Leadership Turbocharged: Unleashing 21st Century KPI Mastery
Accelerate Your Leadership with a 21st-Century KPI Mastery System
Introduction
Welcome to the next chapter of the helmig advisory "Close The Gap" blog series. This time, we're going to challenge today’s business KPI status quo and expose a startling truth:
Many businesses still operate as if they are driving a car by only glancing at the rearview mirror. Sounds absurd, right? Well, that's what relying on just on hindsight-focused financial metrics will do to you.
In this blog post, we talk about the power of a 21st-century KPI Leadership System, where you'll have a clear view through the windshield with a cool, dynamic heads-up display.
And yes, it involves AI, but as well rectifying some old omissions.
Enjoy the ride!
Defining the current state of affairs
Imagine piloting a car with a pitch-black windshield and navigating solely by glancing at a rear-view mirror that displays a delayed video feed. To make matters more intriguing, everyone hails you as an exceptional driver based on your track record of accurately guessing what lies ahead. Your "intuition" or "guts" are applauded. Sounds absurd when applied to cars, doesn't it? However, when it comes to steering a business, this is precisely the state of affairs that most leadership teams have come to accept: encountering bumps in the road, taking wrong turns, and being outpaced by competitors—all observed and analysed through the rear-view mirror. This rear-view mirror, mind you, presents information with a lag of one to three months (in the best-case scenario, as many companies require an additional one to three weeks to consolidate information into reports). The reason behind this acceptance of such precarious driving conditions stems from the widely embraced belief that there is only one standard for reporting and assessing performance at the corporate and senior management levels: data grounded in the principles of generally accepted accounting practices (GAAP). CEOs and supervisory boards have become masters in scrutinizing financial data, elevating the art of ‘peering into the rear-view mirror’.
Let's assess the current state of affairs to uncover opportunities for improvement within this peculiar scenario.
As per standard fiduciary obligations, every company must report historical cash flow, revenue, Cost of Sales, depreciation, EBIT, and other such data points. These figures are consolidated after the conclusion of each reporting period. In our car cockpit analogy, these represent the fuel and mileage per hour indicators: How much fuel (cash) do I still have in the tank, what is my burn rate (CoS, depreciation), my speed (revenue) and my overall performance (EBIT) - giving us miles per hour.
Sales metrics and key performance indicators (KPIs) such as daily orders, hit rate by customer/segment, the margin by order, market penetration, and mix changes, along with operational KPIs like inventory turns, conversion or commodity costs, daily productivity, on-time delivery, and PPM or customer rejections, as well as R&D/engineering metrics like time to market, on-time release, and timely milestones—these are the metrics that should be understood and enhanced to ensure a smooth ride. In our car metaphor, they correspond to the steering wheel, accelerator, and shift stick to keep it simple.
However, the management board typically has access to these metrics on a mostly quarterly basis. So the ride is quite rough since they over-compensate all the time due to the delay.
Hence, relying primarily on GAAP reporting to drive your business creates a GAP (pun intended). In other words, attempting to navigate a car by peering into the rear-view mirror and steering solely based on fuel and mileage indicators requires considerable "intuition." No wonder, that many companies are driven into the ditch.
Numerous studies indicate that, apart from the financial metrics required for fiduciary purposes, most other business KPIs lack easy accessibility and consistent definitions across industries: Market penetration, variable costs, the share of wallet, contribution margin I or II, or quality issues in Division A may not hold the same meaning for Division B. Now, imagine driving a car where each tire measures its pressure differently and independently decides if the tread still provides sufficient grip. What happens when there's a sudden turn or ice on the road? So, while operating closely with customers and independently capturing diverse markets, it remains essential to establish a standardized approach for measuring performance in sales, operations, service, R&D, and product management. Complying with fiduciary requirements and delivering excellent financial reporting for markets and shareholders does not preclude us from implementing internal metrics and KPIs that genuinely illuminate the realities of our value chain.
Improving the current situation: Step 1 - Understanding the real-time performance of the car and underlying conditions
Thanks to significant advancements in technology, 21st-century corporate-wide metrics systems are no longer dependent on monolithic ERP, MES, or CRM systems. Cloud computing platforms like Microsoft Azure, Amazon Web Services, Google Cloud Platform, and their non-US counterparts offer the capability to consolidate various business systems on a daily or even hourly basis. By leveraging cloud service providers, internal data scientists, and machine learning engineers, along with user-friendly reporting tools like Power BI and Tableau, we can swiftly gain a fresh perspective on the driving conditions and performance opportunities.
However, achieving this requires a corporate-wide consensus on the metrics and KPIs to be tracked, along with aligned definitions akin to “Generally Accepted Metrics Principles (GAMP)”. Defining these metrics by function should not take more than a few days. Subsequently, the board of directors must determine the priority levels of these metrics—first, second, and third tier.
Besides this, to make it “real”, all collected data are to be standardized and directly accessible to authorized personnel, ensuring integrity without any manipulation or "optimization" of information.
The standard for consolidation today can be as close to real-time as possible. Regardless of whether the information is currently used weekly, monthly, or quarterly, having all the information readily available in real-time enables the creation of a "Digital Twin" of the entire value chain. Imagine the possibilities for decision-making going forward. For more insights on this topic, I invite you to explore our blog post and podcast on "Digital Twin Value Chain."
By consolidating all this data into actionable information and insights, you construct a real-time digital dashboard or cockpit for your entire business - an environment that is fully transparent and constantly optimized.
Yet, sticking to our car metaphor, we are still not truly looking through the windshield; we merely see the road directly beneath us, which is already a significant improvement compared to relying solely on the rear-view "video" mirror and fuel/mileage gauge. Now, we can appreciate incoming orders and observe corresponding schedules for the next operational cycle.
However, we still lack an understanding of why. Do we have an increase or decrease in orders (speed) because of sales team efforts, the launch of new products by R&D, on-time and quality delivery by production, and so on? In 80% of cases, we are left guessing, as we lack insight into the underlying conditions of the road, the broader landscape, and most importantly, the direction in which we are heading.
Step II of improving the current situation: Windshield and heads-up display
Now, we move on to the next phase of embracing 21st-century key metrics: cleaning the windshield to provide the driver with a clear view of the surroundings and, as a truly top-class car today, adding a heads-up display.
So, in addition to the wealth of internal data available to us, we incorporate external indicators, taking our pick from GDP, Inflation Index, Consumer Confidence Index (CCI), Purchasing Manager Index (PMI), Baltic Dry Index (BDI), Architecture Billings Index (ABI), Misery Index (which combines inflation and unemployment), TED (Treasury-Eurodollar) Spread, Venture Capital Funding Index, and more. We also leverage ‘information age’ indicators like Social Media Penetration Rate or Influence Score, Online Sentiment Analysis, Social Media Reach, and Tweet analysis.
With these expanded data sources, we can employ tools like ANOVA, multivariate analysis, and factor analysis to uncover correlations that give insights into possible feedback loops between external factors and our own performance.
However, these methods are now considered somewhat antiquated. By harnessing machine learning analytics such as Reinforcement Learning, Natural Language Processing (NLP), or even Generative Adversarial Networks (GANs) with your competitor data, we elevate our insights to an entirely new level.
Let's pause for a moment. Up until now, we were merely updating the rear-view mirror in our car and adding some cockpit dials, gaining insights into our internal performance. But by integrating machine learning capabilities with the amalgamation of internal and external data, we wipe the windshield clean and gain both a view into the broader landscape (environmental insights) and a heads-up display that highlights statistical correlations. In other words, we obtain predictive cues that can help us navigate.
This means we are no longer merely reacting and relying on our ‘agile’ management skills or intuition to stay on course. Instead, we can proactively anticipate what lies ahead.
And to use our car metaphor one final time: What happens when you have a clear view through the windshield with no fog obstructing your vision? You can drive faster, safer, and leave all the other cars that still have drivers fixated on the rear-view mirror in, well you guessed it, your own rear-view mirror.
Let's assess where your company stands in terms of embracing 21st-century metrics and KPIs by examining the statement below.
Count how many of the following questions you can confidently answer with a resounding "yes" based on factual evidence:
Do all our sales, operations, and financial data reside in a single database or data lake?
Can we assess the status of orders, mix, margins, customers, plant performance, and health and safety indicators on a daily basis?
Are Contribution Margin I and II, variable cost, overhead cost, absenteeism, productivity, mix change, and market penetration measured consistently across our entire business?
Do we utilize modern reporting software like Power-BI throughout the company, with the board of directors relying heavily on this type of reporting (considering PowerPoint outdated for operational and functional metrics reporting)?
Is machine learning functionality integrated ubiquitously into our business operations?
Is our access control set up to strike a balance between providing the necessary openness for running the business and preventing data leakage?
Have we established a standardized set of metrics and KPIs that are company-wide and under the control of the board?
Do we embrace the idea that real-time reporting is the new norm?
Are all operations personnel incentivized to provide accurate and timely information into systems such as ERP, MES, CRM, etc., with measures in place to address omissions and misuse?
Do we regularly assess each metric to determine if manual intervention is necessary or possible, and do we incentivize departments to minimize the number of "tamper-prone" metrics?
If you answered "yes" to the majority of these questions, congratulations! It indicates that you have a firm grip on your 21st-century business cockpit. Enjoy the rewards with your employees, customers, and shareholders.
At this point, it may be more beneficial for you to focus on other topics rather than continue reading further.
Size of the Prize
If you find that several of the statements don't apply to your company or if you're unsure about the answers, it signifies a significant opportunity for improvement—the largest among all the topics we've covered in this blog to date.
To grasp the size of the prize, let's examine a few companies that achieved remarkable success by working with clear sets of metrics beyond hindsight financial indicators: Take, for example, Danaher under the leadership of Larry Culp (now CEO of GE) and Honeywell under Dave Cote. These companies experienced significant growth during the time their leaders focused on metrics that went well beyond the traditional financial measures (the fuel/mileage gauge). It's worth exploring their stock performance during leadership periods, which you can check using your preferred share price tools. Look at Danaher 1985-2015, and Honeywell from 2004-2016. You may also consider examining companies like Unilever and Procter & Gamble, all during the times that their leadership utilized operations-inspired metrics (supported often by Lean and/or Six Sigma methodology). These organizations constantly improved operational and financial metrics to better serve customers and shareholders long before machine learning became popular and financially feasible. Now, imagine the possibilities when you combine this attitude towards metrics and in addition leverage AI and cloud services to uncover insights.
The impact that this level of performance could have on your company is left to your imagination. It is reasonable to expect that it will propel you from linear progress towards exponential growth.
As always, in this blog, we aim to provide a practical and actionable pathway for improvement.
Setting up a 21st-century KPI cockpit requires a clear plan and commitment from the board and leadership.
Here are the key points to consider:
Time plan: The implementation process can take approximately 12 months, depending on the current focus and readiness of the organization.
Board Sponsor: The CEO or COO should take the lead and champion this initiative.
Project set-up: Start with a board presentation showcasing best-in-class business cockpits with internal and external metrics. Contrast the current level of transparency in your organization and establish the target state. Develop a blueprint and assemble a small cross-functional task force with clear objectives. Conduct focus groups to agree on the set of metrics and KPIs. Ensure monthly reporting to the board by the COO with clear output KPIs. Build a reporting setup using tools like Power-BI or similar platforms, and have the CEO report quarterly to the supervisory board.
Digitalization/Automation opportunity: The opportunity for digitalization and automation is high. The technology and cloud computing infrastructure are readily available. The main challenge lies in the willingness of the board to embrace digitalization fully.
Risk: The risk associated with this initiative is low. If necessary, you can continue steering the company using traditional methods. However, embracing a digitalized cockpit offers significant advantages in terms of performance and decision-making.
Cost: The cost is moderate. Allocate resources for an internal task force, employ external support if needed, invest in visualization platforms like Power-BI, set up a data warehouse to gather metrics, and create APIs to integrate data from local ERPs. Additionally, deploying data scientists and machine learning engineers is required.
Keeping it Real: Controlling and Succeeding long term
Sustaining success: Establish guardrails around data transparency and ensure ongoing monitoring of internal and external criteria that correlate with business performance. Continuously update and improve the KPIs based on insights generated. KPIs and metrics can change - depending on the focus: after all, seeing every month 100% is not really interesting.
Watch outs: Be prepared for pushback from various functions and organizations, including board members, who may resist increased transparency. Address concerns by declaring an "amnesty" for past issues and incentivize improvements in the new/updated KPIs.
Conclusion
The opportunities presented today are immense. We have the power to shape our destinies through combining the improvement of the old, with adding the new via digital transformation and innovation. Embracing 21st-century metrics systems that go far, far, far beyond traditional financial measures allows us to leverage data from across the organization and analyze it for insights, augmented by correlated external factors.
By adopting this approach, businesses can achieve exponential growth and break free from traditional limitations.
Stay safe and be bold in your journey towards a data-driven future - and stop just looking at your rearview mirror.
Daniel
© helmig advisory AG, 2023. All rights reserved.
PS: Did you enjoy this blog post? Sign-up for the “Close the Gap” blog and “The Supply Chain Dialogues” podcast on the helmigadvisory.com webpage, or listen in on Apple Podcasts or Spotify).
Are you interested in having a dialogue about the above, receiving some advisory support on tackling the topic best in your firm, receiving a structured talk for your team (s), or just having an exploratory call with Daniel? Contact us via the web form or give us a call.
© Helmig Advisory AG, 2023 - All rights reserved.
