How often have you heard executives proclaim that next year, the target for financial results will be a substantial lift from the current year? For example a CEO may state, “Next year we expect to improve from a 10.3% to 15.4% rate of return on shareholder equity.” Is this leadership or wasted words? Where did the 15.4% come from? How is it substantiated with facts? Is this expectation a goal or a wish?
In my opinion such a high-level aggregate target, typically stated in financial terms, is not a goal – it is a result. That is, highly aggregate targets are a consequence of collectively accomplishing lots of other outcomes. Similar to a track and field pole vault athlete who must have so many things come together to clear the bar – speed, knee lift, arm push-off and body form – an organization must also collectively get it right to optimize the use and strategic alignment of its spending and resources.
Analytics to move the dials in a balanced scorecard But even if an organization can get it collectively get it right, how does the CEO know such a precise financial target – or any target number? The financial return is a dependent variable, not an independent one. That means there can be dozens, arguably hundreds, of interrelated factors, the inherent variables, that can collectively contribute to the financial results. The good news is there is now a way to optimize an organization’s performance.
The heralded solution to aim for maximum financial results is to use strategy maps with a balanced scorecard. Together they serve like a GPS navigation instrument in a car. Although a strategy map and its companion balanced scorecard do not alone provide the power to optimize financial results, when correlation analysis among its KPIs is applied, the maximum achievable return on shareholder equity can be tested and validated. Trade-off analysis can be applied. The amount of spending can be examined to assess when any exceeds a limit that aggregate profits begin to decline.
Analytics plays a critical role in improving financial performance. Ultimately it is not about monitoring the KPI dials in a scorecard but rather moving the dials. This requires making good decisions that analytics provide the insights and understanding for. Predictive analytics with more accuracy and certainty provide executives, managers, and employee teams to foresee the future and its projected outcomes.
Getting buy-in for analytics with cultural change A strategy map and its scorecard with KPIs set direction and determine projects and core processes to improve. The underlying power to achieve results comes from the integration of the many enterprise performance management methodologies that I so regularly write about. When the methodologies are integrated and infused with reliable analytics – particularly predictive analytics – then the maximum financial returns can be determined.
Is it easy to adopt analytics practices? Not really. It requires behavioral change management to get buy-in. What is needed is a culture for fact-based decision making supported by reliable analytics. Being analytical provides companies with a competitive edge.
Goal or wish? Summary, aggregate enterprise measures are not goals but rather aspired results. The true target setting must shift to project selection and core process improvements – independent variables. These require analytics to remove guesswork and gut-feel and replace it with the knowledge and answers to achieve KPIs and optimize performance.
About the author
Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and book author in business analytics and enterprise performance management systems. He is the founder of Analytics-Based Performance Management LLC, an advisory firm located www.garycokins.com. He began his career in industry with a Fortune 100 company in CFO and operations roles. He then worked 15 years in consulting with Deloitte, KPMG, EDS, and SAS. He has authored several books, and continues to write articles and blogs on EPM, managerial accounting including activity-based costing (ABC), and business analytics. His next book is “Predictive Business Analytics” due out in October 2013, published by John Wiley & Sons.
Originally posted on International Institute for Analytics