Looking ahead with predictive KPIs

Key performance indicators (KPIs) are defined as the quantifiable measures used to determine how well an organization meets its operational and strategic goals. Too often leaders don’t look at KPIs through the right lens. Executives who look at KPIs to answer the question, “How did we do?” instead need to ask, “How will we do?” Rather than a rear-view-mirror look at performance, the right batch of KPIs can help predict business success, reveal the challenges ahead, and help data-driven organizations gain real competitive advantages.

Predictive KPIs help executives lead the organization rather than just manage, shifting the focus from short-term objectives to longer-term visions. Instead of numbers to hit, these KPIs can help drive change.

The end goal for any company or organization is growth. The KPIs will depend on the organization’s goals, business model and processes. Some KPIs are almost universally applicable, while others will vary by industry. We suggest starting by identifying a value outcome—your organization’s guiding north star. For public companies, it may be driving shareholder value. Secondly, identify the strategic drivers, then identify the tactical drivers. Lastly, map financial and operational metrics to the tactical drivers.

Start by pulling in the organization’s leadership and focus on what to measure rather than how. By integrating your ERP with a modern financial management system, you can automate KPIs and then update these in real time. This gives you the ability to create reports and dashboards that automatically combine operating dimensions with financial data so you can analyze KPIs for each operating entity, location, building, region and other units.

Predictive KPIs Vary by Company Maturation

As outlined in our eBook Predictive KPIs, predictive KPIs will vary based on the maturation stage of a company, and these stages are typically start-up, adoption, growth, maturity and reinvention/decline. The strategic focus for each of these stages are execution, engagement, expansion, efficiency and perception, respectively.

For example, at the start-up stage, predictive KPIs might include:

• Budget variance and the trends over time: Greater variances would suggest the organization is not budgeting properly, which could lead to challenges moving forward.
• The ability to meet project deadlines and speed of implementation (if applicable): Achieving high marks on these KPIs shows the organization can meet its commitments to its customers.
• Gross burn rate: Measures the rate at which the company uses up its available cash to cover operating expenses. The higher the burn rate, the faster the companies with a high burn rate will run out of cash without more funding or financing.

At the maturation stage, predictive KPIs might include:

• Customer lifetime value: As a predictive KPI, increases or decreases in customer lifetime value can show where the organization is headed on future return. If the customer lifetime value is decreasing, the company will need to add more customers at a higher rate to achieve its results.
• Average revenue per user: ARPU is a shorter-term way to look at customer revenue. As with customer lifetime value, decreases in ARPU might predict revenue challenges moving forward.
• Maintenance costs: An increase in maintenance costs is another predictive KPI that might indicate greater organizational inefficiency. Over time, it’s reasonable to expect some modest increase as assets requiring maintenance age, but unexpected jumps are signs of problems to come.

Finding the right mix of KPIs is not easy. Some of the challenges include:

• Understanding where the organization is on a maturation scale
• Identifying relevant KPIs
• Establishing both internal and competitive benchmarks
• Getting the right data
• Explaining the KPIs to leaders in the organization
• Having the right platforms in place to simplify reporting, regardless business complexity

You can learn more about predictive KPIs by reading our eBook entitled Predictive KPIs.