In the quaint days of old, managing a business entailed studying last quarter’s revenues and expenses, taking the pulse of market demand, and conjecturing a forecast with fingers crossed. Do this today and you’d be laughed out of the boardroom.
Companies now plot their future on more than just financial metrics. To steer the organization forward, they rely on an assortment of nonfinancial performance indicators like customer satisfaction, employee engagement, brand loyalty, market share, and pipeline throughput.
The thinking is that such measurements provide a more accurate, comprehensive, and especially forward-looking sense of actual business conditions. Unlike traditional financial metrics that tell leaders how well the business did, nonfinancial metrics indicate how well the business is doing. Fortified with this knowledge, company leaders can make more-assured and productive decisions.
Sounds all well and good. The problem is that discrete business units, departments, and functions are developing nonfinancial metrics with little centralized oversight. One can argue that different business leaders know enough about their respective fiefdoms to craft appropriate and useful key performance indicators (KPIs). Since each leader is held accountable for the performance of his group, he should own the metrics without meddling from above.
But what if one group’s KPI unknowingly affects the performance of another group’s KPI, as is inevitable? A low days-in-inventory ratio is good news for the chief supply chain officer, but it may cause product stock-outs that result in customer dissatisfaction, bad news for the chief customer officer.
Obviously, the achievement of desired scores in one part of the organization must be balanced against different goals in other parts. That’s not an easy task without some form of governance structure in place to collect, prioritize, monitor, and assess the enterprise-wide use of nonfinancial metrics.
Meanwhile, the sheer number of nonfinancial metrics grows wild. The Hackett Group tallies close to 100 KPIs across diverse industries.
“Businesses are developing all sorts of innovative KPIs, not surprising given the advancements in data analytics,” says Jason Balogh, principal in Hackett’s enterprise performance management transformation practice. “The issue with the KPIs is that there are too many ‘PI’s’ and not enough ‘K’s.’”
Greater rigor is required to ensure that senior executives are aware of both the upsides and the downsides of nonfinancial measurements, and, most importantly, their interrelationship.
“Each metric is designed to align with the business goals of a certain function, but they always cross over to affect the business goals of other functions,” says Sean Monahan, a partner at A.T. Kearney. “No one metric is perfect. They all come with tradeoffs.”
These tradeoffs—like the aforementioned potential impact of low inventory on customer satisfaction—must be comprehended. The challenge is oversight. But, traditionally, no one executive has been entrusted with supervising the development and use of KPIs across the organization.
Resolving the issue is a delicate matter. The idea of someone else owning their data irks business leaders. “The heads of sales, marketing, supply chain management, product development, and HR don’t want another executive with little understanding of their sphere of operation looking over their shoulders and telling them what they should and shouldn’t be doing,” says Balogh. “They’re closest to the activities associated with that data and feel they should own it, rightly so.”
What’s the solution? The answer is not for a single executive to police other executives’ use of KPIs, but for the executive to be a fulcrum for sharing the data. “One of the best ways for an organization to improve its performance management environment is to have the CFO partner with the rest of the business in the development of more-balanced metrics,” says Balogh. “The goal is not for the CFO to micro-manage or own the metrics, but to analyze their interrelationship.”
In other words, the CFO’s accountability for traditional financial metrics should extend to nonfinancial measurements, as well. “The CFO’s job is to synthesize all kinds of information—financial and nonfinancial—flowing into the business to determine their correlations and noncorrelations,” says Michael Blake, president of Arpeggio Advisors.
Why must the CFO and not the chief operating officer, for instance, take on the task? “Most CFOs have basic skills in statistics to determine if the metrics connect to actual company performance and are aligned with strategic goals,” Blake says.
Sharing this perspective is John Mulhall, U.S. leader of the financial management consulting practice at KPMG. “Many CFOs have a clear understanding of the company’s strategy, operating model, customer channels, and competitive challenges to ensure that the right financial and nonfinancial metrics are used to drive performance,” he says. “They also have the ability to translate the numbers for the CEO, board of directors, and shareholders.”
Chief Performance Tracker
More finance chiefs are assuming this broader responsibility. About three-quarters (76%) of finance teams currently track some nonfinancial metrics, according to a November 2016 survey of about 300 global CFOs by Adaptive Insights. Nearly half (45%) of the respondents say they now act as their companies’ de facto chief data officer—reporting on a range of KPIs, including nonfinancial metrics.
That storehouse of nonfinancial information represents 20% of all the KPIs tracked today. Looking ahead a mere two years, however, 48% of the CFOs project that nonfinancial metrics will comprise 30% of the total volume of KPIs they track.
That’s a lot of data flowing into finance, but someone has to be accountable for business performance, says Tom Bogan, CEO of Adaptive Insights. “The CFO’s job is to blend, balance, and evaluate all the KPIs coming in from across the organization to cultivate what really matters; otherwise there’s the risk of too much information cluttering decision-making,” he explains. “The CFO also is in the ideal position to drive consensus around the KPIs, helping business leaders spot trends early to mitigate risks and seize new opportunities.”
Nevertheless, Bogan acknowledges, the challenge of rapidly assimilating operational and financial data into a single source of truth is a “daunting task” for finance teams. A CFO must extract wide-ranging metrics from across the enterprise, ensure the metrics are accurate and as real time as possible, and then analyze the interplay of the measurements to discern interesting or alarming correlations.
CFOs also need operational skills to detect if departments and functions are tracking the right metrics. They must be able to prioritize which KPIs are more important than others in achieving the company’s overall strategy. And in doing all of this, they must not step on the toes of other department and function heads, much less the chief operating officer.
“The CFO’s goal is to balance the tensions across families of measures and their probabilistic outcomes, ensuring data transparency and a consistent visibility of overall performance,” Balogh says.
This heightened accountability for CFOs raises the obvious question: Is the finance department up to the task? If not, then today’s ideal performance management model may be little more than tomorrow’s pie-in-the-sky waste of time.
One CFO putting stock in the concept is Neil Williams of Intuit. The company developed what it calls the “True North Framework” to monitor, manage, and report on the nonfinancial KPIs in use across its organization.
The framework is composed of four categories representing employees, customers, partners, and shareholders. Each features a list of the nonfinancial metrics of key import to its constituency. For example, the metrics for “employees” include engagement scores, which are determined by quarterly surveys; turnover rates; and what Williams refers to as “regrettable employee losses,” a tally of exceptional employees who have left the company.
For “customers,” the primary metric is NPS (net promoter score), which gauges how willing a customer is to recommend the company’s products and services.
Each Intuit product has an NPS that encompasses its specific value proposition to the customer. “With our TurboTax product, for example, we draw the NPS from three measurements—how quickly our customers are able to finish their taxes, their ease of use in doing that, and how quickly they receive their largest allowable refund,” says Williams. Intuit captures this information via customer surveys and online monitoring of the customer’s use of a product, he notes.
All of Intuit’s nonfinancial metrics flow into a data repository, where they are sliced and diced by QlikView business intelligence software and served up on a customized dashboard. “Once a month, I meet with the top 400 leaders here in a videoconference to go over the dashboard,” says Williams. “We discuss the findings, deciding the things we need to improve upon. They see me as their partner in the process.”
Mark Partin of BlackLine is another finance chief who has effectively assumed the role of chief data officer. Among the key nonfinancial metrics he gathers from across the business for tracking is NPS.
“Traditional accountants often think that DSO [days sales outstanding] is the truest measure of customer success, but frankly the information comes in too late to do much about it,” he says. “NPS really gets to whether or not your customers are satisfied and enables a company to take mitigating actions now.”
Partin also finds value in scoring “time to implementation,” a measure of the time between a customer sale and when the buyer begins to get value from the product. That is different from the typical “time-to-revenue” metric calculating the time between a purchase and the actual use of a product, at which point a software company begins recording revenue.
“It’s just a much more insightful metric,” says Partin. “Just because the revenue flows in doesn’t mean much of anything in terms of customer satisfaction. There’s always a learning period that occurs once the product is used.” By continually measuring this time period, BlackLine can take actions to reduce it, Partin says.
BlackLine’s finance team also is entrusted with measuring the engagement of both customers and employees. User engagement is gauged by tracking how many of the company’s software licenses are used by each customer. “If a customer buys 1,000 user licenses and only 900 are being used, then 100 licenses are going to waste,” says Partin. “As a software-as-a-service provider, if you want customers to buy your licenses every year, they need to regularly, routinely engage with the product.”
Employee engagement is tabulated by annual surveys of the workforce. Says Partin, “Why wait for the retention metrics when you can gauge employee satisfaction, motivation, and productivity well ahead of the curve?”
Both Williams and Partin insist that finance is the right department to entrust with oversight of nonfinancial KPIs. “I have a strong point of view that the finance team is less biased and less invested in the business units and functional groups, making it more likely that we can consistently and efficiently collect, calculate, and report the metrics with an objective view of how they affect overall strategy,” Williams says.
Adds Partin: “The CFO tends to be the person in a business who best recognizes the value of metrics and is in a prime position to drive accountability throughout the organization. We know which KPIs will drive the financial outcomes we want, and the initiatives that tie back into them.”
Demand for Data Diviners
To perform the task of overseeing nonfinancial KPIs, finance needs staff members with data science skill sets. So, many CFOs are starting to recruit data analysts from outside the traditional finance and accounting professions and installing them in their departments. At Intuit, Williams is beefing up the analytical capabilities of the financial planning and analysis group.
“Twenty percent of the finance workforce [at Intuit] is now focused on reporting, forecasting, and budgeting,” Williams says. “We’re constantly looking for ways to automate more of the accounting role so that the staff spends less time on manual data collection and working on spreadsheets and PowerPoint presentations, and more time answering the important questions posed by the numbers.”
Still, he acknowledges that finance “is not all the way to bright on this. We’ve made great strides in getting the data available and out quickly, with high integrity. We’re now beginning to understand what it all means and the actions required.”
Partin’s company, BlackLine, is in the business of developing automated tools to liberate accountants from routine tasks so they can provide value-added analyses of nonfinancial metrics. Nevertheless, he maintains that technology is only part of the solution.
“You also have to create structure and accountability around what you’re doing to ensure the metrics are accurate, timely, and actionable,” he says. “It’s up to the CFO to integrate the nonfinancial metrics and the financial metrics in creating the long-term strategic plan.”
Partin provides the example of a sales department projection for a significant increase in the number of new global customers over the next three years. That growth will subsequently require the legal department to contract additional attorneys and the accounting department to hire more staff in billing and collections.
“Knowing this, finance is now in front of what will be a future capital allocation, giving the CFO time to be more balanced and flexible in the budgeting,” says Partin. “That’s why we have to lead this. We’re in the perfect position to complete the puzzle.”
Russ Banham is the author of 24 books and a longtime contributor to CFO.
At Ricoh Americas, nonfinancial metrics steer sales in a new direction.
For decades, Ricoh Americas mainly sold hardware—printers, copiers, and multifunction office products—along with repair services. But with the commoditization of such equipment, it needed to transform its identity to that of a provider of valuable enterprise services.
To change the company’s culture, “we needed to look more deeply at what we measured—our key performance indicators (KPIs)—and determine whether any were driving ‘old’ behaviors,” explains Gary Crowe, Ricoh Americas senior vice president and CFO. “You get what you measure, and it turned out that many KPIs were focused on and incenting the behavior of a hardware company.”
For example, during the transition, although Ricoh Americas’ business units were hitting their goals for revenue and services sales, management discovered that the number of salespeople who were actually selling a services-led offering was quite small. As a result, the company added KPIs to measure the percentage of representatives who were successfully selling services.
In addition, for much of its history, Ricoh Americas had relied on cycle time (the time between responding to a proposal from a business customer or the dealership network and delivering the product) to gauge customer satisfaction. The metric worked just fine—until Ricoh altered its value proposition.
“We decided to focus more on customer needs, developing additional software solutions and services,” says Crowe. “These different services required customer interactions with different groups at the company. We needed to take this one metric we had relied on for so many years and make it much more granular, measuring multiple customer-related processes across the enterprise to minimize cycle time. One cycle time metric became many.”
Crowe says the proliferation of data analytics has made it easy for employees to access a lot more data and do their own analytics to understand customer behaviors. But as CFO he needs to be sure what they’re doing “is pulled up to a higher level. My role includes making sure the data is correct and comprehensive, and determining if there might be better ways to do what [employees are] doing.” — R.B.