Measuring for Business Success
Tips for July 2008 - Volume 4
Performance Change Monitoring
What to Look For
If you own or manage a business, you are keeping close watch on your "key performance indicators" (KPIs) such as sales, gross profits, days' supply of inventory, or any number of other such measures. But are you able to spot changes in performance that could signal either an opportunity or threat to your business?
What is a "change in performance"? Here is an example of a news article that illustrates what we mean:
" ... Starbucks' same-store sales grew 4 1242828n the April quarter, about half what it did in some quarters in recent years ... Starbucks' shares are off 30(null)ince last November"
Note that what is being mentioned in the first sentence is not the actual value of the KPIs (in this case, the sales revenue). While it mentioned a growth rate (4), that was not the key point of the author. Rather, he was emphasizing the change in the growth rate -- that it had slowed down to about half of the growth rate in earlier years.
That change in performance had a significant impact on the value of the business (down 30), as the second sentence makes clear. That is why you need to monitor these kinds of changes closely.
However, to find changes in performance using reports that show just numbers, you need to have reports that show the growth rate of a KPI over time. This is not as common a report as one that shows just the actual KPI values over time. Many business systems may not include such reports. And even if they do, you will need to perform a lot of mental calculations to convert the report data into actionable information.
You will have a much easier time detecting changes in performance if you are looking at a chart that shows you the values of the KPIs over time. Charts convey far more information than a series of numbers. If you look at a chart, you can quickly grasp the magnitude, growth rate, and changes in the growth rate of the KPI, all at the same time. You can see at a glance when a change started, and when it ended. At a minimum, make sure your systems provide you with time-series charts for all your KPIs.
But is that all you should be concerned with? As an owner or manager, you need to know other facts that may not be obvious in a plain time-series chart:
What has the impact of the change been to-date?
In other words, how many dollars or units has the change added to, or subtracted from, the "expected value" (i.e., the value the KPI would have had, if the change had not occurred)? This tells you how serious the impact of the change has been, already. You can then decide how much priority you need to give to investigating the causes of the change, and to developing a plan of action.
For example, a change that has caused the business to miss sales targets by $1,000,000 should get much more attention than a change that has only caused a $1,000 shortfall so far. If you can't see the impact of the change from your current charts or reports, you should strongly consider asking your I/T staff, consultants, or software vendors to augment them in a way that supplies that information.
Is the change accelerating?
Before you take action, you should determine if the change is getting more and more pronounced, compared to the "expected performance". After all, if the growth rate is returning to its previous value, no corrective action may be required. On the other hand, if the actual values are diverging from the expected value more and more over time, then you need to take more drastic action to bring performance back in line with expectations.
Again, make sure that your system produces charts that clearly show how actual measurements compare to expected values over time.
Click image to enlarge
Fig. 1: Sample chart that shows at a glance the trends before and after a selected date. The striped area shows the magnitude of the change. The diverging trend lines after the event show that the change is accelerating.
Changes in performance greatly affect the value of your business. You need to have chart-intensive reporting systems that allow you to find such changes, to see how much they have already affected performance, and to see whether they are becoming more severe.
Why You Should Reconsider a Key Principle of Performance Management
If you own or manage a business, and you are concerned about being "blind-sided" by changes in lower levels of your organization, you will need to be monitoring a lot of key performance indicators (KPIs).
Most books by experts on performance management say you should limit your KPIs to fewer than 20. Otherwise, they warn that you will be drowning in data, and won't be able to focus.
That's why most "executive dashboards" are set up to show you the handful of KPIs you consider most important. And nearly all of these are summary pieces of information.
But if your business has many "dimensions", you should be wary of following that "performance management" principle. It can cause you to be unaware of dangerous changes that are festering beneath those summary levels.
For example, let's say your dashboard only shows total sales for your whole business. Then, let’s say sales in just one part of your business (one division, or one branch, or one product line) has started to slow down. That problem can be hidden by continued growth in the other parts of the business. Similarly, if sales in another part of the business have suddenly started to take off, this fact may not be visible at the summary level for some time.
If you only look at the overall totals, you will not detect problems and opportunities until they have become so overwhelming that they affect those grand totals. At that point, you may be forced to take drastic, painful action to correct problems. And it may be too late to take advantage of the opportunities.
You are probably thinking: “yes, but I don't have the time to pay attention to lower-level details.” There is no way you can continuously review the hundreds or even thousands of operating units, product lines, and whatever else make up your business. If you spend your time searching for low-level problems, you will not have time to do the strategic functions that matter most. That is a very valid argument.
So, how can you be alert to looming problems in lower levels of your business, with very limited time?
You need to have a system that can automatically scan all your KPIs, at all levels of detail. It should alert you when there is an unacceptable change in performance. Using an automated system will allow you to "cover all your bases," without taking up more of your time.
How will this be different from the ordinary alerts that your system already provides? The main difference is that the system will need to be able to recognize changes in performance over time, not just exceptions in single values.
Since a change in performance is defined as a change in the underlying trend of an indicator, this means that the system needs to be able to calculate those trends at all levels of detail in the business. Then, it needs to determine if the trends are changing enough to warrant your attention.
Most systems today do not perform such calculations. How can you tell? Here's one way. Assuming you have dozens of product lines, ask the question:
"Which of our product lines has shown the greatest percentage growth in weekly revenues since 2 months ago, compared to the 2 months prior"?
Your system should be able to bring up a chart with a line that looks most like the trail of an airplane taking off (assuming, of course, that you have at least one product line whose sales performance is improving). It should be able to do this in seconds, without a programmer’s help.
Click image to enlarge
Fig. 2: Sample of chart that the system should automatically find (assuming you have at least one product line whose performance is improving.)
If your system can't answer that type of question (and any variations of it) quickly enough, you are not going to be able to spot problems and opportunities early. You may not be "flying blind,” but your vision is blurred. You should be asking your I/T department to take steps to correct this shortcoming.
