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In today’s world, organizations are inundated with data. Trying to sort through all of that data to determine what is useful for decision making is oftentimes a grueling effort. J. Douglas Maxwell, the CFO at American First Finance, believes that discovering the real key performance indicators (“KPIs”) requires that the finance team partner with the business to discover and define its organization’s KPIs.
“KPIs are needle movers; the metrics that your entire management team should religiously focus on. KPIs should be clear, concise, and actionable so that the entire team knows what steps to take in order to improve performance when the KPI indicates that the organization is drifting off target.”
The challenge is that organizations first need to identify KPIs and not confuse them with either activity metrics or performance metrics. To differentiate between activity metrics, performance metrics, and key performance metrics, Maxwell uses a football analogy to get his point across.
An activity metric might be something along the lines of ‘we ran 50 plays in the game’ or ‘our total time of possession was 40 minutes.’ An equivalent example in business is ‘our sales team made 65 cold calls this month’ or ‘we processed 350 accounts payable invoices.’ The response to an activity metric should be “so what?” “There’s nothing wrong with activity metrics”, says Maxwell. “Just don’t confuse an activity metric with a KPI. An activity metric usually measures something in terms of volume, but it does not indicate whether or not that particular activity had a positive impact on profitability. It is quite simply nothing more than a statistic.”
“The challenge is that organizations first need to identify KPIs and not confuse them with either activity metrics or performance metrics.”
Performance metrics add to the understandability of an activity metric. ‘We ran 50 plays and gained 300 yards, for an average of 6 yards per play.’ Now we have a deeper understanding of the impact of the activity and its effectiveness. But the answer still does not tell us anything about the results. If all of the yardage gained during the ballgame is from the 20-yard line at one end of the field to the 20-yard line at the other end of the field, the team still has not succeeded in scoring a touchdown. And scoring touchdowns is what you need to do to give yourself a chance to win the game. “Organizations may be content to erroneously focus on performance indicators. But since the goal is to score, you sometimes have to dig a little deeper as a management team to identify KPIs, those needle movers that point to whether or not your team scored and are on a winning track”, says Maxwell.
Maxwell goes on to say, “Executive leadership teams should have 3-5 KPIs that are clear, concise, and actionable. The achievement of a KPI should have a direct bearing on profitability. By focusing on KPIs, a team can ignore the distractions of data overload and focus centrally on those metrics that truly move the needle. It takes the time and commitment of the management team to agree on what those KPIs are for an organization. But clearly defining KPIs, monitoring performance, and taking the appropriate actions when necessary, increase your chances of achieving a winning score!”