Although it is fashionable to use key performance indicators (KPIs) in business management decisions, CFOs are being advised to balance their reliance on them.
“The issue with the KPIs is that there are too many PI’s and not enough K’s.” That is the view of Jason Balogh, principal at the performance management transformation practice The Hackett Group. The Hackett Group has recorded close to 100 KPIs in use across different industries, and Balogh suggests companies should consider the relationships between existing KPIs before devising new ones.
Balogh supports his view with the example of a low days-in-inventory delivering a good KPI for a chief supply chain officer, but quite the opposite for a chief customer officer who has to contend with product stock-outs and customer dissatisfaction. He says that many metrics designed to measure the performance of one department will cross over to affect the performance of another.
How Centralizing KPIs Helps Resolve the Issue
With business leaders in different departments being accountable for the performance of their departments, a broader picture is required. For this reason, more CFOs are assuming the responsibility of interpreting diverse KPIs in order to determine whether the metrics are connecting with actual company performance and to see if they are aligned with the company´s strategic goals.
According to a survey conducted by Adaptive Insights, nearly half of the three hundred respondents said that they acted as de facto chief data officers, and more than three-quarters said that their finance departments track some of the company´s nonfinancial metrics. John Mulhall from financial management consulting firm KPMG says it right that CFOs perform this role. He said:
“Many CFOs have a clear understanding of the company’s strategy, operating model, customer channels, and competitive challenges to ensure that the right financial and nonfinancial metrics are used to drive performance. They also have the ability to translate the numbers for the CEO, board of directors and shareholders.”
Is CFO Reliance on KPI Metrics Getting Out of Hand?
The fashion of using KPIs to influence business management decisions may be going too far claims an article in the Journal of Business Ethics. Authors Natalia Cuguero-Escofet and Josep Rosanas suggest that, in the pursuit of formal evaluation criteria, some businesses have abandoned factors such as company culture, managerial discretion and personal relationships.
Rating managerial performance against a number of objectively measurable indicators tied to the corporation’s strategic agenda – rather than less regimented forms of motivation and evaluation can have a negative impact on the performance of a company. The authors cite four examples of companies that failed to balance how business management decisions were made and paid the price.
The reason why so many CFOs are assuming responsibility of interpreting KPI data is because no one metric is perfect, and the article concludes by saying that a balance between formal systems and “soft management” is required to put companies in a better position when metrics go wrong. This will not only help prevent future crises, but also contribute towards creating a better workplace environment.