Operational KPIs and Performance Management
Are Your Daily Decisions Based on Fact?
submitted by David Hatch, Aberdeen GroupFriday, June 27, 2008
Businesses thrive or fail based on their ability to identify, define, track, and act upon key performance metrics / indicators. 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. This study will investigate how organizations are approaching the identification and tracking of operational KPIs to improve timeliness and accuracy of decisions that affect daily performance.
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Context
Recent Aberdeen research has revealed that improvement of operational efficiencies is the top pressure driving companies to invest in operational business intelligence technologies (Figure 1).
Source: Aberdeen Group, December 2007
Performance management metrics have traditionally been accessed through technologies such as scorecards, dashboards, operational reporting, analytics, and “automated alerting.” Operational managers are increasingly demanding visibility into day-to-day metrics in order to align business activity with corporate objectives. This requires gathering, tracking, analyzing, and acting upon KPIs that can change multiple times throughout the business day or week.
The creation, management, and continual review of KPI data can prove to be a difficult process, particularly when large, complex data volumes are concerned. Projects also often involve the integration of data from a variety of disparate sources, complex formulas and calculations to derive accurate KPIs, and a host of infrastructure requirements to deliver the information in a meaningful format (reports / dashboards, scorecards, alerts) and via an effective medium (desktop, web, remote access, email, PDAs, mobile devices).
This report will explore the business processes that executives and line-of-business management employ to improve performance through the acceleration of operational decisions based on key performance metrics / indicators. Our research and analysis will provide:
- Insight into the barriers preventing timely access to KPI information
- Pointers towards Best-in-Class strategies and tactics for improving access to and use of key performance metrics for operational decision-making
- Options and approaches for increasing the accuracy and timeliness of KPI information
- A method for determining how to elevate company performance via KPI management to Best-in-Class levels through a set of strategic and tactical actions that have proven to be successful among industry peers
Aberdeen’s Hypothesis
From an end-user’s perspective, Aberdeen research will investigate how companies are meeting the challenge of defining, measuring, and refining operational KPIs that drive company performance. The study will determine what strategies and actions companies are taking to:
- Understand the key operational business drivers that affect company performance
- Establish a corporate and / or departmental set of operational KPIs
- Align operational KPIs with line-of-business goals and incentives
- Provide a method for making KPI-based performance visible to the enterprise
- Create an on-going process for internal and external KPI review, evaluation, and re-alignment
Table 1: The Best-in-Class PACE Framework
| Pressures |
Actions |
Capabilities |
Enablers |
| *Mandate to find operational efficiencies |
* Adopt operational KPI methodology
* Align business goals to operational KPIs
* Improve timeliness and accuracy of operational business decisions |
* Formal process for identifying and incorporating operational KPIs into day-to-day operations
* Continual internal and external review of operational KPIs
* Industry association or consortium membership for the purpose of identifying industry KPIs, benchmarks, and performance levels for competitive comparison
* Method for making KPIs visible to line-of-business management and decision-makers |
* Dashboards
* Scorecards
* Business Intelligence (BI) platform or appliance
* BI query and reporting tools
* Advanced analytic application
* Data integration and hygiene / cleansing tool
* Automated alert technology
* High availability data management tools
* Information portals
* IT consulting services
|
Source: Aberdeen Group, June 2008
The performance metrics which will be used to determine Best-in-Class companies include those shown in Table 2.
Table 2: Best-in-Class Performance Metrics
| Mertic Name |
Measurable Values |
Measured As |
Customer satisfaction index |
Percentage improvement in customer satisfaction, issue resolution speed, and resolution accuracy in past 12 months |
Percentage improvement or decline
(-50% to >50% in increments of 10%) |
Time-to-information |
Time between actual business events and access to information about those events during past 12 months |
Months to weeks, weeks to days, days to hours, hours to minutes, minutes to seconds, seconds to sub-second |
Time-to-decision or action |
Time between actual business events and action taken to address those events during past 12 months |
Months to weeks, weeks to days, days to hours, hours to minutes, minutes to seconds, seconds to sub-second |
Decision-maker visibility to KPIs |
Percentage increase or decrease in visibility to operational KPIs among employees with operational responsibilities during past 12 months |
Percentage increase or decrease
(-50% to >50% in increments of 10%) |
Customer retention |
Rating of customer retention performance during past 12 months |
Percentage of actual retention during past 12 months (raw percentage or "don't know) |
Source: Aberdeen Group, June 2008
Other metrics to be considered in this study:
- End-user satisfaction
- Existence of KPIs in four major scorecard categories: financial, customer, process, HR and innovation
- Increase in number and types of decisions that can be made
- Improvement in quality of information upon which decisions are based
Case in Point
Take, for example, the case of a mid-tier wine importer operating in a highly regulated market. With a three-tier distribution system legally enforced, there are limited opportunities to pursue growth strategies such as vertical integration. However, during the last decade there has been increasing consolidation among the distributor and retailer channels that the company depends on to reach the consumer. This consolidation has concentrated power downstream in the supply chain, threatening margin pressure and the potential restriction or loss of distribution channels. With only limited strategic options, the company focused on the KPIs that could drive continued growth and competitive success in the marketplace:
- On-hand / on-time inventory available
- Outstanding “open” order value
- Net-new accounts through distribution network
- Promotion costs and ROMI
Through better management of the core KPIs that were driving business, the company was able to increase revenues by 12% in one year, more than twice the industry average. From an operational standpoint, the availability of inventory and open order value enabled field sales representatives to gain competitive advantage through a better view of the customer and the right price and delivery pressures to apply. Strategically, senior management could keep a pulse on the key metrics driving new business and whether costly marketing programs were delivering or not.
“We’re ready to sit down and discuss issues and arrive at solutions much faster. That’s made us a better partner - and a more desirable partner - for a lot of distributors across the country.”
~ CFO, Mid-Tier Wine Importer |
Research Methodology
Our research will show that to achieve performance improvement, companies must blend a combination of strategic actions and new technologies to:
- Automate the access and delivery of critical business information
- Shorten the gap between business events and actions taken
- Relate incentives directly to KPI achievement
- Improve visibility to KPIs for decision-makers
- Increase customer retention and satisfaction
Solution Snapshot
Solution providers can range from large BI platform software vendors to highly specialized data visualization and delivery solution providers. Table 3 provides a partial list.
Table 3: Enabling Technology Vendors
Source: Aberdeen Group, June 2008
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