This KPI has become the new go-to metric for CFOs

When it comes to KPIs, are you still working off a 1992 playbook?

I talked with Michael Schrage, a research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy, about legacy KPIs, such as cash flow, revenues, and customer acquisition costs. These coincide with the idea of a balanced scorecard and measures that drive performance, which Robert S. Kaplan, a Harvard professor, and David P. Norton, a management consultant, first explored in 1992, he says. Their research later became the 1996 book, “The balanced scorecard: translating strategy into action,” resulting in a popular strategy management framework that many organizations still use as the basis for KPIs, Schrage says.

“A fundamental challenge to CFOs is legacy KPIs from 30 years ago,” he says. “The idea that the amount of data we have, and the quality of algorithmic tools that we have in 2022, remotely compares to what we had in 1992 is ridiculous,” Schrage says. Advances in technology like A.I. and machine learning provide greater insight that needs to be reflected in updated KPIs, including a focus on human capital, he says.

Schrage thinks “smart CFOs” understand their position is evolving and gradually incorporating aspects of the chief operating officer role. “It’s just not our financial capital; it’s our human capital, as well,” he says.

That’s where emerging KPIs come in—employee experience, customer experience, and “the big metric is customer lifetime value,” Schrage says. “What is the correlation between the employee experience, customer experience, and customer lifetime value?” he says. “That’s what I feel needs to be discussed.”

I had a chat with Harmit Singh, EVP and CFO at Levi Strauss & Co., about emerging KPIs. “As a metric, customer lifetime value has become important,” Singh says. “We are accelerating our direct-to-consumer business, which is stores and e-commerce. Those are channels where you can build relationships with customers.”

Prudential Financial has been undergoing an enterprise-wide transformation since 2019. I talked with Prudential EVP and CFO Ken Tanji about how the company approaches KPIs. “As we go through transformation, our focus has been on improving the customer experience,” Tanji says. “Establishing clear KPIs is critical to track our progress.” And that includes analyzing customer experience metrics, he says.

In my report, “Many companies are still using KPIs from the ’90s. Here’s how to modernize them,” you can read more about Schrage’s research on digital transformation and KPIs and more on Singh and Tanji’s perspectives.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

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Courtesy of Technavio

Going deeper

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Leaderboard

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Overheard

“We see inflation deeply entrenched in the economy, and what’s unusual about this particular period is that both demand and supply are being affected by exogenous events, namely the pandemic and the war on Ukraine.” 

—David Solomon, the CEO of Goldman Sachs, said on Monday during the company's second-quarter earnings call with investors, as reported by Fortune.