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Selecting the Right Business Processes to Subject to Reporting and Analysis

Originally published June 23, 2011

As your organization begins to flesh out a strategy for reporting and analytics, settling on a set of performance metrics that reflect ways to measure corporate performance provides a yardstick against which “success” can be measured and monitored. However, if the real goal of a reporting and analytics activity is to help improve the way the organization works, then analysis alone will not achieve the intended improvements. On one hand, Lord Kelvin said, “You cannot improve what you cannot measure,” but on the other hand, why bother measuring something you don’t plan to improve? If you plan to start reporting and analyzing things, make sure the analysis is designed to help you target business processes that can be improved using the analytical results.

As an example, let’s say that your organization wants to increase its net margin and selects that as a key performance indicator. By increasing the net margin, the company may hope to increase its share price (and consequently its corporate valuation). Net margin is calculated as the net profit divided by the revenue. In turn, net profit is calculated by subtracting the costs from the revenue – the cost of goods sold, the depreciation, interest, and other expenses. At a high level, this provides some more performance indicators to measure, monitor, and report.

In turn, you can drill down into each of these high level measures to look for the dependent variables. For example, when it comes to cost of goods sold, there are direct labor costs, subcontractor costs, travel costs associated with direct labor tasks, equipment, materials, finder’s fees, etc. Revenues can be measured as well, focusing on product revenue, services revenue, maintenance fees, royalties, or other kinds of licensing arrangement fees. Each of the other subcategories has its own components to contribute.

And each is affected by proper performance within each function of the business. To increase net margin, you might want to decrease the cost of goods sold. But the cost of goods sold is affected by the costs associated with making the product as well as the costs for selling the product. So do you measure the manufacturing process or the sales process?

To figure out what processes to measure – no matter what key metric is being measured –  there are some real questions that need to be asked:

  • What are the processes associated with each measure?

  • Are there gaps or failures in any of the processes that detract from the best performance?

  • Can these gaps or failures be corrected?

  • How much effort is necessary to correct those failures?

The underlying driver is not the specifics of the measures, but rather the associated activities within the organization that contribute to the components of our key indicators. And while the key measures might be easy to materialize by scanning the financial statements, many of the day-to-day activities and processes span different functions within the company. So even though overall performance rolls up to some specific sets of numbers, there may be many processes and tasks allocated among a variety of areas of the business that can impact success.

And that is where our set of questions comes in. Of these processes and tasks that impact success, some operate more efficiently, correctly, or quickly than others. And with the same set of processes and tasks, increasing the efficiency (or correctness or speed) of some can contribute more to improved scores for the key performance measures than others. This provides us with criteria for selecting a business process to monitor: while you may be capable of reporting and analyzing any of the processes and their corresponding tasks, you probably only want to pick those processes in which there are measurable gaps, those gaps can be corrected, and the level of effort to correct the gap does not exceed the value you get from making the correction.

There is a potential dilemma here. How do you know which are the right processes without measuring them first? On the other hand, we are trying to narrow down the scope of what is being measured first so that we don’t invest effort in measuring things that are way too difficult to change.

This is where the subject matter experts come in. In this case, we look to key individuals with a good understanding of the cross-functional processes and how each set of tasks within each function are related to overall corporate performance. In larger organizations, these are often enterprise architects or sometimes business analysts who have broad experience working in different areas of the company. The same types of individuals participate in smaller organizations also, but without the fancy titles. They are problem solvers, investigators, and key action people who get involved in different activities across the board. These are the folks to integrate into your straightforward analytics process, and they are the lynchpins in the next step of sponsorship and engagement.

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