Rethinking Business Performance Metrics for the Digital Age
- As many organizations are bumping up against the limitations of traditional business and financial KPIs, business leaders are increasingly considering the adoption of new, smarter metrics for the digital age
- These include “softer” KPIs focusing on customer or employee experience
- Modernizing KPIs is the perfect opportunity for organizations to ensure they align with strategy and support business agility
Market conditions and the way we do business have dramatically changed over the past years. However, most companies and organizations still rely on the same old Key Performance Indicators (KPIs) to measure business success: ROI calculations, traditional efficiency & productivity metrics, etc.
Isn’t it time for business leaders to assess the effectiveness and relevance of the metrics they use and possibly to update them to reflect changes in the technology landscape, in consumer and employee expectations, and in the overall business environment?
An Overview of Traditional Business KPIs
Businesses have historically used time-tested sets of metrics to assess value and performance. Chief among these are financial indicators that can be used to assess profitability. Some of the most common variants of Return On Investment (ROI) calculations include:
- Net Present Value (NPV), that computes the current value of all the inbound and outbound cash flows associated with an investment. The idea is to account for the fact that time affects the value of cash flows in order to assess the “real” value derived from an investment.
- The Weighted Average Cost of Capital (WACC) measures the return that a business is expected to provide to its various equity holders and lenders. In other words, it sets a threshold for profitability.
- The Payback Period of an investment, i.e. the time required to earn back the sum originally invested.
Additionally, you can use a number of business- and operation-oriented KPIs to assess:
- sales and growth
- inventory management performance
- cost and revenue
- resource efficiency
- asset productivity
However, one can wonder whether these “textbook” KPIs are still effective to measure business success in the digital age. In fact, a McKinsey study found that over 85% of companies struggle to quantify the ROI of their digital initiatives and to define meaningful KPIs when it comes to assessing the performance of new digital channels and touchpoints.
The Emergence of “softer” KPIs
As a matter of fact, an increasing number of companies are transitioning from traditional indicators to softer metrics such as customer-focused KPIs.
Instead of measuring success in terms of financial performance (for example by focusing on sales numbers and profitability), they are taking a more customer-centric approach by implementing such metrics as:
- net promoter score, which assesses the likelihood for customers to recommend the brand
- customer lifetime value
- customer churn
- general awareness of the brand and company
Moreover, the recent shifts in workplace culture and worker expectations (remote or hybrid working, increased focus on work-life balance and on meaningful work experience, etc.) have prompted many organizations to focus on employee satisfaction metrics, while the continued march towards digitalization has led to the creation of dedicated KPIs to measure organizations’ technological quotient and overall digital maturity.
Towards Strategy-aligned KPIs
With the expansion and diversification of the landscape of possible KPIs, business leaders are now empowered to choose which metrics are most relevant to assess the performance and success of their organization and initiatives. The era of one-size-fits-all KPIs has come to an end.
This is the opportunity for companies to better align their key performance indicators with their overall business strategy. A MIT Sloan Management Review survey found that only 26% of companies believe that their functional KPIs align with their strategic goals.
Promoting and bolstering strategy alignment is of key importance in our current business environment. Not all organizations have been affected in the same way by the COVID crisis and the subsequent economic and productive challenges. Crisis response strategies and plans have varied significantly from one company to the next.
As a result, the KPIs used by your most direct competitor may not be relevant to your business. Each business leader should go back to the drawing board and perform an unbiased analysis of the organization’s current business drivers and strategic priorities in order to define KPIs to match — inventing new ones if needed.
Importantly, these KPIs should be revisited over time in order to factor in any new developments.
Finally, the right KPIs can also act as drivers for strategy realization and boosters for organizational agility. Digital transformation leaders can leverage the capabilities of machine learning to drive continuous improvement: Smart algorithms can use KPIs and their underlying data as input in order to learn from past performance and improve future results.