In-Depth
A Best-in-Class Approach to Managing Operational KPIs
Success or failure in meeting operational performance goals is increasingly dependent on how a business identifies, defines, tracks, and acts upon operational key performance indicators.
By David Hatch
Operational performance is rapidly becoming a top priority of business intelligence and performance management projects. In June and July of 2008, Aberdeen Group investigated a wide spectrum of operational performance management capabilities through a primary survey research program. This study, based on responses from over 200 organizations, uncovers the strategies, actions, technology investments, and services that Best-in-Class companies are utilizing to improve operational performance.
Almost half of all respondents have been focusing on operational performance management for three years or more, and 77 percent of respondents have implemented recently or budgeted projects within the next 12 to 24 months. Executives and line-of-business management are increasingly feeling the pressure to enable timelier and more accurate decisions in order to improve operational efficiencies. The faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better an organization can manage day-to-day operations and customer interactions. Aberdeen research has found that companies are focusing on obtaining solutions that address specific business pressures driving operational performance.
In Aberdeen's latest report, Operational KPIs and Performance Management (available at http://www.aberdeen.com/summary/report/benchmark/5461-RA-operational-kpis-management.asp; free but requires valid e-mail address), four key metrics were used to determine Best-in-Class (BIC) performance: Customer satisfaction, customer issue resolution capability, conversion of inquiries to sales leads, and sales forecast-to-plan performance (the top 20 percent of performers among survey respondents earned "Best-in-Class" status).
Among the characteristics that set BIC respondents apart is the level of integration of business intelligence (BI) capabilities with ERP implementations. In fact, more than half of the BIC companies reported use of business intelligence embedded within ERP applications in order to define, track, and manage operational KPIs. Comparatively, companies we identified as Industry Average and Laggards only do so 35 percent and 19 percent of the time, respectively.
From a customer service operations perspective, service program renewal rates have improved for BIC companies by an average 4.7 percent, while all other respondents have seen a 2.7 percent decline in renewal rates. Overwhelmingly, respondents agreed that customer service is the top priority when asked to identify the next area of the business where operational performance management efforts will be directed.
Business Pressures Driving Operational Performance Initiatives
Performance management metrics have traditionally been accessed through simple means such as spreadsheets and static reports, as well as advanced methods involving business intelligence technologies such as scorecards, dashboards, operational reporting, analytics, and "automated alerting." Operational managers are increasingly demanding visibility into day-to-day metrics so they can align operational business activity with corporate objectives, which requires gathering, tracking, analyzing, and acting upon KPIs that can change multiple times throughout the business day or week.
Although this reflects the business areas most concerned, executives are struggling to gain visibility into the operational performance driving the business. As the old adage states, "you can't manage what you don't measure." Nearly one-third of all companies are prioritizing executive management visibility to operational performance as the top pressure driving their focus and investment into identifying and managing operational KPIs. This drive toward improved visibility is an internally focused pressure that directly addresses the next most reported business concern -- replacing "gut-level" decisions with "fact-based" decisions.
To accomplish this, companies clearly must have a firm grip on the actual operational performance drivers, and the definition and calculation of operational KPIs that will inevitably produce the desired visibility.
Benchmarking for Success
The improvement of operational performance requires a combination of capabilities and mastery of technologies and techniques that have been introduced to businesses only recently, along with technologies that have been in use for much longer periods of time.
Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: Process, organization, knowledge management, technology, and performance management.
These characteristics serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Based on the findings and interviews with end users, Aberdeen's analysis of the Best-in-Class demonstrates that successful operational performance and KPI initiatives depend on a combination of specific capabilities and technology enablers.
Updated KPIs Work Best
As business dynamics change, so too must the KPIs used to measure performance. Best-in-Class companies are over 50 percent more likely than Industry Average companies and 100 percent more likely than Laggards to employ a method for identifying, incorporating and reviewing/updating KPIs related to operational performance.
The process of updating KPIs on a continual basis is extremely important when it comes to operational performance. KPIs that are established at the outset may become obsolete very quickly. For example, an online retail company that is presenting a new product line on its Web site may set KPIs initially based on past performance of similar products. However, after the first few days of activity, results may indicate a new method for presentation or a new offer type to be introduced. The KPIs used to measure performance, therefore, may need to be altered to reflect the new paradigm and need for a re-set of the short term goal.
Who, When, How Knowledge Management
To establish a set of operational KPIs, and an operational performance-driven culture, clear and effective corporate communications capabilities is vital. In addition, intelligence about industry-wide performance will help to gain an understanding of the benchmarks that should be used based on peer and competitor performance. Finally, any performance measurement capability should be accompanied by an internal training program that allows all stakeholders to understand and buy-in to the program.
Companies are trying to improve efficiencies and performance of many day-to-day and real-time operational activities, such as customer interactions, finance and accounting processes, transportation/shipping, sales activity, manufacturing, inventory management, and marketing. Aberdeen research conducted for the September 2007 report, Smart Decisions: The Role of Key Performance Indicators (see http://www.aberdeen.com/summary/report/benchmark/4279-RA-key-performance-indicators.asp, $399), found that Best-in-Class companies are improving their time-to-information through the implementation of capabilities, technologies, and services that enable faster delivery of mission-critical information to the people who need it, when they need it, and how they need it.
Aberdeen found that during the past year, the gap has widened significantly in terms of the time-to-information capabilities that Best-in-Class companies have achieved. In fact, Best-in-Class respondents are now over 65 percent more likely to obtain information about business events within a day or less than are Industry-Average companies.
Best-in-Class organizations are establishing KPIs to measure the company's operational performance over time and are obtaining comparative capabilities to ensure that performance measures are in alignment across the organization. Although Best-in-Class companies have excelled at establishing internal alignment of KPIs to corporate and departmental goals, the ability to extend this to comparisons against industry thresholds and competitive performance is lacking. Still, Best-in-Class companies are significantly more apt to have this capability than Industry Average and Laggard organizations.
Best-in-Class companies are also more likely to establish KPIs across a wide range of operational areas of the organization. Aberdeen research has revealed that the more operational areas addressed, the more improvement will be realized across all areas of the business. Aberdeen's research program measured respondents' use of operational performance metrics across a wide variety of operational business areas, including: customer performance, service performance, sales operations, and sales plan/forecast.
Key Insights
The alignment of operational business activity and performance to the goals of the enterprise as a whole (while the top strategy listed by all respondents) is one that Best-in-Class companies have embraced and supported strongly. This support, however, is shown clearly through the second and third most prevalent strategies currently implemented by Best-in-Class companies. To align operational KPIs and business goals, companies are focusing on changing/establishing internal culture.
Operational excellence and change cannot occur until the organization as a whole understands the importance of operational KPIs and how they relate to their own job performance. Additionally, companies recognize that the dynamics of business at the operational level can change frequently. This explains the importance of establishing regular internal and external reviews of operational KPIs and why this strategy is a top-three action that companies are prioritizing.
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David Hatch is vice president and principal analyst of Aberdeen Group's business intelligence practice, where he benchmarks user organizations' BI strategies, actions, and planned technology investments. His research focuses on the collection, assembly, and delivery of information throughout the enterprise. Dave holds a BA in Communications from the University of Massachusetts.