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8/2/2019 How to Define Right Metrics PerformanceMgt
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Notes accompany this presentation. Please select Notes Page view.These materials can be reproduced only with written approval from Gartner.Such approvals must be requested via e-mail: [email protected] is a registered trademark of Gartner, Inc. or its affiliates.
How to Define the Right Metrics for
Performance Management
Michael Smith
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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?
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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
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Issues Requiring Improvementsin Performance Management
What is the root cause of these issues?
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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?
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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.