Leading Indicators and Key Exception Indicators are key tools in optimising finance processes. Gartner’s latest research supports this and even makes the bold claim that predictive business performance measures will help drive productivity by 20 percent by 2017. According to Gartner, such measures can comprehend exceptions and variances to individual process execution and thus are essential to mitigate and prevent the impact of disruptive events on profitability.
The present report confirms our own observations and research around the need to implement a new type of performance indicators. Management has become increasingly comfortable with the concept and practice of KPIs. However, a now common feedback among senior executives is that, while KPIs are helpful in measuring performance, they do not prove as effective in improving it. The key problem seems to be a disconnection between what KPIs measure and how to interpret them to drive performance and profitability gains.
The following quotes are from Samantha Searle, Research Analyst at Gartner:
- “Using historical measures to gauge business and process performance is a thing of the past.”
- “To prevail in challenging market conditions, businesses need predictive metrics – also known as “leading indicators” – rather than just historical metrics (aka lagging indicators).”
- “Business process directors who don’t apply predictive metrics to cross-boundary business processes will leave their organisations vulnerable to the risk of failing to execute their business strategies.”
- “[V]isible metrics won’t help drive strategic business outcomes, such as increasing profitability, if business and IT leaders don’t have the right metrics in place.”
- “[Business & IT leaders] They persist in using historical measures and consequently miss the opportunity to either capture a business moment that would increase profit or intervene to prevent an unforeseen event, resulting in a decrease in profit.”
The above statements reflect to a great extent our own experiences. Measuring the status of organisational efficiency is a logical and proven management instrument. This often results in focussing on implementing KPIs and institutionalised internal systems. These KPIs and controls are useful and form the foundation of process management. The limit of KPIs (and controls) is that they are lagging, after-the-fact and indicative in nature; they summarise the specific facets of the outcome of transactions as an average number.
KPIs have no eye on actual individual business transactions. They lack the context to provide insight into what factors cause or influence the outcome or, indeed, where the average masks a high distribution of results. As such, deviations from the average and relative value are not monitored nor considered. This hampers both the opportunities to remediate the occurred exception and to structurally improve the process. Thus, KPIs often do not show the performance improvement or the risk limitation potential of a process. In order to identify exceptions, we need another level of monitoring based upon the leading indicators underpinning and strengthening the KPIs. These leading indicators comprehend ‘what might go wrong’ and ‘what is going wrong’ in individual process execution and form the basis of root cause analysis and process improvement activity. They offer the possibility to act before an undesired outcome occurs and ‘this ability will be crucial in determining the organisations who survive the shift towards a digital world and those who will be left behind’ (Searle, Gartner).
Ahead of Gartner we conducted a study among over 70 executives from North America, Asia and Europe. The purpose of this was to explore the extent to which organisations base their business decision on lagging and/or leading indicators and to identify what could most significantly enhance the performance management regime today. The results show that the KPIs are the dominant tool for performance measurement but a large percentage of organisations are struggling to translate this into performance improvement. The reason behind this can be the lack of leading indicators in place to supplement the use of KPIs. As few as 8% of organisations have so far adopted a complementary set of leading as well as lagging indicators. More results of the survey plus 5 recommended steps forward have been compiled in an infographic available below.
See link for the full Gartner announcement.
If you found this useful and are looking for a deeper dive into leading and lagging indicator usage and scenario implementation, see this whitepaper Performance Improvement from Measurement to Action (KPIs & KEIs)