15 June | by Betsy Maclean and Lance Rubin

Introduction to the co-author

Betsy enjoys leading Finance teams that streamline and automate traditional Finance work so they can make delivering innovative analytics a top priority. After roles at both large public companies, small private companies, and several companies in between she is now actively engaged in the dual pursuits of leading the Audit Committee for the Board of Directors of mCloud Technologies (TSXV: MCLD) and launching a Financial Insights & Analytics practice for Two Degrees, a division of Slalom.

Why did Betsy select the topic and why is she passionate about it?

“You can’t manage what you don’t measure” is a mantra that resonates with me.

Most dashboards overflow with tables and graphics that track key financial outcomes.

But telling the story of a business requires a more comprehensive look at the processes and interim measures that give rise to those financial outcomes.

Here’s hoping this article encourages finance leaders – and the decision makers and operational leaders they support – to reflect on what additional measures qualify as great dashboard add-ons because they shed light on their business’ drivers and developing trends.

“So? How are we doing?”

As the CFO of a small-but-growing company I was often greeted this way. It was left to me to determine how to construct a succinct yet relevant answer.

Leaders from different areas of the company’s value chain generally focus on measures that pertain to their area.

At the same time, each business has a handful of key indicators that, taken together, capture a powerful snapshot of the business’ overall performance. It is therefore common to see references to Key Performance Indicators, or KPIs.

But, as it happens with buzz words, precise definitions are hard to come by. The responsibility for selecting and delivering KPI-laden dashboards often falls to Finance.

Topic and context in no more than 3 sentences

To simply the topic its worth considering the following 3 key points:

What gets measured gets done.
Humans like to “game” the system for their personal gains and KPIs are the centre of this for business.
Measuring the wrong stuff (vanity) can be very costly and move us away from true value (cash flow)

If you had to teach this topic in a class to school kids what key tips would you give them to focus on?

Whether you play sport or enjoy academic challenges everything we do gets measured (especially at school).

How do you know you are getting better or winning if there isn’t a score board at your match?

How do know if you pass the school year if you don’t get marked?

Whether we like it or not our lives are measured and tracked (especially now during the pandemic).

In business this is the same, but we have to make sure we measure the right stuff that will help us win in the game of business which is all about cash flow ($’s in your bank account or back pocket).

What practical steps can people take now to learn more?

Decisions regarding what measures to include – and what measures to leave out – are important because the resulting portfolio of KPIs must accurately convey a comprehensive picture of a dynamic enterprise.

Decision makers from across the business naturally have their own preferences for which metrics best “tell the story”, and a solution that works for everyone can be hard to find.

Given the daunting nature of this undertaking it helps to have a framework to use as a guide.

In this case several popular frameworks are useful.

The Balanced Scorecard framework, first introduced by Cooper & Kaplan, contributes a 2x2 graphic that acts as a sanity check as the portfolio’s measures are being considered.

The graphic they proposed takes the form of a two-axis plot. The horizontal axis is a line that signifies a spectrum, with “Non-financial” at one end and “Financial” at the other, while the vertical axis is a continuum with “Results Oriented” and “Process Oriented” at opposite ends. The resulting graphic is shown below:

The four quadrants lend themselves to a productive KPI portfolio brainstorming session at which decision makers from each area in the value chain put forward the list of measures they would like to see included.

Some metrics may be best updated daily or even hourly, while others lend themselves to a monthly or quarterly cadence.

That “periodicity” or “refresh frequency” can be left aside in the initial discussion because the primary goal of the exercise is to ensure that we are successfully developing a robust set of measures that takes into account reactive metrics, often in the two “results oriented” quadrants, and also proactive metrics, often in the two “process oriented” quadrants.

Here are some popular choices for inclusion:

The second framework that can help shape discussions regarding KPI portfolios arises out of what I like to refer to as the “line of sight” phenomenon.

Simply stated, each leader’s span of control acts as a lens through which they view the business – or, more correctly – their “slice” of the business.

The Sales VP will be keenly focused on Total Sales, since this measures progress against the strategic goal to grow the business.

At the same time, the Operations VP will need to determine if the Operations team can deliver what’s needed for the contracts that Sales has worked to finalize.

That perspective brings Supply Chain, Product Development, Customer Support, and other operational measures of success into sharp focus.

Both efforts depend heavily on the ability of the Procurement team to place, receive, and process purchase orders because consistent tactical execution is the cornerstone upon which operational and, in turn, strategic success is built.

It is often the case that key indicators can be intuitively organized into hierarchies that align well with this Strategic – Operational – Tactical framework.

Leveraging these two frameworks provided a convenient logical foundation when I was asked to design/build/launch a Business Intelligence (BI) dashboard for Honeywell’s Process Solutions business unit.

The framework implicitly offered up a common language so that leaders from multiple areas within the business could discuss the relative merits of both the developing prototype of our KPI Portfolio and potential concerns related to individual measures.

A key added benefit was how seamlessly the development of our prototype KPI portfolio served as a precursor to the nuts-and-bolts conversation regarding the ability of our data to meet the demands inherent in the proposed set of performance measures.

As often happens, there were several hoped-for measures that were simply not supported by our transactional data.

Sales targets lacked detail by region and sub-region. Large variances between standard costs and achieved actual part costs prompted us to revisit the notion of what our proposed “cost efficiency” measures were, in fact, meant to measure.

At the time the answer lay in our ability to compromise – and to follow the adage “great is good, done is better.”

Today’s ready availability of enterprise resource planning (ERP) systems with powerful add-on tools creates environments characterized by large volumes of transactional data complete with a far more expansive list of dimensional attributes.

This means it’s now possible to support a greater array of KPIs. For a time this proliferation of bigger and more detailed data sets was coupled with the frustration of having “too much data, and not enough information.”

Fortunately, two developments have helped to improve things.

First, intuitive and user-friendly tools such as Power BI, Tableau and Alteryx have leveled the playing field.

They’ve put data, and also meta data, in the hands of finance teams and others who are a step closer than IT to the ultimate consumers of the KPIs, namely decision makers in Sales, Marketing, Product Development, Operations, and Customer Support.

Second, Power BI specifically has made it possible for businesses with Microsoft Office licenses to launch mobile KPI dashboards. More recently, Azure Synapse Analytics complements and extends the analytics capabilities available from Microsoft.

The result? Dashboards that feature a balanced and intriguing portfolio of KPIs that can be “road tested” by leaders and individual contributors up and down an organization’s hierarchy.

This democratization of performance indicators makes real the promise of holding accountable resources whose span of control is tactical as well as those with operational and broader strategic lines of sight.

Portfolios of key performance indicators are only as good as our ability to design and then distribute these business measures.

The good news is that the pace of innovation has accelerated and brought forward tools and applications whose functionality and visual representations are as varied as the preferences of the decision makers for whom they were designed.

Where are good places (links) to find out more on the topic

Here are a few great links to find more information:

How important is this skill in the context of learning Financial Modelling?

Financial modelling depends upon the integration of measures that drive business results.

That means that it is essential to invest time upfront to identify leading indicators and metrics that capture developing trends so the insight these measures offer is made visible to decision makers across the breadth and depth of a business.

If our financial models fail to focus succinctly on these key measures, then it will have no value and we would have failed to meet our stakeholders expectations.

If we don’t clearly understand what we are measuring, why and how we can influence it then what’s the point? It goes to the fundamental purpose of modelling in the first place.

To make better decisions that focus on business outcomes and actions needed to make an impact.

How does all this disruption, AI and automation talk impact this topic

The advancements made in data analytics and using tools like PowerBI & Excel which have also embraced AI means that data collection, reporting and insight can be quicker and more valuable.

However, AI isn’t perfect so make sure you have a well-trained human watching over it.

AI will not replace what we do, but it can enhance and extend key aspects of what we do.

If you want to find out more and follow the rest of the article series be sure to download the Financial Modelling App

If you want to find more information on financial modelling and content visit the Model Citizn website.

DEVELOPING A PORTFOLIO OF KEY PERFORMANCE INDICATORS (KPIS)