Monitoring the right vital signs has always been essential for informing key company decisions. The coronavirus pandemic hasn’t changed that, but many businesses have changed what they consider a vital sign and how to measure it.
To deal with the ongoing health and economic impacts of the pandemic, businesses worldwide revised traditional key performance indicators (KPIs), added new ones, and changed how they prioritise their KPIs, said Tinashe Chirume, ACMA, CGMA, an accounting manager at British Caribbean Insurance Co. in Jamaica.
“The virus increased credit, liquidity, and market risks, and KPIs now focus more on business survival, on being agile,” Chirume said.
In 2021, he expects nonfinancial vital signs reflecting employee and customer demands to gain importance. That includes, for example, KPIs measuring employee satisfaction, staff turnover, or an increase in customer calls because the services they get don’t work well for them.
Revenue, profitability, and growth will remain important, Chirume suggested. But where the data for these traditional financial KPIs comes from may change. New revenue streams from digital channels and customer/client concentrations have become crucial since the pandemic started.
Figuring out what and how to measure
Companies looking to monitor their performance can take their pick from a bewildering array of figures and ratios.
Canvassing opinions across a company on the most useful metrics to track helps ensure collaboration and reduces the risk of manipulation to meet targets, said Brian Head, FCMA, CGMA, the CFO of Armour Communications, a UK company that provides encryption for secure digital communication.
“At every level, people all have to buy into what’s being measured and why it’s valuable,” Head said. “If you don’t, you’ll just have uninterested parties, either paying lip service, finding ways around it, or gaming it.”
Often companies know what they want to measure, but getting the data that gives them relevant metrics for that KPI can be difficult, said Danielle Supkis Cheek, CPA, a director at business and accounting services firm PKF Texas.
That is particularly true for some of the nonfinancial vital signs companies are likely to start monitoring because of the pandemic, Chirume said. For example, companies have been looking to employee net promoter scores, attrition and turnover rates, absenteeism, and employee uptake of HR programmes to measure employee satisfaction, but figuring which data is best may be difficult.
The pandemic represents one of the most significant business disruptions in recent memory, Cheek said. Determining how much pivot occurred in customer-facing or back-office matters can change the meaning of certain indicators or metrics.
Even minor operational changes, system improvements, and meeting of key thresholds may indicate it is time to reassess the metrics you track to make sure they are still aligned with the company’s position, she added.
Companies that select the right KPIs to track can see unrelated, money-saving benefits, such as combatting fraud, she said.
As a consultant, Cheek runs through all the scenarios in which data could potentially be manipulated before recommending indicators for a company, often preferring mixed ratios such as those that compare operating and financial metrics.
The power of comparing financial data to operational data is that they typically cannot be manipulated in the same way by the same people, Cheek said. Also, people understand how to interpret mixed ratios fairly easily, as it can tie operations to dollars.
For example, a cash-strapped client of hers whose products had to be stored in tanks for various periods created a mixed ratio measuring contribution margin per tank day. The goal was to find the most efficient cash generation strategy by addressing the limiting factor, which was the tanks, she said. The operational team learned a lot about how to select what batches needed to be made in which order.
Measurements that rely on data from different parts of a company are much harder to misrepresent, she said, adding that the cost of potential fraud and the ability to mitigate fraud risks through a proactive data monitoring programme can justify additional staffing or technology costs linked to tracking and monitoring those figures.
To get KPIs right, Cheek suggests teams:
- Prepare an inventory of all data sources, including unstructured data, that they have access to and make notes about data structure and known quality.
- Interview key decision-makers and potential metric users to see what kinds of problems they have, what they need fixed, what various long-term or short-term goals they have, and what worries them most about where they lack insight.
- Talk to the people who are integral to creating the data. Learn how the data is generated, inquire about data dictionaries, and ask people what they think of the data and what it means to the business. These data experts may have ideas of what should be incorporated into the KPIs.
- Be observant of what happens operationally on production floors. Maybe there are large piles of scrap metal in a machine shop that typically has very little scrap in cost of goods sold.
- Come up with a hypothesis for how certain metrics will answer unknown questions they learned about, how the metrics will relate to one another, and how they fluctuate over time.
- Start testing theories, exploring the data, and refining theories. Cheek said she likes to use software such as Excel, Tableau, and/or Microsoft Power BI to visually explore her data.
- Put together preliminary ideas and communicate them informally or formally to key stakeholders to see if the information is relevant and provides timely information that can be used for decision-making.
- Reassess, tweak, and improve the most relevant KPIs continuously. They should never be set in stone.
A good place to start is the list of items in a document retention and destruction policy. If they don’t have one, they should provide their list of items to the person responsible for putting a document retention and destruction policy in place.
Formatting and exploring data, including investigating outliers, trend anomalies, etc., are usually the most time-consuming parts of implementing any kind of KPI programme from scratch.
— Sophie Hares is a freelance writer based in Mexico. Sabine Vollmer is an FM magazine senior editor. To comment on this article or to suggest an idea for another article contact her at Sabine.Vollmer@aicpa-cima.com