KPI: the first step to do for a successful Business Intelligence process.

Introduction

There are a lot of business intelligence softwares that gives you the possibility to control your business, from Oracle to Microsoft to SAP. In any case, before the software and the implementation, there is a question a company has to answer: What do we need to measure?

In this article will be discussed the definition and the importance of the KPIs, who and which areas are involved, how to define good and bad KPIs, a categorization, the most used KPIs and the feedback about KPIs from the companies point of view.

Definition of KPIs

In the question above, what do we need to measure, a part of the definition of KPI is hidden. A performance indicator or key performance indicator (KPI) is a measure of performance. Such measures are used by companies to define and then evaluate the success of their business. Before to evaluate a business and create a software, the first goal to achieve is to define the parameters that characterize the specific business. After that it is possible to monitor these parameters to fully understand the present state of the business and to define future actions.

Who and which areas are involved in the definition of KPIs

Before giving concrete examples, there are other elements to consider defining KPIs: who and which areas are involved in this bi process.

The first question is who is involved in bi process, that means who can gain from that. Generally those are:

High level management
Communications
Marketing
Sales
Any stakeholders interested in the company

Considering them, it is natural to see the business intelligence process as a common involvement of all the lines of an organization.

Since the answer to the first question, it is possible to guess the areas involved. The 3 main areas are:

Cost
Product
Customer

How to define good and bad KPIs

KPIs are different according to specific business. Since this bi approach is very analytical and measurable, a mandatory element is the KPIs have to be SMART. That means:

Specific for the business
Measurable to get a concrete value for the KPI
Achievable, attainable to get real values
Relevant to measure
Timely, time-bound to define them in time frames

According the SMART definition, it is possible to identify good and bad KPIs. If the KPI is not SMART, then it is a bad KPI. An example can show this concept.

A KPI like Increase Sales that is defined as Change in Sales volume from month to month and it is measured by Total of Sales By Region for all region with the target to Increase each month seems a good KPI. Looking deeper into that there are other questions arising that show how the KPI is not SMART. Does this measure increases in sales volume by Euro or units? If by Euro, does it measure list price or sales price? Are returns considered and if so do the appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or Euro or units, do we want to increase sales volumes each month?

Categorization of KPIs

As we can see from the above KPIs, it is possible another categorization.

Quantitative indicators which can be presented as a number
Practical indicators that interface with existing company processes
Directional indicators specifying whether an organization is getting better or not
Actionable indicators are sufficiently in an organization's control to effect change
Financial indicators used in performance measurement and when looking at an operating index

The most used KPIs

The most used metrics concerns the above 3 ares.

Investigating on costs means understand cycle time, ability to conform to market standards, quantity and quality.

Information on product are about pipeline work, research and development, time to market, and product customization.

A modern approach on marketing is more focused on customer behaviour. Therefore some metrics are: environmental appearance, complaint management, employee empathy, product expertise, and responsiveness, customer acquisition, demographic analysis applying to become customer, turnover by segment, bad debts, profitability by segment.

Specially if a company is customer focused, then it is possible to integrate a business intelligence tool with a CRM, customer relationship management software.

Other examples of used KPIs are reported in the following research.

Measured Area	Best-Practice KPIs
Overall Business Performance	Most profitable products, Most profitable marketplace, New vs returning customers, Most profitable listings, Most profitable coupons
Online Sales Activities	Visitors & conversions, Page and listing views, Orders, Shopping cart, Up-sells orders
Product Performance	Product profitability, Top sales revenue, Top close rates
Listings Performance	Listing turnover, Listing profitability, Listing by marketplace, Duration view
Marketplace Performance	Marketplace sales activity, Marketplace profitability, Average cost per order, Marketplace listing turnover
Customer Insight	Customer scorecard, Geographic view, Marketplace view, Lifetime value
Campaign and Coupons Performance	Campaign conversion percentage, Campaign activity (number per clicks, orders, coupon conversion percentage, Coupon activity(number per clicks, ),

The feedback of companies about using the KPIs

All those metrics are used by companies. The following table says in which measure companies use them and how they consider those KPIs important.

	% claiming to use metric		% rating as very important
Metric	Frösén et al.	Ambler et al.	Frösén et al.	Ambler et al.
Sales (value and/or volume)	90	91	86	71
Profit / Profitability	89	92	85	80
Gross margin	81	81	79	66
Perceived quality / esteem	78	64	73	37
Total number of consumers	73	66	59	24
Consumer satisfaction	72	68	68	48
Market share (volume or value)	68	78	62	37
Awareness	67	78	63	28
Marketing spend	66	65	48	39
Number of consumer complaints	65	69	57	45
Number of new consumers	64	57	58	57
Loyalty / retention	63	64	62	47
Shareholder value / EVA / ROI	63	53	54	79
Customer Satisfaction	63	45	63	58
Brand/product knowledge	60	55	48	45

Conclusion

In this article we talked about the first step to do when companies want to go for a business intelligence software. Before the tools, they need to understand what they need, what to measure and how to do that. There is the SMART approach to define the KPIs and then several examples of common used KPIs. If you are in the business, check also the KPIs other companies use and if they consider them relevant for their strategic goals.

In FeroPluris we consider the definition of KPIs the first step to be fully satisfated with a business intelligence software. If you want more information about how to define them and how to install, configure and making running or developing a specific solution for you, just send us an email to info@feropluris.com or call us at + 49 5241 964 6265.

References:

http://www.ebizq.net/blogs/decision_management/2009/11/kpi_framework_for_a_competitiv.php

http://www.thefearlessfactor.com/s-m-a-r-t-goals-are-not-just-for-goalkeepers/

http://www.identityquest.co.uk/self-development-skill/

http://www.hometuitionagency.com.sg/blog/uncategorized/home-tuition-–-there-is-only-one-way-to-set-goals/

http://www.stratmark.fi/wp-content/uploads/Use%20and%20Perceived%20Importance%20of%20Marketing%20Metrics%20in%20Different%20Business%20Settings.pdf

http://management.about.com/cs/generalmanagement/a/keyperfindic_2.htm

http://en.wikipedia.org/wiki/Performance_indicator

http://www.databasejournal.com/features/mssql/article.php/10894_3604206_1/Mastering-Enterprise-BI-Introduction-to-Key-Performance-Indicators.htm

http://www.aiea.it/pdf/sessioni%20di%20studio%20e%20di%20formazione/2009/Torino%2017%20dicembre%202009%20Possenti.pdf

http://www.dis.uniroma1.it/~nanni/Didattica/MatDid/SIA/slides/1x_SIA_s_Massocchi_Altran_BI.pdf (in Italian)

http://www.appsbi.com/monitor-your-kpis-with-business-intelligence-software