Business analytics Featured

7:00pm EDT January 26, 2010

Achieving strategic objectives in any organization is highly dependent upon defining and monitoring critical measures of business performance: marketing results, pipeline and backlog trends, costs and employment trends.

“By defining the key performance indicators that relate to critical elements of the corporate strategy, management teams can ensure the timely identification of issues impacting the achievement of objectives as well as the timely development and execution of contingency plans needed to meet those objectives,” says James M. Pippis, a director in the Audit & Accounting Group at Kreischer Miller.

Smart Business spoke with Pippis about how companies can use business analytics to achieve strategic objectives.

Why are analytics important to a business?

The days when executives could make decisions based solely on instinct are gone — today’s business environment is simply too complex, dynamic and competitive. The data contained in traditional financial statements is often stale by the time it is disseminated or omits nonfinancial metrics that might help paint a clearer picture of causes and effects.

The identification and monitoring of key performance indicators can help management teams gain access to the real-time data necessary for rapid responses. When properly constructed, the resulting information not only mitigates risk, it can also provide companies with a competitive advantage. For example, there are many companies that have achieved substantial increases in revenue and profits by rapidly refining marketing efforts based on the results of real-time monitoring of customer response rate metrics.

How can companies implement effective analytical techniques?

The first step is the development of a business plan or strategy. Next, key performance indicators associated with critical objectives must be identified. If these metrics are not evident, analysis of third-party industry research or consultation with outside advisers can help companies select meaningful measures of business performance.

After identifying these metrics, it is important to determine whether the current infrastructure facilitates timely and accurate reporting of these measures and, if not, implement processes to address this problem. Finally, management teams must determine which decision-makers within an organization will get the data and create formal reporting mechanisms to make sure the information gets to the right people at the right time.

Which metrics can help a company drive increases in profitability?

Unfortunately, the solution is not one size fits all, because every industry has a set of unique measures that represent key lagging or leading indicators. For example, service organizations often find measures of employee utilization, project profitability or revenue per employee to be highly correlated with overall profitability.

By tracking any one of these statistics, management teams can identify excess capacity and shift resources to other customer assignments in order to maximize profitability.

In the retail and distribution industry, monitoring trends in average order value can provide management teams with timely feedback indicating whether changes in marketing programs have been effective in generating increases in transaction values. If not, management teams can make rapid changes to marketing initiatives, maximizing the return on marketing spending.

In a manufacturing environment, monitoring warranty cost by product can help to identify quality deficiencies that could undermine profitability as well as jeopardize longstanding customer relationships — which could have a significant impact on the company’s ability to achieve its long-term objectives. Early identification and investigation of the root causes of the trend might lead to the identification of defects in raw materials from a particular supplier, deficiencies in the maintenance of its plant and manufacturing equipment, or training issues with the company’s labor force, all of which might be able to be remediated at a cost far less than the current warranty costs being incurred.

What are some common pitfalls associated with business analytics?

The most obvious issue is the selection of the wrong metrics, but thorough research or consultation with strategic advisers can help mitigate this risk. Additionally, identifying and monitoring too many metrics can sometimes result in analysis paralysis. It is important to try to ensure that managers focus on a handful of key metrics and then use additional supporting data to try to clarify problematic trends reflected in these key metrics.

Next, ensuring the accuracy of the data is absolutely critical. Nothing is more frustrating than feeling like you are making progress based on interim information, only to find out that actual performance was dramatically different than your expectations.

Finally, it is important to make sure that you link reward programs, such as incentive plans, with performance targets, and communicate progress frequently. Most employees can have a direct impact on key performance indicators and resulting business performance, but if reward programs are not linked to these metrics, the probability of achievement of defined objectives will fall.

By developing a sound strategy, implementing an effective information system and monitoring performance on a routine basis, companies can maximize the probability of achieving strategic objectives. Additionally, management teams can achieve meaningful improvements in the measure that matters most — shareholder returns.

James M. Pippis is a director in the Audit & Accounting Group at Kreischer Miller. Reach him at jpippis@kmco.com or (215) 441-4600.