The second session of the Sunrise Sip Club, sponsored by Expandable Software, 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 measures1
- But 75% of performance measures are financial in nature, and
- Companies without balanced scorecards rely on 82% financial measures1Why? 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:
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.
Many ERP Platforms now come with imbedded Dashboard capabilities. Should you use them?
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.
