Edward Roske

KPIs vs. the Bottom Line

Are key performance indicators more important than the big picture?

by Edward Roske Oracle ACE Director, November 2011

In a for-profit company, many managers will tell you that every employee should be focusing on the bottom line. Sadly, in my opinion, every one of those managers would be completely wrong.

Making money (or as upper management in the organization call it, “increasing shareholder value”) is the goal of senior management and the corporation as a whole. But I believe that individual departments, cost centers, profit centers, or organizational units should be neither measured against overall profitability nor focused on it at all.

Here’s why: the profitability of a business is an outcome of the inner workings of hundreds of discrete processes. Think of it in terms of anatomy: all the parts of my body work together to make sure I stay alive. But my stomach focuses not on my continued life but on the very narrow activity of digestion. My heart focuses on pumping blood, my bones focus on providing overall structure, and my spleen focuses on . . . well, actually I have no idea what my spleen does.

And that’s exactly the point. While as the CEO of my own body I care about my overall performance (and continued existence), I don’t have to constantly monitor what all the parts are doing. Similarly, those parts of my body (in the service of my metaphor about business) need to focus on exactly what they can control and nothing else.

This should look familiar to anyone who works in a corporation. Every corporate department has certain responsibilities within management’s control. HR makes sure our employees are happy. IT ensures that our computer systems are stable. Accounting focuses on closing our books accurately and on time. Manufacturing has the ability to control waste and utilization levels and reduce steps in the manufacturing process. Sales (this is a tricky one) should concentrate on selling.

Every employee in every department should be managing the items that are within their control. Execution of those items determine their key performance indicators (KPIs) and business drivers that, once all the parts are put together, will eventually result in the company being more profitable.

While the manager of shipping might like to know that his company is profitable (so that if it’s not, he can start updating his resume) and what the stock price is (so that he can sell his company shares and put the money in a safe investment, like gold or collectible NASCAR plates), profit is an indirect output of the work he does on the job and nothing he can directly change.

What we need to determine are what his drivers—his KPIs—are. In a perfect world, his job can be summarized in 10 KPIs that can allow him to quickly see how he’s performing and improving on his job.

For the shipping manager it might mean tracking the number of loads received, the percentage of trucks shipped full, the utilization of dock space, the cost per shipment, or department head count. Whatever those 10 items are, they should always be front and center—from the time he logs in to his computer in the morning until he leaves at the end of the day.

Ultimately, how those KPIs are presented is less important than identifying and reporting on them in as timely a fashion as possible. I think it’s better to have a printout of your department’s KPIs that was current five minutes ago than to spend time maintaining a pretty dashboard that hasn’t been updated for weeks. Focus on timely updating, and use technology to get the information to the people in your organization in near-real time.

While I happen to feel that Oracle’s Hyperion and enterprise performance management (EPM) applications are the best products out there for delivering this information throughout your company, I think that a cultural change needs to precede the technology. It’s more important is that you stop focusing on profit and begin identifying and reporting on these KPIs.

Just like when my stomach stops being upset, my body feels better: Improve the departments, and profit (even in this economy) will naturally follow.

Edward Roske (eroske@interrel.com) has 15 years of experience with Oracle Hyperion products and is an Oracle ACE director and the CEO of interRel Consulting.