Danger of Leading Indicators

22 12 2009

UPDATED 12-23, 2009:  Boston.com story about home sales – seems like we have stories with divergent viewpoints.  Good example of how a single version of the truth depends upon the story teller…

CNN Opening Paragraph: NEW YORK (CNNMoney.com) — After surging 10% in October, sales of existing homes jumped again in November, growing 7.4% compared with October to an annualized rate of 6.54 million units, according to the National Association of Realtors. (full article)

Boston Globe Opening Paragraph: WASHINGTON—Sales of new homes plunged unexpectedly last month to the lowest level since April, a sign the housing market recovery will be rocky and heavily dependent on the generosity of Uncle Sam. (full article)

Read each…Ahh, the politics of spin, or is it the spin of politics of spin.

November saw a healthy jump in home sales.  The good news is that home sales and housing starts are usually very good leading indicators about the health of the economy.  Yet the bad news, in this case we have a potentially baked number.   The market is being artificially inflated with both lower interest rates and a government subsidy for first time home buyers.  What makes this worse is we have created a situation where we know less – we know a number improved, but we have no understanding if the economy is better.

CNN Story on November Home Sales

This is one of the fears about designing the right KPIs.  We want to find the perfect KPI, or create a list that tries to include everything.  What we need are a few KEY indicators to trigger the right conversations about what actions (business levers to pull) to take or not take.   We also need to discuss performance and action in a holistic manner and not get caught in panic mode because one indicator seems to be below expectation.  We also do not want to trigger an action to artificially improve a number.

For example…Days Sales Outstanding (DSO) can be used as a measure of customer satisfaction.  The interpretation is that people pay the bills of the people they like first.  If you are able to shrink the number, then you at least have an indication that customers are generally happier than they were last month.  If the Marketing VP were compensated on Customer Satisfaction and we used DSO, the VP might change the payment terms.  While we might see improvement in DSO, we are probably not seeing an improvement in Customer Satisfaction, which was the goal when we started.

As you are designing KPIs:

  • Start with your high level annual goals for the year
  • Build out a system to discuss the implications (don’t just look at the number)
  • Assign someone to write up the implications on a regular basis
  • Create a commonly understood definition of the KPI, and document it where it can be easily accessed




Performance Management Defined

17 09 2009

Last week I asked Jonathan Becker of Manage by Walking Around blog and Gary Cokins of Closing the Intelligence Gap blog to argue the definition of Performance Management and what it might look like…and in all fairness, I need to also share mine:

Performance Management is composed of three distinct disciplines, Strategy Management, Operational Performance Management, and Financial Performance Management. It is a systematic and standardized management and communication process to proactively enhance performance gaps.

  • Strategy Management – to set direction, foster alignment, and communicate priorities
  • Operational Performance Management – where we execute our goals and objectives by creating customer value along with our core processes.  This is also the most widely defined as each industry handles this somewhat differently, but how we manage it should be integrated with a common process.
  • Financial Performance Management – to provide insight into what resources we have and how best to use through monitoring and reporting upon the budget.

In addition to this we need to use within the same system our enabling support structure.  This includes managing technology, culture, people, etc.  Each element needs to be improved upon based upon strategic need, thus helping to eliminate personal politics and squeaky wheels.  Below is my Performance Management framework.

PM Framework Master

Gary makes a great point that most people create a framework that is intentionally incomplete to enhance their offerings (and I completely agree).   I built the above framework with the goal of a complete framework.  It is not perfect, but I feel provides a strong starting point to assess our process improvement gaps.

In the end, management is just a process, albeit a very important one.  It needs to be enhanced and improved to leverage the most of the management talent.





Performance Management Defined (PM Series)

10 09 2009

One  item plaguing Performance Management is that the concept has no real meaning that is both commonly understood and concisely stated.  To some, Performance Management is financial, to others it is software, and to some just a phrase they like to use. To shed a little light on this, I thought I would ask fellow bloggers, Jonathan Becher and Gary Cokins to debate the various definitions.

  • How would each of you define Performance Management and what does it mean when it is successfully implemented?

You both write specific blogs about the definition of Performance Management (Becher/Cokins) and have been examing the idea for some time.  Have your opinions changed on its definition?  What have you seen the market do over the last few years that you agree with or perhaps disagree with?  Jonathan, you do a nice job providing an indicator of the level of maturity that Performance Management in that a Yahoo search resulted in 14 million hits while the well understood concept of Customer Relationship Management returns 15 million hits.  Clearly, Performance Management is now mainstream, but does it really have a buying agenda like Customer Relationship Management?  Or are people just buying parts and using the popularity of the term to elevate the project?  And even so, does it matter?





People, Process, and Technology

12 08 2009

In every BI vendor’s marketing material is the traditional People, Process, Technology venn diagram.  The promise is that leveraging the combination of the three will unlock enhanced results.

Traditional Venn

In order to use this for performance management, we need to rethink the original deisgn.  First we need a vision on how to bring these together and communicate what matters and how it will be done.  We also need to bring a focus on getting only the right things done and specifically not doing the wrong things.  Words (and diagrams) do little in terms of actions.  For us to achieve sustained performance, we need to understand and communicate which processes can create value (and which do not), what technology it will require, and a focused management process to ensure they get done in a timely manner.

Venn New

As you design your game plans, you need to make sure you are developing not only a plan but how success will be defined:

  • What is the desired outcome?
  • Who gets to define it?
  • How will it be managed?
  • What happens if it goes wrong?
  • Who would provide the best rational for the disenting opinion?




KPI: Overhead per Customer

22 07 2009

If you are trying to measure management improvement, how about looking at Overhead per Customer (or per transaction).  This should be a decent indicator in terms of management and overhead scalability.  If we are doing a better job of managing the business we should see some increased returns in the management function.

  • If the trend is increasing, we should be discussing the scalability of the organization.
  • If the trend is decline, is it for the right reasons?

While you are at it, you might also include cost of sales per transaction.  This one is perhaps a little more debateable in that we don’t want to artificially manage this number.  Reducing the number of sales reps, may drive down the number.  Reducing compensation plans may chase away our better sales reps.





Perfection to Value

16 07 2009

One of the areas where performance takes a giant hit is in the area of project initiaition or closure.  And this is further complicated by personal preferences, politicing, and portfolio management.

In the diagram below there are three lines.  Line A is Corporate or Organization expectation of the trade off between speed and perfection.  Projects or tasks with little value (lower left corner) should require lower expectations of research, analytical thought, and discussion.  While projects that are higher in value (farther up to the right) should have higher expectations on quality of thought and preparation.

Perfection to Value Trends2

What happens all too often is we see line C where people don’t have the capacity or time to do the right job and throw something together.  We see that in the end we deliver far less than desired while wasting resources.  The small blue box is the value received, the red box is the wasted resources, and the green box was the original expected value of the project.  The arc is the value frontier, which demonstrates the trade off value between speed and quantity – or what we expect in terms value created from a combination of speed and quality.

Quality vs Speed - Speed

Or we have line B where we basically have a failure to launch because we spend all of our time debating how to be perfect.  Very similar to the situation with line C where we deliver far less than originally desired while wasting similar resources.

Quality vs Speed - Quality

Portfolio Management

Is this an individual issue, or a management issue?  If we were to plot out the results of the individual projects how would your organization look?

Perfection to Value Management2

If we were to see trends like the circles above, this would indicate a management problem.  As management either did not get the individual(s) to move back to the expected line, or management places to high a premium on either speed or perfection thus artificially altering expecations.

What I have witnessed is that line B is more often the norm.  Line C typically causes painful exposure, which causes people to be more fearful, thus needing more inputs and more support.  This creates more meetings, more approvals, more time, more people, which again causes more information, more analysis, more debate.  It is a vicious circle.

Failure to Act is a companion blog.





KPI Design: Better than average

16 06 2009

In the June 1st issue of ESPN Magazine there was an interesting story about Rafael Nadal.  In the story there is a call out with some interesting facts about his play.  One of the items is his rotations per ground stroke versus the average pro.

Nadal Math Smaller
While this is fanatastic information to explain why he is better than average, what might have been more relevant to the article which is about his excellence would be to compare him versus the other top players.  What if all the top players are hitting at 5,000-6,000 rotations per ground stroke?

As we are designing KPIs and targets we need to make sure we are measuring against a relevant target, not just an industry average.





Manage vs. Monitor

21 05 2009

It has always struck me as a little odd that a great deal of marketing literature in the Business Intelligence and Performance Management space talks about “monitoring” performance.  Isn’t the entire goal of this space to help companies actively “manage” their business.  My concern is that “monitoring” assumes that all is well unless some alarm is triggered.  

While it is fine for the thermastat to monitor temperature, perhaps business is a tad more complex.  Instead of waiting for things to get to a threshhold, we need to understand a number of things that all work more or less together to explain a more complex concept.  

Instead of just showing up for a meeting, what if we focus on creating a culture of being prepared for a meeting.  We can then use Business Intelligence as a organized and focused set of tools to help with our prep work.





Setting Targets

23 04 2009

Setting targets for Performance Indicators should be well thought through. This should not be an exercise in looking at the historical average (unless that is specifically relevant) and then apply 10% as the desired increase. You will want to review history, but you need to understand the goal. It is also important to define the KPI clearly.

For example, let’s use the retail market’s target of sales to sales last year. Retail has traditionally looked at this on a daily basis, as well as rolled up to the week, month, quarter, and year. I have two primary concerns with this:
  • If the weather was bad, we ran a promotion, or some other contributing factor, we may not know it and are really not comparing apples to apples. Additionally, what if last year was really bad? Beating that number doesn’t do much for us. 
  • If we are reviewing this on a daily basis, we loose institutional knowledge due to the repetition. What if we miss a day? Is there any repercussion? What if we miss three days in a row? What if we miss 10 days out of 14? Were there enough days in there of good performance to hide the fact that a trend is occurring?

What would make more sense to me would be to look at this number as a rolling average, or take the total sales for the last 365 days / 365 on a daily basis. Here we can very quickly identify a positive or negative trend, as we don’t have to look at numbers that swing wildly by the day of the week. Instead of talking about  a couple of bad days, we understand that even though we had a couple of bad days, the overall trend is above the goal. We can also integrate our sales goal and show it relative to the trend line.  





Complexity

21 04 2009

Think of all the complexity we have created as organizations. Whether data, process, people, and of course politics. We time stamp everything we can, we empire build, we work in silos, we do things to do things. Or even worse, we do the things that are easy, or that we like to do. And because of all this complexity there is no way to identify that those activities aren’t helping.

As a company or organization grows, this continues to add to the complexity. We get further and further away from understanding what creates value.

  • What would happen if we started to unravel the organizations complexity?
  • What if we created a new type of organizational hierarchy focused on value creation?
  • What would happen if we just focused our efforts on the stuff that matters?




Defining Operational Performance Management (OPM)

12 02 2009

OPM is part of a number of buzzwords within the industry that is often used, yet poorly defined. While it is part of a the Performance Management family (which is also overused, generally accepted, yet not well defined). For us to make the niche more credible it is important to have a generally accepted definition of what it means.

I have tried to frame OPM as a methodology, a framework, a process in which the focus is upon creating value with the customer in mind. Where Financial Performance Management strives to improve the budget development and budget management processes to enhance shareholder value, OPM takes us beyond the constraints of the financial mindset. We need to look at the processes and initiatives that drive customer value creation. Processes and initiatives like sales and marketing, operations, supply chain, pricing and discounting, etc.

It is clear these two legs (OPM & FPM) must work together, and one should not take priority at the expense of the other. All to often our budgetary process becomes our measure of success, even though it is a lagging indicator. Where OPM becomes particularly valuable is that if we are building customer value correctly, it leads to greater financial results. Are we better off to hit our budgets in a year when the market was wildly successful? If the market grew at 10%, yet one grows at their budgeted 8% – was management successful?