Making Smart Decisions: The Role of Key Performance Indicators
A new Aberdeen study offers guidance for executives and business managers to get the most out of key performance indicators when making decisions.
by David Hatch
Businesses thrive or fail based on their ability to identify, define, track, and act upon key performance indicators (KPIs). Executives and line-of-business managers are increasingly feeling the pressure to establish the right KPIs to enable timelier and more accurate decisions. The faster and more accurately KPIs can be accessed, reviewed, analyzed, and acted upon, the better the chance for an organization's success.
Aberdeen’s new report (available at http://www.aberdeen.com/summary/report/benchmark/4279-RA-key-performance-indicators.asp) is a roadmap for business management and decision makers to achieve those goals by maximizing use of KPIs.
Aberdeen benchmarks enterprises into one of three levels of practices and performance:Best-in-Class (the top 20 percent) enterprises employ practices that result in the top industry performance, and are significantly superior to the Industry Average
The middle fifty percent of enterprises are categorized as Industry Average and have average industry performance. Laggards (the bottom 30 percent) follow practices that are significantly behind the average of the industry and have below-average performance.
Aberdeen Group examined the use of KPIs, the experiences, and intentions of more than 350 enterprises in a diverse set of enterprises. Respondents completed an online survey that included questions designed to determine the degree to which KPI strategies are deployed within enterprise operations and the performance implications of the technologies and capabilities reported. The study reveals the Best-in-Class strategies and tactics that improve access to and use of key performance metrics for decision-making. Aberdeen’s research survey and one-on-one interviews asked subjects to explain the options and approaches they used to increase the accuracy and timeliness of KPI information for improved decision-making, and what benefits, if any, they derived from KPI initiatives.
Aberdeen supplemented the online survey with telephone interviews with select survey respondents, gathering additional information on KPI strategies, experiences, and results.The study aimed to identify emerging best practices for KPI usage and provide a framework by which readers could assess their own capabilities.
Aberdeen used six key performance criteria to distinguish Best-in-Class companies from Industry Average and Laggard organizations. The study analyzes several categories, including the scope, efficiency, and effectiveness of process standardization; how the company is organized to manage and optimize a particular process; an enterprise's visibility into key data and intelligence required to manage this process. The research also focused on the level of automation to support this process and how this automation is integrated and aligned, as well as how performance is measured and how frequently it is measured.
The study found that Best-in-Class companies have seen several mean average performance improvements in the past 12 months, including process and organizational performance improvements of 10 percent in time-to-decision and 11 percent in the number of decision-makers with visibility to KPIs; financial performance improvements of 9 percent in both profitability and revenue growth; and customer performance improvements of 9 percent in both net-new customers gained and customer satisfaction.
How Best-in-Class Enterprises Approach KPIs
KPIs are at the heart of a performance management initiative and are meant to provide strategic measures of success (or failure) rather than just measuring non-critical activities and processes. KPIs can provide “business alignment” across all levels of an organization (business units, departments, and individuals) with clearly defined and “cascaded targets” and benchmarks to create accountability and track progress. The success of any performance management program is therefore dependant on an effective strategy for defining, tracking, and acting upon KPIs.
Business executives have many options for implementing a KPI-based performance program, and Aberdeen research found that Best-in-Class companies have implemented KPI strategies, capabilities, and technologies that have delivered positive results toward improving performance. Seventy percent of Best-in-Class companies have improved their time-to-decision by greater than 10 percent versus 7 percent of Industry-Average and 5 percent of Laggard enterprises. Further, 33 percent of Best-in-Class companies improved market share by greater than 10 percent (versus 14 percent of Industry Average enterprises and 3 percent of Laggards), and nearly half (47 percent) of Best-in-Class companies improved profitability and revenue by greater than 10 percent (compared to 22 percent of Industry Average companies and 13 percent of Laggards).
Additionally, business and IT users at Best-in-Class companies have identified several highly critical concerns when considering an investment in technologies and services for the development of KPI-based performance programs. At the top of the list: ease of use, compatibility, and scalability, signifying the effect that a KPI initiative has throughout an organization. This may partly explain the prolific use of spreadsheets among many respondents due to the relative familiarity that users have with them. It may also explain the popularity of Windows network environments and operating systems that support them. However, “scalability” points to an issue that is not addressed by spreadsheet methods, and stresses the importance of the IT infrastructure role in a KPI-based initiative.
While most companies have started (or are planning to start) an enterprise KPI initiative, 50 percent of Best-in-Class companies have more than three years of experience with an enterprise-wide KPI strategy. This illustrates the importance of early adoption and the time periods that must be factored into a KPI strategy. The sooner a company starts planning and implementing a KPI-based initiative, the more likely one is to attain Best-in-Class status, but it does not happen overnight.
The top pressure driving organizations to adopt a KPI strategy is the desire to improve company performance (62 percent of all companies selected this pressure as their top business driver). However, Best-in-Class companies are 8 percent more likely to prioritize the alignment of business activity with company strategy, and are 10 percent more likely to stress improving timeliness of business decisions in comparison to industry average companies.
Best-in-Class organizations have clearly identified the strategies they are planning to take to improve company performance through a KPI initiative. Although there is commonality among all company categories about aligning business goals to KPIs (63 percent of all companies identified this as their top strategy), Best-in-Class companies (48 percent) are far more likely than Industry Average (32 percent) and Laggards (31 percent) to establish an ongoing review of KPIs as part of their overall strategy.
This is a critical finding of the research. Industry Average and Laggard companies that neglect this step are at risk of measuring KPIs that are based on metrics that do not reflect the current business climate.
Best-in-Class organizations are more likely to have established capabilities to implement their KPI strategies. Over half of Best-in-Class companies have institutionalized their approach to KPIs with activity around corporate KPI culture, such as establishing committees and/or processes to define KPIs (53 percent), and making KPIs visibile to line of business management and decision-makers (51 percent).
Best-in-Class Companies and Technology
Best-in-Class companies are almost twice as likely as Laggards to have dashboard and auto-alert reporting capabilities in place. As a whole, Best-in-Class companies have selected technologies and services that center around providing rapid access to KPI information (dashboards, scorecards, and auto-alert reporting) and assistance in understanding the KPI process via management consulting and training.
Of the 42 percent of Best-in-Class companies using a balanced scorecard approach, just over half (53 percent) are doing so with a true balanced scorecard system, compared to 33 percent of all other organizations combined.
The differences are found mainly in the level of complexity and logical mapping between strategies and KPIs. We found that Best-in-Class companies are more likely to incorporate a “strategy map” into the balanced socrecard process, and cascade KPI metrics to departmental goals. This provides a method for aligning business strategy with KPIs that are measured within the scorecard, and also presents a roadmap for how business-unit goals roll up to the overall company strategy.
Best-in-Class companies are planning for a shift in technology that will make KPIs accessible and visible to the enterprise. While dashboards are the most popular tool, Best-in-Class companies are beginnning to plan for a mix of reporting and analytics capabilities to deliver KPI information. The combination of high-level reports with top-level KPI measures (with analytics capabilities) enables organizations to see a problem and answer questions based on underlying data. Analytic capabilities must be able to deal with the complex data sets and calculations often associated with KPIs.
Three-quarters of Best-in-Class companies strive to provide access to KPI information to line-level staff (only 59 percent of Industry Average companies do so). Furthermore, 16 percent of Best-in-Class companies provide access to KPI data within an hour of an actual business activity, twice the rate of Industry Average companies.
KPIs are an integral part of a company’s performance management strategy. The correct definition, use, and (most importantly) continual adaptation of KPIs directly impacts performance. Aberdeen research has found that Best-in-Class companies have adopted a set of capabilities that deliver positive results across a diverse set of performance metrics. To achieve Best-in-Class performance, organizations must:
- Institutionalize a KPI strategy: Best-in-Class companies are instituting a KPI culture for alignment of business strategy and company goals
- Continuously revise KPI definitions: As a business changes, so must the KPIs used to measure it
- Provide access to KPI information to all decision makers: Dashboards, scorecards, and auto-alert reporting are being used by Best-in-Class companies
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David Hatch is research director 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.