Abstract

There is no question that Business Intelligence can play a significant role in increasing internal productivity as well as competitiveness. To some extent I am going to play the role of devil’s advocate in this article and challenge people to utilize Business Intelligence at the right time and by the right people.

Why do firms suddenly need Business Intelligence?

I have read a number of articles recently that advocate the use of Business Intelligence by many people within an organization. Actually the reasoning seems to be valid. IT departments are swamped with requests for service by more and more people. Many of these requests are Business Intelligence oriented. People see things happening in their market place and need to respond as quickly as possible. Business experts say that we need to become more agile, ready to change our operational and sales strategies in an instant to meet an ever more chaotic competitive environment. Business Intelligence tools are becoming more and more powerful.

The recommended solution is simple. Teach people how to utilize Business Intelligence tools so they don’t have to wait on the IT department several weeks. The underlying assumption is equally simple. If people know how to use Business Intelligence tools, they can react quickly as market conditions shift.

Do you really need to move this quickly?

I don’t think that Business Intelligence for SMBs and SMEs needs to be based on the assumption that we need to react quickly; almost it seems as if there’s a panic. If we don’t address the crisis de jour, our opportunity to meet the challenge will pass in just a few weeks. That’s what some industry experts seem to be saying. Be ready to react instantaneously and in order to do so you need instantaneous information from your Business Intelligence system. Since IT cannot react that quickly, it’s up to the individual to generate the information they need. That means these individuals need to know how to use the Business Intelligence system.

I accept the fact that firms need to react to changing market conditions, but I don’t agree that reaction times are measured in days, not months. Business conditions do change, but you shouldn’t try to react with a speed of a commodities trader. Yes, some firms make money in the commodities market, but there are also far too many examples of firms and unsupervised individuals making bad bets.

Maybe the underlying issue is the whole notion of reacting to changing market conditions. If you need to react quickly, that’s a knee jerk motion and you may not have all of the information you need simply because you tried to use your Business Intelligence system to react quickly.

Maybe you should be more proactive?

Rather than trying to use your Business Intelligence system quickly in order to react quickly, you should proactively use your Business Intelligence system to put you in a position where you can react quickly and effectively. I think that’s the issue. You cannot achieve long term success if you are constantly reacting to changing market conditions.

This doesn’t mean you should never react quickly. Sometimes you need to do so, but the key issue is creating a proactive Business Intelligence system so that when conditions change, you already have simulated the conditions. Proactive means that you have discussed various scenarios and have the information at hand when and if conditions change. Actually you should have already defined market scenarios and used your Business Intelligence system to help you determine what your reaction should be. Proactive means that you have already asked and answered the question.

Who should generate the intelligence?

If you have decided that it’s best to be more proactive, who should be responsible for generating the information you need to make sound business decisions? I am still not convinced that people need to be spending their precious time designing Business Intelligence reports. Many Business Intelligence systems are very powerful, but this power tends to be wrapped in complexity. Most people (and firms for that matter) need to concentrate on what they do well. Sales and marketing executives should spend time determining what the firm should do, not determining how vital information can be extracted from the Business Intelligence system. That should be the responsibility of the Business Intelligence guru. Sales and marketing executives should be using information effectively, not generating it.

Does IT need to be responsible? Possibly or you could create one or more super users that know the Business Intelligence system intimately. Business Intelligence for SMBs and SMEs (given their rather limited number of employees) has to be more of a one man or woman show. That’s not the best scenario due to the risk of losing that valuable person, but then that’s an issue for all SMBs and SMEs and every one of their most talented employees. The key question you need to address is in essence the experience/benefit ratio of any Business Intelligence system. People who use a Business Intelligence tool infrequently are going to take longer to extract the information simply because they need to refresh their memory before they begin. At the same time their reliability of the data extracted might not be as high, again simply because they are not quite as knowledgeable as someone who does this more frequently.

In the end there are two objectives you need to keep in mind. If you proactively take the time now to determine what information you might need in the future and create the decision support tools (reports as well as what if analysis tools) you will need, you won’t have to react in a crisis mode when market conditions change. Second, you need to determine whether it makes sense to train people on a complex Business Intelligence tool when they may not need that tool except on an infrequent basis. Again, if you take this step now, you will be ready when the need for information occurs.

Creating an internal Business Intelligence system

Business Intelligence for SMBs and SMEs isn’t just about reacting to outside market influences. It can and should be just as important to control internal business operations. Actually this is the case for any firm.

While there is no doubt that sound business decisions are based primarily on the person making the decision, these decisions need to be based on sound information. Seat-of-the-pants decisions might work for small firms where the experience of the primary decision maker is the key element, but there is just too much information spread over too many decision makers for this practice to work in larger firms. In this case accurate and timely information must serve as the foundation upon which sound decisions can be made.

Why do you need this information?

Accounting and ERP systems can store and regurgitate just about anything you want. Actually it’s possible that for every transaction posted there can be 20, 30 or 40 fields that will allow you to slice and dice data any number of ways. The fact that you can carry reporting (intelligence?) to this level of detail doesn’t necessarily mean you should do it.

Start by asking yourself why you need the information. If it doesn’t lead to a decision, then you don’t need it.

In what format should this information be presented?

With the exception of audit trail reports, rows and columns are out. In no case can they lead to a decision.

Pie charts and bar chart are out as well. They, like row/column reports, are no more than a snapshot of a specific condition at a specific instant in time. People should never make snap decisions and that’s all this information can support.

Having said this, there is one use to which some specific data can be applied. Exception Management or Business Alerts are usually triggered by a specific value, but only if that condition falls outside an expected range. As an example, if a customer’s account exceeds its credit limit or a specific invoice becomes “x” days overdue, that condition should be brought to the attention of a named individual. Business Alerts handle the notification process while Exception Management gives users the ability to deal with an alert in a contact manager like application that allows them to track the steps they (and others) take to resolve an issue.

If rows and columns, bar charts and pie graphs are not acceptable, what’s left? Line charts are the only form of reporting that actually lets users develop a sense of the history and future of business conditions that can then give people the total picture. It really doesn’t matter where a company is today, nor does it matter where a company has been. All of that has already happened and cannot therefore be changed. What can be changed is the future and that’s where people need to concentrate their thoughts.

Think of a line chart as a beginning, a middle and an end. Historic values form the anchor upon which the line chart is constructed. The last current piece of data is the jumping off point and the extension of the line formed gives us an idea as to where our future “might” be.

Once we see the total picture, we can determine if it is heading in the right direction. Well, that’s part of the analysis, but not everything. The extended line chart gives us a hint of our future, but we still haven’t figured out if that’s where we want to be. You need a second line chart that acts as our target. Now we can see in an instant our past, one possible future and our target.

There are still two adjustments we might need to make. If the volatility of the data is significant, we may have to utilize some form of smoothing to make the data more understandable. Second, data does not follow a straight line path. Sometimes it’s increasing/decreasing over time. If that’s the case we may need to utilize some form of analysis that let’s us see these trends.

Now we can “see” the data and make a decision. If the trend seems to be within the acceptable range or budget we created, then no decision is required. If the trend seems to be heading in a negative direction, then we know we need to take action. No data analysis will ever tell us what to do, but this approach will help us determine if we need to do something and most importantly if the decisions we have taken seem to be having a positive affect.

One last thought. The key to the charts we have been discussing is that they give us an opportunity to become more proactive. If you see that your actual results are starting to trend in a negative direction, you can proactively take steps to make changes before the raw data indicates that you need to do something. Of course this is just another form of forecasting, but in this case the forecast is operationally oriented.

What information needs to be extracted and displayed?

While it is certainly easy to create graphs once the data values have been identified, the hard part is determining what you need to track. Remember, you can create any number of fields than can be used to feed your data analysis engine. Picking the right fields is the tricky part.

Think of an Income Statement. It’s got lots of data that could be graphed. Now think of virtually every accounting and ERP system’s ability to support drill down. If you can drill down from a data value to underlying information, then the information is of no use to you because it is being influenced by other data. Since you cannot track everything, you need to identify those basic factors that have the most influence on your business. Identify your profit drivers.

Maybe inventory turns in a distribution environment can be thought of as a Profit Driver. Don’t forget though that it’s not going to be possible to track every single item your carry. Maybe start with inventory turns as a whole, then by product line or possibly region. Where you start is not as important as your ability to quickly see where you may have a problem developing. Then you can drill down to a more detailed analysis.

Profit Drivers are a bit like the concept of a common denominator. You need to identify those values that are not influenced by other factors. If you can track and control these key business drivers, the Income Statement will take care if itself.

Summary

Effective business decisions drive business profitability. These decisions need to be rooted in facts that can be brought to light instantaneously. People do not have the time to guess. They need to know where to place their attention. They also need to know whether the decisions they make are having the desired effect. If there is too much data, the issues may remain clouded. If there is no way compare actual results against targets, how can you ever know if you are where you want to be or need to be. Finally, people need to identify those Profit Drivers that have the most significant impact on the organization.

Business Intelligence systems are the vehicles by which critical information can be extracted from an accounting or ERP system and used to not only monitor internal processes, but also support the strategic decision making process whereby firms can identify opportunities to create tactical advantages or meet market challenges. Since changes in tactics might need to be implemented quickly, there is no time to waste. You do not have time to query your Business Intelligence system and you certainly need to avoid the creation of erroneous data analysis.

If you are going to rely so heavily on your Business Intelligence system to support the decision making process, your analysis needs to be proactive and it needs to be managed by people that are Business Intelligence experts, not casual users. If you can determine in advance what your competition might do, then you can also determine in advance what you might do. Rather than waiting (and doing nothing) until your competition strikes, you can and should be using your Business Intelligence system to support the planning process, not support the reaction process.

Business Reporting has always been one of the many soapboxes I love to jump on (http://www.accountinglibrary.com/blog/category/business-intelligence/, http://www.accountinglibrary.com/blog/category/business-alerts/, http://www.accountinglibrary.com/blog/category/exception-management/). While there is no doubt that sound business decisions are based primarily on the person making the decision, these decisions need to be based on sound information. Seat-of-the-pants decisions might work for small firms where the experience of the decision maker is the key element, but there is just too much information spread over too many decision makers for this practice to work in larger firms. In this case accurate and timely information must serve as the foundation upon which sound decisions can be based.

Why do you need this information?

Accounting and ERP systems can store and regurgitate just about anything you want. Actually it’s possible that for every transaction posted there can be 20, 30 or 40 fields that will allow you to slice and dice data any number of ways. The fact that you can carry reporting (intelligence?) to this level of detail doesn’t necessarily mean you should do it.

Start by asking yourself why you need the information. If it doesn’t lead to a decision, then you don’t need it.

In what format should this information be presented?

With the exception of audit trail reports, rows and columns are out. In no case can they lead to a decision.

Pie charts and bar chart are out as well. They, like row/column reports, are no more than a snapshot of a specific condition at a specific instant in time. People should never make snap decisions and that’s all this information can support.

Having said this, there is one use to which some specific data can be applied. Exception Management or Business Alerts are usually triggered by a specific value, but only if that condition falls outside an expected range. As an example, if a customer’s account exceeds its credit limit or a specific invoice becomes “x” days overdue, that condition should be brought to the attention of a named individual. Business Alerts handle the notification process while Exception Management gives users the ability to deal with an alert in a contact manager like application.

If rows and columns, bar charts and pie graphs are not acceptable, what’s left? Line charts are the only form of reporting that actually lets users develop a sense of the history and future of business conditions that can then give people the total picture. It really doesn’t matter where a company is today, nor does it matter where a company has been. All of that has already happened and cannot therefore be changed. What can be changed is the future and that’s where people need to concentrate their thoughts.

Think of a line chart as a beginning, a middle and an end. Historic values form the anchor upon which the line chart is constructed. The last current piece of data (the most recent value) is the jumping off point and the extension of the line formed gives us an idea as to where our future “might” be.

Once we see the total picture, we can determine if it’s heading in the right direction. Well, that’s part of the analysis, but not everything. The extended line chart gives us a hint of our future, but we still haven’t figured out if that’s where we want to be. You need a second line chart that acts as our target. Now we can see in an instant our past, one possible future and our target.

There are still two adjustments we might need to make. If the volatility of the data is significant, we may have to utilize some form of smoothing to make the data more understandable. Second, data does not follow a straight line path. Sometimes it’s increasing/decreasing over time. If that’s the case we may need to utilize some form of analysis that let’s us see these trends.

Now we can “see” the data and make a decision. If the trend seems to be within the acceptable range or budget we created, then no decision is required. If the trend seems to be heading in a negative direction, then we know we need to take action. No data analysis will ever tell us what to do, but this approach will help us determine if we need to do something and most importantly if the decisions we have taken seem to be having a positive affect.

What information needs to be extracted and displayed?

While it’s certainly easy to create graphs once the data values have been identified, the hard part is determining what you need to track. Remember, you can create any number of fields than can be used to feed your data analysis engine. Picking the right fields is the tricky part.

Think of an Income Statement. It’s got lots of data that could be graphed. Now think of virtually every accounting and ERP system’s ability to support drill down. If you can drill down from a data value to underlying information, then the information is of no use to you because it is being influenced by other data. Since you cannot track everything, you need to identify those basic factors that have the most influence on your business. Identify your Profit Drivers.

Maybe inventory turns in a distribution environment can be thought of as a Profit Driver. Don’t forget though that it’s not going to be possible to track every single item your carry. Maybe start with inventory turns as a whole, then by product line or possibly region. Where you start is not as important as your ability to quickly see where you may have a problem developing. Then you can drill down to a more detailed analysis.

Summary

Efective business decisions drive business profitability. These decisions need to be rooted in facts that can be brought to light instantaneously. People do not have the time to guess. They need to know where to place their attention. They also need to know whether the decisions they make are having the desired effect. If there is too much data, the issues may remain clouded. If there is no way to compare actual results against targets, how can you ever know if you are where you want to be or need to be. Finally, people need to identify those Profit Drivers that have the most significant impact on their organization or on their specific area of responsibility.

Forget about columns and rows. Forget about bar charts and pie charts. Adopt a proactive system that helps you track not just where you have been or where you are today, but where you could be tomorrow.

Why does one business prosper and another business in the same industry fail? Does the victor know something the loser doesn’t? Each may offer the same products or services. Each may have the same type of client base. Each may have the same level of expertise with respect to the mechanics of their products, services and industry. However, one may possess a jewel more precious than many people realize. That jewel is a well defined management philosophy.

“That set of rational principles which form the basis for guiding or controlling the operation or performance of a business activity“.

The key concept contained in the definition above is the identification of the rational principles and that’s our primary task. Our secondary task is the testing of each principle to insure that it’s applicable to all phases of business life and action.

After considerable thought and experience (What better way to test this definition than in the cold light of reality?), I would like to propose the following list of business or management principles. This isn’t an all inclusive list, but presents what I consider to be the leading candidates.

1. The objective of any business is the generation of profits: While some might dispute this statement as not being applicable for non-profit entities, I would counter that all must generate profits, for it’s only through profits that any business can sustain itself. We should not be afraid of being profitable. We should strive to be as profitable as possible without violating any of the other business principles. That’s the key concept.
2. The most important asset of a business is its employees: No business operates without employees. No business can achieve its potential unless each employee has the ability and the right to achieve their individual potential. Each employee must feel as though they are a part of the total organization. Each employee must feel as though they matter. It’s just that simple.
3. Customers are just as much a part of a business as employees: While this might seem to be an obvious statement, far too many businesses fail to recognize just how important their customers are. Products and service must meet the actual and perceived needs of the customer. Notice that I have used the plural form of the word “need“. The physical product or service is but one need. The process of selecting the initial supplier of a product or service, and the continuation of the relationship be­yond the first order, involves the identification and satisfaction of a whole host of needs. The only manner in which this can be accomplished is the inclusion of the customer into the daily life of the business. This is exactly the same goal the business should have with respect to its employees (and let’s not forget suppliers too).
4. Management gets paid to think: Consider for a moment the example of the business that fails and the business that succeeds. Consider also the examples everyone can cite of businesses that appear to place their management in a position of “doing” rather than “thinking“. Could it be that the management of the failing company chose by default the wrong fork in the road, simply because it was so busy taking care of business that it didn’t even rec­ognize that there was a fork in the road. I’m not suggesting management must live in an ivory tower, for to do so ignores the realities of the practical side of business life. What I am suggesting is that management must recognize subtle changes in the environment in which it competes, and alter the life of the business to reflect these changing circumstances. It can do so only if it has the ability and the time to think.
5. No business operates in a vacuum: Vacuums come in many forms, and each can be as dangerous as the other. The specific vacuum to which I am referring produces a form of insulation between the business and the outside world. Our world is changing rapidly. While management might con­sider itself to be very capable, nobody has all of the answers. Management needs contacts in the outside world to test its competency. It should hunger for knowledge, and welcome the testing of its principles against others. It cannot be afraid of this process, but should encourage it. Management cannot afford to be wrong, and should recognize that it might be wrong. That’s what this testing process is all about.
6. Business conditions are in a state of constant change: While everyone might agree with this statement, the successful business uses it as one of the cornerstones of growth and longevity. The successful business assumes it must change, and looks for opportunities to change. Change here isn’t change for the sake of change, but rather changes that will enable the business to become more efficient, move into new markets, take advantage of new technologies, or reduce the impact of downward movements in the economy.
7. Information is the key to the identification of strengths and weaknesses: This statement might be considered to be a corollary of the one dealing with operating in a vacuum. The former dealt with an outside vacuum, while this statement deals with the vacuum of inside information. The increasing importance of Business Metrics has led many companies down the path of excessive informa­tion, and ultimate strangulation in their own data. Information systems should be based on maximizing the effectiveness of the data generated. As I stressed in my blog post about Business Metrics (http://www.accountinglibrary.com/blog/business-metrics-creating-a-framework-for-success/), managers must define those “few” critical values that represent the driving forces that lead to success. If the information generated does not lead to some form of decision or reaction, then it has no meaning and should be discarded. If a business concentrates on its most important common denominators, then the income statement will take care of itself.
8. Organization must be taken to its lowest level: Each business function is important. Some may be identified as more important, but none is inconsequen­tial. Each person in a business is important. Each customer is important. The company must be structured so that each person or department has the tools it requires to achieve maximum effectiveness. The busi­ness is, in many respects, a living organism, and it’s the responsibility of management to insure that each cell or body part receives equal attention. Without this, that part could become diseased, and could drasti­cally affect other body parts.

Conclusion

Each business must go through the process of identifying its individual philosophy. Once these statements have been created and adopted fully at all levels of the organization, they must be reviewed regularly to insure that they are being followed. All other actions of the company must be rooted in this philosophy, and must be tested against it. The successful company will acknowl­edge that it requires a philosophy. The less than successful company will not recognize this need. While this might sound simple, it isn’t. Successful companies know they are not perfect, and will strive to identify their strengths and weaknesses. They are not afraid to measure themselves, for they know that in doing so, they move one step closer to their goal. Maybe you should consider if any of these statements can assist your company?

Introduction

Once you have fully implemented your new accounting/ERP system, to assume that it and the support structure around it will continue to operate at maximum efficiency and effectiveness invites stagnation and decay in the future. Just as we visit our doctor on a routine basis (hopefully), accounting/ERP systems deserve, in fact requires that you initiate a formal review (checkup) at least once each year.

 The Annual Business Checkup is not a predefined set of tasks. The key element is the notion of a formal review of the accounting/ERP system. In this case the system is not just the accounting/ERP software but every factor that contributes to sound business management practices including business objectives and strategies, business processes, personnel and finally how the business management system relates to each of these elements. To some extent it can be viewed as software selection lite in that the analysis should start with a review of business strategies and tactics and then progressively move deeper into the organization, following essentially the same path as a formal software selection project. In this case the objective is not the selection of a new accounting/ERP system but the fine tuning of the existing accounting/ERP system.

Review Business Objectives and Strategies

If a business is to compete effectively, it must be organized for success. All business processes, the accounting/ERP system itself and all personnel must contribute to the achievement of specific business objectives and strategies. Therefore the first step is a review of the business itself and the industry in which it competes.  

Review Detailed Functional Effectiveness of Business Management System

The high level review mentioned above must be followed by a more detailed review of the accounting/ERP system and how it supports the efforts of individual people and workgroups. The objective of any accounting/ERP system is helping people do their jobs better and by doing so help the organization compete more effectively. Each person or workgroup in the organization that integrates with the accounting/ERP system should participate in this review. This is the only way management can ensure that every person is contributing to their maximum potential. If improvements need to be made, who is better qualified to identify these improvements than individual people? Their supervisors may not know what is required and to limit this review to only management level people is to limit the potential effectiveness of the entire review process.

One specific review should be undertaken on a regular basis. After a new accounting/ERP system has been fully implemented and people fully trained, the efficiency of the system will be at a very high level. Over time this efficiency will deteriorate. People will become lazy. New people will be hired or move to other departments. The system itself will not deteriorate, but the way it is used will. Given this, an integral part of The Annual Business Checkup should be a review of how people are using the system. In some cases users may need additional training or in other cases they may just require a gentle nudge to follow proper administrative procedures.

Review Detailed Reporting Effectiveness of Business Management System

Business management systems process information and produce reports. That has always been their primary objectives. The previous step examined the functional effectiveness of the business management system. The next step in The Annual Business Checkup must be a detailed analysis of the reporting system as the information generated by the accounting/ERP system supports the decision making processes that move a company forward.

One of the dangers of all accounting/ERP systems is that they can store and regurgitate an enormous amount of information that at best has marginal usefulness. While people need information to make sound business decisions, they should require only information that is specific to their job and that helps them make a decision or take an action. Status reports do not help people take action. They are just a picture of a firm at one specific point in time. For some people the number of reports sent to them is a measure of their importance. That must be avoided. Other people struggle each day because they are not getting the information they need at all or are not receiving the information they require in the proper format.

The reporting system must help people make decisions (excluding of course those reports that verify the validity of the data input into the system). They must define exactly what information they require and the format required to read and interpret that information quickly. Reports should help people understand where they stand and where they should go. Reports should help people identify actual or potential problems and the factors contributing to these events. Specialized reports should not be avoided simply because they cost money to design. The time a person can save by not having to wade through poorly selected and formatted information will more than justify the cost to create actionable reports.

Review Executive Information Systems and Exception Management Systems

Two additional steps should be taken when analyzing the reporting system. Virtually all standard reports produced by an out-of-the-box accounting/ERP systems are by necessity somewhat generalized. As such the specific needs of an organization may not be addressed by these generic reports. Two areas that should be analyzed in detail are Executive Information Systems and Exception Management Systems.

An Executive Information System presents summarized information that helps people see at a glance where they are going and how they are performing with respect to their objectives. Rather than wading through generalized or status reports, people should be able to identify the key information they need to gauge their performance, set targets for each of them, and then review their performance against these targets.

While some accounting/ERP systems are beginning to offer Executive Information Systems, most of this data is generic and very generalized. A truly effective Executive Information System should present information that is unique to the company, department, workgroup or individual. That is where some work may be required, but the time saved will more than pay for the creation of such a system.

Exception Management Systems are to some extent a specialized Executive Information System. In this case the application isolates those items that require a user’s attention because specified targets are not being met. While some accounting/ERP systems support the notion of triggers that will send an internal e-mail to an individual notifying them, as an example a sales order has not yet shipped, a more effective method may be the creation of specialized reports that highlight as an example all sales orders that are late, or all purchase orders that have exceeded their requested delivery date. Creating these reports is fairly straight forward and eliminates the necessity to review a more generalized open sales order or open purchase order report.

Review Functional Possibilities

The last item that should be included in The Annual Business Checkup is an analysis of applications and functions that the company is not yet using. In many cases users do not realize the potential of certain applications or may not even be aware that specific software supported business processes are available. The best example of this is collections management. Users simply assume that since they have an aging report they need nothing else to collect overdue accounts or that nothing else is available. Some products do in fact support collections management either directly or through a third party application.

Consultants or resellers should be constantly searching for new applications that can benefit their client. Users should be constantly searching for the same thing and demanding that their consultant or reseller present to them all possibilities so that they can take advantage of new applications or improve their business processes. If an organization does not move forward, it will move backward because many of its competitors will be moving forward.

Introduction

One of the keys to increasing business profitability is giving each employee specific information they need to make sound decisions, the ability to concentrate on the areas of the business that require their immediate attention and an environment that allows them to collaborate with others to address issues that span more then their individual areas of responsibility.  Binding all of these success factors is one key concept.  If any business wants to achieve true success, they must be proactive, not reactive.  This article will discuss how people can use Business Metrics to identify critical issues before they can have a significant negative impact on the organization.

Background

Most classic business management reports are at their core no more than a picture of an organization at a specific point in time.  As such these status reports do not help people make decisions and do not effectively contribute to income and profit growth.

While this type of reporting was acceptable in the past (particularly since it was all we really had), we now have the technical ability to measure even the smallest events that drive any business.  The question is how can we build a framework for success?

Proactive Business Metrics

I cringe every time I see bar charts and pie charts as representative of what information users can extract from an ERP system and display on their “dashboard”.  While these charts certainly look pleasant (particularly when displayed in color), in the end they are nothing more than status reports and as such do not (or should not) drive business decision making.  Why? Bar charts and pie charts do not (and never will) lead to any form of decision or action.  A pie chart that displays the percentage of revenue generated by a firm’s top ten customers tells you nothing.  There is no basis for comparison to tell whether this is good or bad.  It looks pretty, but it leads to nothing.

Truly effective business metrics give you a basis for comparison that either tells you where you are going and whether you are above or below expectations. 

Let’s use Inventory Turns as an example.  Measure Inventory Turns each month and plot the values in a line graph showing the value for the past 12 months (or any time frame that is sufficiently long that a pattern can be discerned.  The user can visualize immediately where Inventory Turns has been and where it might be going.  It’s a good start, but not perfect.

Now add a system generate trend line that is calculated from the raw data.  In many cases the individual data points are so chaotic that it is difficult to see any trend, but the trend is what’s critical, not the individual value each month.  The trend line should not be a straight line, but a curve that shows whether Inventory Turns is improving or not.  A manager viewing this chart might be able to see instantly that the trend is acceptable and nothing needs to be done.  Next chart please!

Now let’s take this analysis one step further.  While the trend line in the example above may seem to indicate that Inventory Turns is acceptable, you need to add one final element.  How does Inventory Turns compare against expectations (budget)? Actually you could choose to not display the raw data as the trend line and the budget line are the two critical elements.  Now you have the complete picture: the actual trend and the budgeted trend.

This type of charting is used in the securities industry every day.  Computers track a stock’s value each day.  They also calculate a confidence interval above and below the trend line.  If the trend breaks above the upper confidence interval, a buy signal is generated.  Similarly, if the trend line breaks below the confidence interval, a sell signal is generated.  That is precisely what could be done to assist manager track inventory turns or any other defined success factor.

Business Metrics Delivery

Assuming that you have identified the Business Metrics that drive your business, how do you effectively deliver this information to named users?

1. Identify specific Business Metrics that drive an organization’s success and that lend themselves to a budget/actual comparison. 
2. Give users the ability to display any chart full-screen.
3. Give users the ability to drill down to the independent variables that drive the data displayed.  As an example, Inventory Turns is driven by sales, purchasing activities and receipts.
4. Give users the ability to view the actual data in table form.
5. Do not display information that is of no concern.  If the values in the chart are acceptable, give users the ability to either not have these charts displayed or display them at the bottom of their dashboard.
6. Give users the ability to request that a chart be included in their display list the following month.  In this example, Inventory Turns might fall within an acceptable range next month, but the user may want to “see” for themselves.
7. Utilize a red light / green light summary whereby users can view a list of their personal Business Metrics.  Actually all you would have to display is the name of the metric and a red/green light indicator.  This would be particularly useful if a person was tracking a significant number of charts.  If the information is acceptable, the green light will be displayed.  Obviously if the information is not acceptable, the red light would be displayed.  The user can then hyperlink to the metric of greatest interest.
8. Give users the ability to view the charts of those people reporting to him/her.  While we should assume that people will be attentive to their areas of responsibility, some managers might want to review the status of information tracked by people on their team.  Alternately, the system could be set up to track individual metrics as well as team metrics.

Summary

The real key to business success isn’t trend line charts.  It’s the recognition and subsequent tracking of what’s important to the business.  Before you can succeed in business, you have to understand what drives your business.  Then you concentrate on these basic or lowest common denominator success factors.  If you get them right, then your Income Statement will take care if itself.