Part 1: The problems with traditional business metrics
Written by Keir Thomas-Bryant
Cast your mind back to the dark old days. The finance department crunched the numbers arriving from the various departments and these were typically hand-written or typed, at best. At the end of every period, whether that was a year, quarter, or month, they produced a printed report for the executives showing the essentials of profit and loss, or sales figures.
That was just fine back then, of course, because that’s what everybody else did.
Now? Things have changed. Business has evolved so that granular data is generated and collected within the business on a second-by-second basis. The idea of a finance department producing a single report periodically is laughable. Some have moved across to dashboards, for example, that give an instantly accessible view of the data.
However, many businesses still haven’t got beyond the other problems surrounding the “periodic report” mentality and approach. They haven’t grasped the myriad of ways their data can truly work for them in providing insights.
With such insights on its side, a business can be responsive and reactive. It can act on what’s happening right now, rather than what happened days, weeks, or even months ago.
Problems with data
In a survey conducted by Sage, 86% of business leaders told us they blame lack of collaboration or bad communication for business problems and team failures. Many stated they must consult with at least five employees to gain a somewhat complete picture of a customer or vendor, and it seems no two employees were focused on the same customer or business problem.
This begins to illustrate the issues with traditional reports and/or dashboards in most businesses, of which three can easily be identified.
- Information gets old quickly
The information your business generates is like bread. The clock starts ticking as soon as it’s mixed into a report, and although fresh the day the report pulled from the finance oven, the staler it becomes the further you get from this point.Significant delays are introduced if information needs to be gathered from each department and then transferred somehow to the finance department, even if this is done electronically. It can then take days or even weeks if the finance department needs to work its magic compiling and interpreting the insights into a report, or to present it on a dashboard.The report or dashboard eventually seen by the executive could be so out of date that it’s essentially historic. Historic data has its uses, of course, but it can’t be the default.Even worse, old reports force the business decision makers to be reactive, rather than responsive. It forces executives to make guesses, rather than informed decisions based on what’s happening right now. Every business decision is in some way a gamble, but successful gamblers know better than to use old information. Those betting on a horse race might study a horse’s form in previous races–the old information–but they also monitor the condition of the turf on race day, and listen to the word coming from the stables right up until the horses enter the starting gate. The fresher the insights, the better the potential for making the right decisions.So why are businesses still seemingly obsessed with old information?
- Information is siloed
Because information is drawn from each department, there’s little likelihood that it all matches up logically. For example, the sales figures will probably cover the period just ended, but the manufacturing of those products sold might’ve actually taken place before that period. Yet the information sent by them is likely to be for the period just ended because all that’s being examined in their part of the report is cost.It takes the experience and interpretation of the finance department to turn everything into something that makes sense, but this is also where bias or misunderstandings can be introduced. And considering massive business decisions are made using a typical report then these biases or misunderstandings can have disastrous consequences. It can lead to the logical fallacy wherein people believe something to be true simply because others do.And none of this is to mention the implicit trust the finance department must have in the veracity of the information that each department chooses to send. The very act of creating reports invites manipulation and distortion because it involves active choices about what should be included, and what should be kept under wraps.If all information was always “live”–always up to date–then the situations listed above could simply not happen in the first place.
- Performance metrics are siloed
Each individual system within each department enforces its own approach to its data–a kind of culture surrounding the purpose for the data–making it hard to enforce an overall mission statement within the business. Each department might have its own KPIs built around their particular view of their data, rather than the goals of the entire company.This makes it near-impossible for the business to act as one. It’s not necessarily that the departments aren’t trying to align to company goals. Their hands are tied by their systems.The finance department runs an accounting system. The sales department relies on a customer relationship management (CRM) system. The fulfilment department runs a warehouse management system (WMS).Between all these systems are a multitude of spreadsheets propping up certain functions or even entire departments, each vital in its own way but usually hoarded over by just one person who can understand its labyrinthine complexities.The sales department finds it hard to be responsive to what the manufacturing department is doing because it can’t instantly see the amount of inventory its producing. Customer support can’t be responsive to issues arising in fulfilment if they can’t track customer orders. Any attempt at inter-department cooperation is slow and often built around shared files or even printouts discussed in meetings. With time at such a premium nowadays in business, there simply isn’t the luxury for anybody to take their time making a decision!Successful businesses need to act as one.
The danger in monitoring traditional metrics alone
Even if the hurdles listed above are somehow overcome, there remain serious limitations with the use of KPIs or other traditional-style analytics – such as NPS for customer satisfaction – within most businesses.
Here are some examples of issues commonly cited.
Choosing the right KPIs: The KPIs you use evaluate what’s important – and provide valuable insight – but how did your firm or the departments within it choose them? For many businesses the most important KPIs came straight from business school. Others might be ones that are considered by somebody, somewhere to be essential to your sector or type of business. Nobody can deny that most of these KPIs are useful or even essential, regardless of their origin. But because of their importance in running a business, these kinds of traditional KPIs tend to be given an elevated status that can elbow aside other insights or approaches to viewing information that might be equally important. The finance department might want to take a fresh perspective on all the data within a business to dig deeper and use more proactive metrics, if only to compare against traditional metrics–but traditional KPI culture might make this difficult, if not impossible.
KPIs tend to be narrowly focused: Traditional company performance metrics don’t allow you to be proactive, or to catch issues to avoid business performance being affected. They don’t allow you to be precise in predicting cash flow. And an inherent limitation of KPIs is that they can only tell one thing about one area. Attempting to understand the data in other ways is to enter the realm of interpretation, and that brings with it natural yet dangerous biases. Hopefully the KPI insight should be structured so that the message you’re attempting to draw from it is unambiguous, but there is rarely the freedom to roam across the data or analyse the same topic from a different perspective. For example, if a KPI shows that sales performance is down, it would be good to be able to gain perspective on the problem from a fulfilment perspective, or a customer service perspective. Did they have an influence? Almost certainly. But unless you have KPIs setup for those departments to monitor the same data over the same period, this kind of flexibility is unlikely. And the business suffers accordingly.
KPIs can be demotivating: Let’s say sales have a KPI for a particular product line. However, your competitor drops the price of their similar product. You’re able to respond, of course, but there’s little doubt the KPI figures will be dented because of the change. When that negative data is fed back to the sales team at the end of that reporting period, they’re hardly going to feel encouraged. In a similar way, KPIs are unable to respond to changes in corporate culture or even reflect it – you might say you care about staff workloads but at the end of the day KPIs typically measure monetary values.