use that information to drive more effective CX strategies.
- Business process efficiency: Across industries, businesses are busy digitizing and optimizing business processes, yet many fail to measure the return on investment in automation. By measuring and monitoring the ROI of these efforts, CFOs can provide direction on where to invest next.
- Brand reputation: Brand is a key driver of company performance and value. It is hard to assign a single financial number to a brand’s reputation, but by tracking online customer reviews, employee retention and customer churn, CFOs can start to connect brand reputation with financial performance.
- Competitive intelligence: More than half of agile finance leaders say they monitor KPIs related to their competitors. While CFOs have long monitored competitor data available from public financial filings and market reports, they are increasingly turning to competitors’ nonfinancial KPIs as well. Common targets include online reputation, comparative advertising, content marketing and talent recruitment.
Expand Beyond KPIs to Key Performance Drivers (KPDs)
The one big drawback to KPIs is that they are backward-looking and not forward-looking. This primarily stems from the fact that many KPIs are based on reports which typically look backwards. They tell you what happened in the past – whether that be last month or this morning. Simply put, they lack the insights you need to drive your strategy forward.
However, many CFOs are now expanding their performance management efforts to include KPDs – day-to-day activities that are required in order to produce the desired KPI outcomes. In other words, they underpin the strategy in place and ensures its success. For example, customer satisfaction improves brand perception, which in turn drives customer retention/referral rates, which results in increased revenue and profitability.
The identification and management of KPDs can deliver tremendous value in the form of transparency. The ability to monitor in real time whether employees are producing the outcomes required for the company success, CFOs can intercede quickly when those KDPs are falling short. This agility helps ensure KPIs aren’t greatly impacted. For example, if producing a client newsletter isn’t positively impacting your lead generation efforts (i.e. your number of customers KPI or your sales revenue KPI), then you may need to re-think the tactic of producing a newsletter and redeploy your resources elsewhere.
Conversely, imagine your alarm, the company falls below your KPI on sales. But at closer examination, you uncover that one of your largest customers went belly up leading to a decline in sales, but at the same time your number of closed sales exceeded your target by 20 percent. Is this a problem with the sales team or a one-time event that temporary derailed progress?
Your KPDs should be measured against your goals and monitored frequently so that abnormalities can be quickly identified and corrected. To ensure you’ve landed on the right KPDs to monitor, consider testing each metric by measuring any increase or decrease in the KPD against the company’s costs and revenues. If it directly impacts profit/loss then your measure is the precise one to use.
Start Rethinking Your KPI Strategy Today
As a successful CFO, you know you can’t make decisions based on feelings or your gut. You base your decision-making on facts and data. But as the landscape is changing, CFOs are under increased scrutiny to cut expenses, improve revenue and maintain control in an ever-changing, volatile business environment. Reliance on reports and siloed metrics are an inefficient and ineffective process.
KPIs, and now KPDs, can truly help businesses, and especially CFOs, show value beyond traditional reports. The key is to determine the right financial and non-financial KPIs to measure that are closely tied to business strategy, and to ensure that the organization is aligned with your strategy.
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About Macon Albertson
As Tatum’s President, Macon brings more than 20 years’ experience driving profitable growth in the solutions, consulting and staffing sectors. His industry-specific leadership has been critical to building an operating platform allowing for Tatum’s growth and sustained success. Macon previously served as Senior Vice President of Randstad Professionals, overseeing multiple regions. His proven track record in employee and managed services demonstrates an ability to handle even the toughest of turnarounds through disciplined business development and operational management tactics and philosophies. When Macon isn’t in the office, he enjoys being outside and pursuing his passion for race cars.
The CFO Leadership Council offers monthly programs featuring expert panels and interactive sessions that drives meaningful conversation and leadership development amongst our membership. Visit www.cfolc.com to find the chapter near you.