how to define right metrics performancemgt

8/2/2019 How to Define Right Metrics PerformanceMgt

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How to Define the Right Metrics for

Performance Management

Michael Smith


2/19

How Good Are Most Companies atSelecting the Right Performance Metrics?

Companies that validate a causal model

(cause & effect relationships) between

operational performance measures andfinancial results achieve:

2.95% higher Return on Assets

5.14% higher Return on Equity

However only 23% of companies have

a developed causal model

How do you knowwhich businessmetrics drive value?


3/19


4/19

An Integrated Business Intelligence andPerformance Management Framework

Analytic ApplicationsProvides users with analysis of informationfor business transformation/ improvement

Process-drivenanalytic applications

(also known as analytics) Analyst-drivenanalytic applications

(also known as BI)

Performance Management Delivers shared management view into multiple

levels of information/analysis across multipleplanning, execution and decisions cycles

Strategy driven

Business Strategy

People Process

Analytic Applications

BI Platforms

InformationManagementInfrastructure

PerformanceManagement

Business-Centric

BICompete

ncyCenter

IT-Centric


5/19

Issues Requiring Improvementsin Performance Management

What is the root cause of these issues?


6/19

Metrics Should Be Organized Into ThreeLevels

Organizing Your Metrics Into Three Levels Makes ThemEasier To Use

Regulated

Metrics

Industry StandardNon-Regulated

Performance Metrics

Company SpecificMetrics

2. PerformanceMetrics

1. AccountingMetrics

3. AnalyticalMetrics

Example:Gartner BusinessValue Model

What are some examples of Performance Metrics?


7/19

Accounting Metrics Explain Less And LessOf The Full Story

Book to Market Value S&P 500

1978 2006'05'04'03'01'00'99'98'97'96'95'93'92'91'90'85'80 '94 '02$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

Value

($ millions)Year Book Value Market Value Earnings

Measurement Gap

The Enhanced Business Reporting Consortium in the U.S.http://www.ebr360.org

The Operating and Financial Review Initiative in the U.K.http://www.co3.coop/subpage.asp?id=45&mainid=18


8/19

How to Select the Right Metrics

Best Practices:

1. Leading indicators of financial results2. Collectively exhaustive and mutually exclusive

3. Less is more

4. Hierarchical and functional

5. Standards-based

6. Flexible aggregates and primes

7. Holistic, to avoid local optimization

8. Practical, based on available data

9. Evolutionary learn from the Financial AccountingStandards Board


9/19

Leading IndicatorsThat Drive Positive Change

Best Practice:1. Leading indicators that drive positive change

Financial Metrics

Income Statement ($ million)

Revenue $1,000

Less: Cost of Goods Sold 500

Gross Profit 500

Less Operating Expenses:

Sales 200

Administrative 200

Net Income $100

Business Performance Metrics

Business Performance Framework

Sales Opportunity Index,Time to Market

Procurement Costs,Conversion Costs

Customer Retention,Sales Close Index

Service Performance,Support Performance,

New Projects Index,Advisory Index


10/19

Measuring the Real Driversof Business Value

Best Practice:

2. Collectively exhaustive and mutually exclusive

KPIsKPIs KPIs

Key Performance Indicators Key Performance Indicators

Financial Metrics

Marketing Operations Marketing Operations Marketing Operations

Op. 1 Op. 2 Op. 3 Op. 4 Op. 5 Op. 6 Op. 7 Op. 8 Op. 9

BU 1 BU 3BU 2

Corporate

BusinessUnits P&Ls

BusinessFunctions

BusinessOperations

KPIsKPIs KPIs

Key Performance Indicators Key Performance Indicators

Let's look at an example of a metrics that meet these criteria


11/19

The Gartner Business Value ModelIs A Good Starting Point

GartnerBusiness

ValueModel

SalesEffectiveness

ProductDevelopmentEffectiveness

SupportServices

SupplyManagement

DemandManagement

MarketResponsiveness

CustomerResponsiveness

SupplierEffectiveness

OperationalEfficiency

InformationTechnology

Responsiveness

Finance andRegulatory

Responsiveness

Human ResourcesResponsiveness

Customer

Responsiveness

SalesEffectiveness

Sales OpportunityIndex

ForecastAccuracy

CustomerRetention Index

Sales CycleIndex

Sales CloseIndex

Sales PriceIndex

On-TimeDelivery

ServicePerformance

Order FillRate

TransformationRatio

MaterialQuality

AgreementEffectiveness

InformationTechnology

Responsiveness

SystemsPerformance

New ProjectsIndex IT Total CostIndex

IT SupportPerformance

PartnershipRatio

Identifyrelevant

metrics to betracked andcommunicated

Service LevelEffectiveness

(see "The Garter Business Value Model," G00139413)


12/19

What Exactly Does the Research Cover?

Guiding Principles Metric Definitions

Applications Implementation advice Cause and effect relationships

Each metric is linkednumerically to a

balance sheet orincome statementaccount.

Income

Statement

Income

Statement

Balance

Sheet

Balance

Sheet


13/19

Applications of Performance Metrics

Planning The process ofcreating a set of business activities

or objectives that support abusiness strategy.

Forecasting Extrapolating new

versions of plans and budgets basedon the analysis of historical data.

Budgeting Involves defininga short-term, financially orientedplan, which sets financial targetsfor revenue, expenditure and cashgeneration.

Performance

Metrics


14/19

Using Metrics in Strategic Planning

So What's the Problem?

AlignmentAlignment

The ITThe ITMetricsMetrics

The ITThe ITStrategyStrategy

Measuresof IT

Performance

ITStrategy &Objectives

DefineStrategic

Intent

Agreement

effectiveness New projects

index

Systemperformance

Skills inventoryindex

Influenceplanning

process Re-prioritize

existingportfolio

Reduceresponse time

Improve ITskills

Low-cost,high-qualityprovider

Customizedservicesdeliveredquickly

Innovativeproductsaddressingnew needs

DefineStrategicObjectives

Increasestorevolumes

Develop a

Web-basedorderprocess

Improvedproductdevelopment

The BusinessThe BusinessObjectivesObjectives

IdentifyPerformanceMetrics

AssetUtilization

Customer

Retention Configure-

ability Index

Time-to-Market

The BusinessThe Business

MetricsMetrics

The BusinessThe BusinessStrategyStrategy

A E l f U i M i i


15/19

An Example of Using Metrics inStrategic Planning

On-TimeDelivery

ServiceAccuracy

AgreementEffectiveness

Customer

Responsiveness

Target MarketIndex

Product PortfolioIndex

Sales OpportunityIndex Sales PriceIndexSalesEffectiveness

MarketResponsiveness

Market CoverageIndex

Market ShareIndex

ChannelProfitability Index

Opportunity/Threat Index

Cost of SalesIndex

ForecastAccuracy

Product Develop-ment Effectiveness

New ProductsIndex

Feature FunctionIndex

Time to MarketIndex

R&D SuccessIndex

ServicePerformance

Order FillRate

MaterialQuality

Customer CarePerformance TransformationRatio

SupplierEffectiveness

Supplier On-Time Delivery

Supplier ServicePerformance

Supplier OrderFill Rate

Supplier CarePerformance

Supplier MaterialQuality

Supplier ServiceAccuracy

Supplier Trans-formation Ratio

Supplier Agree-ment Effectiveness

OperationalEfficiency

AssetUtilization

SigmaValue

CustomerRetention Index

Configure-abilityIndex

Sales CycleIndex Sales CloseIndex

Cash to CashCycle Time

ConversionCost

Business Strategy: Customized productsdelivered quickly at a reasonable price

Business Objectives: Develop a Web-based

order fulfillment process tied to pre-configuredproduct options Present customer

options

Maximize customer

control Maximize customer

loyalty

Maximize customerinformation

Immediate cashreceipts

Assemble to order,purchase to order

Identify PerformanceMeasures to MonitorBusiness Success:

And How Are Initiatives Evaluated?

An Example of Using Metrics in


16/19

An Example of Using Metrics inBudgeting: Automotive Supplier

Problem: Custom products were a loss leader for the standard product line.

Solution: Automate and integrate the quotation process.

Financial Results:

Benefits: $3.1 m

Costs: 2.3 mNet $0.8 mROI 35%Payback 11 Months

Sales Cycle Index: Baseline 6 days, Target 5 daysSales Close Index: Baseline 43%, Target 48%

SalesEffectiveness

SalesOpportunity

Index

Forecast

Accuracy

SalesCycleIndex

CustomerRetention

Index

SalesClose

Index

SalesPriceIndex

What Roles Within IT and the Business


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What Roles Within IT and the BusinessCan Make This Happen?

Business Counterparts:- CFO

- Business Strategist

- Operating Committee

- Business Management

- Product Marketing orFinancial Analyst

Let's look at thetypical tasks oractivity cycles

for some of

these roles . . .

IT Roles:- CIO

- Enterprise Architect

- Business Process Improvement

- Project & Program Management

- Business Intelligence &Data Warehousing

Integrate Essential BI Competencies


18/19

Integrate Essential BI Competenciesand Skills With a BI CC

Tools andapplications

AnalyticSkills

ITSkills

BusinessSkills

BI CCBI CC Develop user skills

Organize methodology leadership

Link to business strategy

Define priorities

Build technology blueprint

Develop business rules

Discover and explore

Have adaptable infrastructure Identify data

Extract data

Maintain data quality

Lead organizational and process change

Control funding

Data integration andmanagement

Business needs

Organization andprocesses Define BI vision

Establish standards

Manage programs


19/19

Recommendations

Follow the best practices for selectingperformance measures to build the foundation

of your corporate performance managementprogram.

Clearly establish the relationship between theperformance measures and financial outcomesso that all employees can see how operationalperformance drives real business value.

Develop a Business Intelligence CompetencyCenter with clearly defined roles, standardsand methodologies to optimize results.

how to define right metrics performancemgt

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