Everyone has heard the term Business Intelligence used in hundreds of articles, but what does it really mean and how can Business Intelligence be utilized to a firm’s advantage? One of the difficulties is that Business Intelligence is defined in so many different ways and under so many circumstances that understanding how Business Intelligence can be utilized most effectively escapes us.
Business Intelligence implies that some form of information is extracted from the data maintained by a firm and utilized to make what can be called “wise business decisions”. This data doesn’t necessarily have to be restricted to accounting transactions. It could reflect the cost of acquiring and maintaining customers. It could reflect the utilization of resources in the manufacturing process. It could also reflect the time required to process customer orders or complete manufacturing processes. All of these examples relate to performance and the efficiency and effectiveness of business processes.
Since Business Intelligence covers such a wide variety of business activities, let’s switch to a more practical question. How can we use Business Intelligence to help us make wise business decisions and therefore increase our firm’s profitability? That’s where Key Performance Indicators enters the discussion.
If your firm is small, it may be possible to monitor your key business activities using nothing more than your experience. Basically a seat-of-the-pants business control system might be perfectly adequate. That’s fine since it makes no sense to make your business more complicated than it needs to be. However, how do you control your business if you have many employees, customers, or product and service lines? In this case business complexity may reduce the value and effectiveness of your knowledge and experience. If you happen to be relatively new to the firm, your lack of experience has to be replaced by something else that will allow you to more effectively monitor and control business activities for which you are responsible.
Key Performance Indicators (KPIs) are a graphical representation of critical business activities that you can utilize to immediately “see” where you need to concentrate your attention. While your experience and knowledge will certainly have a positive impact on these critical business activities, the sheer number of activities may overwhelm your ability to see the forest for the trees. Key Performance Indicators give you the ability to quickly scan these graphical representations and determine which require your attention and which do not.
Your company’s success is not dependent upon whether you have the most powerful ERP system. It’s dependent upon your ability to
- know what the market wants;
- identify those people who want your products or services;
- convince them that they need your products or services;
- get your products or services to them at the right time and at the right price for you and them and manage your business effectively and efficiently.
The first three objectives are allied with sales and marketing activities, while the last two objectives reflect the way you run your business. In all cases information is the key to your success. The more you know about the intricate details of your business and the sooner you know it, the better you will be able to generate positive outcomes.
In the past Income Statements and GL budget reports were our sole source of financial and operational information. Now we can generate so much information that we seem to spend more time trying to figure out what’s happening rather than taking steps to effect change. Key Performance Indicators measure the efficiency and effectiveness of critical business activities and display them in a format (usually graphical) that gives us the ability to quickly ask and answer the following questions.
- Where have we been in the past?
- Where are we today?
- Where do we seem to be heading?
- Where should we be?
If you ask the right questions, the Key Performance Indicators data flowing from your CRM and ERP system will paint a picture that enables you to quickly “see” whether you are on track. If a Key Performance Indicator is below target, you can take steps to analyze and improve the business activity. As these improvement steps take hold, you can view the relevant Key Performance Indicator and quickly determine if these improvement steps have had a positive impact.
Key Performance Indicators can become powerful business process improvement tools, but you need to be careful. Too much information or the wrong information can negatively impact your ability to monitor and control your business management processes. Part two of this three-part article will concentrate on understanding the nature of Key Performance Indicators and how they can be deployed to your advantage. We will then discuss in part three what you should do once a Key Performance Indicator displays a negative trend.
For more information about the value of establishing KPIs for your business, please contact us.
