You are what you measure Part 1: The problem with traditional business metrics

The finance department is a hub of strategic and operational insight in most businesses. But while they absorb high volumes of data, the outputs tend to be small and periodic, like ‘revenue earned against targets for the third quarter’.

Getting this information periodically, although important for business management, means that, by the time the business responds, it might be too late. It’s like looking in a rear-view mirror and not seeing a pothole in front of you.

To survive the fast-paced, highly competitive business landscape, companies need proactive, indicative business metrics. When combined with traditional metrics, they get complete insight on which to measure performance.

The benefits are proven: According to Aberdeen research, analytics-driven businesses report 86% higher year-on-year increases in operating profit, 32% greater budgeting accuracy, and two-times greater year-on-year growth in operating cash flow.

You can bet that your competitors are diving deep into granular insights to drive their businesses, which leaves you little choice but to catch up.

Businesses need to start using proactive insights to drive their strategy and operations. And the way things are happening in the finance department is not good enough. It needs to take a new insights-driven approach when making decisions, and roll it out to the entire business.

What’s wrong with traditional business metrics?

In the “old days”, finance departments would gather information from every other business department and produce a report at the end of a period (month, quarter, year) that reflected essentials, like sales, profit, and loss.

Today, businesses generate and collect granular data every second. It’s laughable to think that finance can produce a single report based on this data. Some departments use dashboards that let them instantly access and view their data.

But many businesses are still stuck in the ‘periodic report’ mindset and don’t yet understand all the ways their data can really work for them, like having the ability to immediately react to what’s happening in this moment, rather than what happened a month ago.

Data issues

In a Sage survey, 86% of business leaders said a lack of collaboration or communication caused business problems and team failures. To get a complete picture of a client or vendor, they have to speak to at least five people – and no two people were focused on the same thing.

Traditional reports result in a similar disconnect. These are the three biggest issues associated with traditional business metrics:

1. Information is quickly out of date

Information used on the day a report is due is fresh, but with each passing minute, it starts to get stale. If finance first has to get information from different departments before producing that report, it can take days or weeks to interpret the insights and present them in a report or dashboard. By the time executives view this information, it’s already old news.

This forces executives to react to historical information, rather than respond to real-time insights. Decisions are based on guesswork rather than on what’s happening in the moment. The fresher the insights, the better chance business leaders have of making the right decisions.

2. Information is fragmented

Since data comes from different departments, it’s not likely that it will all match up. Sales, for example, might cover the most recent period, but the manufacturing of those products happened before that.

Finance departments are able to turn fragmented data into insights, but there’s also a risk that errors can creep into the reports that executives use to make massive decisions. Information can also be manipulated and biases dictate what information to include in a report and what to leave out. The consequences could be disastrous.

3. Performance metrics are siloed

Every department in a business has a different need for data and different KPIs built around their particular approach, rather than the overall business strategy. This makes it nearly impossible for the business to act as a single unit.

Although the different departments may want to align with the business’s goals, their systems trip them up: finance uses an accounting system, fulfilment uses a warehouse management system, marketing uses a customer relationship management system.

Each system probably has its own spreadsheets, which, to any other department, will be complex to decipher. Sales, for example, can’t respond to manufacturing because it can’t see how much inventory is on hand and how much is being produced. Customer support can’t assist clients if they don’t have access to fulfilment’s ordering system.

Any time departments try to share data, it’s generally done through shared files or printouts discussed in meetings. This is problematic when time is of the essence.

Why you shouldn’t measure traditional metrics alone

KPIs and other traditional-style analytics have limitations. These include:

• Choosing the right KPIs. KPIs evaluate what’s important, but who decides what those should be? Business school? Your sector? KPIs are essential to running a business but sticking to traditional KPIs means you might miss other insights or approaches to viewing information. The finance department might want to dig deeper into all data within a business using proactive metrics, but a traditional KPI culture makes this difficult.
• Narrowly focused KPIs. Traditional performance metrics stifle proactivity and might make you overlook performance issues, like precisely predicting cash flow shortages. Traditional KPIs tend to only focus on one area and trying to interpret that data in any other way could introduce dangerous biases. There’s no freedom to explore the data or to analyse it from a different perspective. If sales data is down, for example, there’s no way to know if the issue lies with fulfilment or customers.
• KPIs can be demotivating. Sales fluctuate for a number of reasons. A competitor discounting a similar product is one example that could lead to reduced sales. When the sales team see these figures without the context, they might be demotivated.

In Part 2 of this series, we’ll look at the different types of performance metrics you can use to complement traditional KPIs.