1. MEASURE WHAT MATTERS According to a recent Gartner survey 80 percent of companies only measure results. In other words, they measure past performance by looking at the results in the financial statements. But they don’t know what impacted these results, or what is best done to improve them going forward. Does your company analyses and reports allow you to ask “why did this happen?” “which area of my business needs most attention, if I want to improve profit?”

2. Importance of KPIs in Finance Finance is one of the first (if not the first) departments to employ metrics. Standardized reporting and one version of truth. Long reporting cycle (yearly) has been shortened with the introduction of interim reports (e.g. monthly Pnl, project PnL e.t.c.) Universally adopted corporate performance indicators (ROI, ROA, ROE)

3. Leading vs Lagging Indicators Lagging Indicators Output oriented, easy to measure but hard to improve or influence. Historical information that measures past performance. Low level of control. Sales / Shipments Financial Statements Loans Score or Record Almost all Financial Ratios are Lagging Indicators

4. Leading vs Lagging Indicators Leading Indicators Input oriented, hard to measure and easy to influence. Information that drives or can be correlated with future performance. High Level of control. Leads / Orders New products Interest rates Resources Employee Engagement

5. Lagging Price-to-Sales Ratio Price per Share / Annual Sales Per Share Profit Margin Profit Margin = Net Income / Sales Inventory Turnover Ratio Costs of Goods Sold / Average Inventory Leading Leads / Orders Growth Rate Affects Sales Growth Rate Managed vs. Total Spend Affects the control over expenses Supply Lead Time Affects the ability to maintain JIT inventory Leading vs Lagging Indicators Level of Control

6. Return on investment (ROI) ROI is a ratio comparing an investment's incremental gains to investment costs. Total cost of ownership (TCO) TCO is the estimated total life cycle cost brought by acquiring, installing/deploying/starting, operating, maintaining, and disposing of the item at the end of its economic life. Learning Curve Rate of Adoption Penetration Employee Commitment Leading vs Lagging Indicators

7. Lagging Indicators measure results – Results are important Lagging indicators are the foundations of Corporate Reporting and are the common metrics used to evaluate corporate performance Lagging indicators’ target values translate directly into the organization’s goals Lagging indicators are the basis of evaluation of leading indicators’ predictive capabilities Lagging indicators’ target values cannot translate directly into actionable directions Lagging Indicators Are Important

8. Define Performance Goals Identify Goals (Corporate Strategy) Identify Top Level Contributing Activities Identify Performance Indicators Define the drivers Identify their measures Analyze their forecast potential Establish Perimeter Define set of leading indicators Establish relationships across sets Develop a predictive model Take to action Automate reporting on leading indicators Incorporate into performance management processes Discovering the Leading Edge

9. Setting Effective Indicators Effective indicators are relevant; they show you something about the system that you need to know. Effective indicators are easy to understand, even by people who are not experts. Effective indicators are reliable; you can trust the information that the indicator is providing. Effective indicators are based on accessible data; the information is available or can be gathered while there is still time to act. Discovering the Leading Edge

10. KPIs are mostly non-financial measures KPIs are not expressed in monetary figures. Sales will be a result of sales calls made, advertising, amount of customer contact, product reliability, etc. Any sales indicators expressed in monetary terms are result indicators. KPIs are measured frequently KPIs should be monitored and reported 24/7. A KPI can't be measured monthly as this is shutting the stable door well after the horse has bolted. KPIs are current or future measures. Most organizational measures are past indicators, measuring events of the last month or quarter. These indicators cannot be and never were KPIs. KPIs are acted upon by the CEO and senior management All good KPIs that make a difference should have the CEO's constant attention, with daily calls to the relevant staff. Having a potentially career- limiting discussion with the CEO is not something staff want to repeat. Discovering the Leading Edge

11. KPIs are understood by staff A KPI should make clear what action is needed. In the case of an airline that was having a problem with late planes, a KPI communicated immediately to all staff that there needed to be a focus on recovering the lost time. KPIs are the responsibility of individuals A KPI can be tied down to an individual. The CEO can ring someone and ask "why?" Return on capital employed cannot be tied down to a manager; it is a result of many activities under different managers. Can you imagine a general manager being told one morning by the CEO: "John, I want you to increase the return on capital employed today"? KPIs have a significant effect on the organization A KPI will affect most of the critical success factors (CSFs) and more than one balanced scorecard perspective. KPIs have a positive effect on other measures A KPI has a flow-on effect on other performance measures. Discovering the Leading Edge

12. Predictive Analytics with Sentinels Patented TARGIT Technology Multidimensional Data Mining algorithms that pinpoint past patterns in KPIs that have a positive or negative effect on target KPIs. Prediction based rules that allow you to receive early warnings. Sentinels warn you about possible changes in advance by expanding the timeframe for the notification agents that give you real-time alerts. Discover the leading KPIs that predict your lagging KPIs.

13. Real Time Correlation Analysis Patented TARGIT Technology Single click application Immediately visualize the variance in KPI results through time Identify those leading KPIs that are the best fit for your model Identify the Key Exception Indicators that may provide early warnings Poor Fit Excellent Fit

14. Real Time Regression Analysis Patented TARGIT Technology Single click application Linear and Polynomial (up to 4 th degree) Regression algorithms. Automated next period prediction Immediately visualize the expected KPI values in future periods Identify trends in your KPIs and receive early warnings

15. Decision Support Process BI Deployment Automation Accelerators ->Easy Analytics & Reports Integrated Action Loop Dashboards – Analytics Reports & Agents ->Self Service BI & Ad-hoc Analytics Data-Driven Culture Dynamic integration/rejection of internal/external data ->Competing on Analytics

16. Leading KPIs are oftentimes Lagging KPIs to other Leading KPIs There is a chain of cause and effect between Indicators which needs to be discovered by the organization. The deeper we understand the chain and the more links we have discovered, the earlier we will be notified about future threats and opportunities Price-to-Sales Ratio Leads / Orders Growth Rate Customer Retention Customer Satisfaction … Customer Acquisition Campaign Reach … Getting to the Bottom of Things

17. KPIs can (and will) be manipulated Example: To improve Inventory Turnover Ratio Managers may be tempted to understock Solution: Ensure performance is measured by a cluster of KPIs that shield your organization from such practices Inventory Turnover Ratio Back Order Rate Rate of Return Inventory Accuracy Sales Growth The Dark Side of KPIs } Inventory Efficiency

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