Watch out for bad KPIs

Bus Stop Board

Metrics are everywhere these days. Data is a way of life, and we expect to get it! But what happens when it’s used badly?

I recently took a trip to London with my son, and was waiting at a bus stop to catch a number 10. I noticed that the bus stop gave me the amount of time I would need to wait. Great KPI! I only have to wait 2 minutes for the next number 10.

But then 2 minutes came and went.

And another 2 minutes.

Then another 10 minutes.

Finally, the bus showed up 15 minutes later than the board had suggested. How could the computer have got it so wrong?

We need valuable information

The information I was reviewing at this London bus stop was not valuable. It gave me false information – which could not be relied on. How many times have you seen data or information in your organisation which has a similar profile. How many times have you made decisions on bad KPIs such as this, which have caused you and your organisation issues?

Be bold. If you are responsible for producing data or information, make sure it is valuable and correct. If it is not, stop doing it.

Find the right metric

I have a theory about the bus data.

The buses are all fitted with GPS systems, so the central computer always knows where they are in London. Therefore the computer know how far away the bus is from each stop on the route (distance).

The system then uses the average speed of a london bus is used to convert distance into time (time = distance / speed). So when I’m sitting in Oxford Circus with my son (probably the slowest road in London), this formula is far too ambitious. In other areas with faster roads, perhaps the buses arrive sooner.

So what is the right metric? I would give the customers the distance of the next bus, in kilometres or miles. So for example, rather than seeing 2 mins, you would see 0.4km. As I sit at the bus stop, I feel comforted that a bus is coming, although I can see that the road is very very slow. As the distance reduces, I get a feel of when the bus is coming, which is never wrong. This is a valuable metric which keeps my expectations managed.

Applying this

If you reflect on this example, and apply it to your organisation, can you think of any similar examples?

As a finance reporting professional, I feel that often too much focus is placed on EBITA variances to the month, or year to date. These historic figures only tell you what happened, not what is going to happen.

My favourite KPI is distance to go (DTG) Vs. prior year. This shows you the future remaining months in your EBITA forecast, Vs. the same period in the prior year. Even in rapidly changing businesses I find this KPI gives me really strong insight into the likelihood of what we think is going to happen. It also highlights errors in forecasting, or ‘sandbagging’ (hiding of upsides from prior months in the final month).

Do you have any examples that spring to mind?

How to be great at budgeting – timelines

In an earlier post I talked about the three elements that make up a successful budget – i.e.

This post is focussing in on timelines as an important factor in a successful budget approach.

Timelines

Budgeting occurs once a year, but you don’t magic up a load of spare time in which to complete the task. Your day job will be churning along in the background. Sometimes it’s quite hard to manage the two processes in parallel.

So to be successful you need an effective roadmap. You need to know when the deadlines are, so you can plan the milestones in. Budgeting is an iterative process, so you need to allow plenty of time to make the changes that you’ve agreed along the way.

Create a budget planner in Excel and to help you. Plot in the final deadlines, and then map back from there. Key milestones will likely be:

  • Initial scoping meeting – agree timelines, any new business initiatives etc
  • Assumptions sign off – with the relevant P&L owner
  • Progress reviews – at least 2 of these
  • Final sign off – at this point the P&L owner is signing up to delivering the numbers
  • Budget submission

Seem like a lot of steps? Perhaps, but if you’re new to this, run this milestone plan past your boss. They’ll soon tell you if it’s over/under kill. As I said earlier, allow yourself as much time as possible between each step to do the work (modelling/analysing/story boarding).

Book meetings in the diaries for all if the above milestones. Do this at the very beginning of the process. Not only will this focus your mind, but you will also find out if everyone is available on your chosen dates. Trust me, finding out your MD not available to sign off his/her budget is not cool, and doesn’t reflect well on you…

A good timeline will allow you to manage the process effectively, making you appear unruffled, professional and in control.

Stay tuned for my next budget element: Communication.