It’s 2022, yet many CFOs are still going old-school, at least when it comes to KPIs.
“A fundamental challenge to CFOs is legacy KPIs, such as cash flow, revenues, customer acquisition costs, from 30 years ago,” said Michael Schrage, a research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy. KPIs—key performance indicators of progress toward an intended goal—need to be revisited by organizations, says Schrage, who conducts research in innovation risk management. KPIs need to reflect the modern technologies companies now have access to, like real-time visibility of the supply chain, he explained. Sticking with legacy KPIs could bring doom to processes such as digital transformation, he said.
Schrage talked with Fortune about emerging KPIs. And CFOs at Levi Strauss & Co. and Prudential Financial shared how they are reassessing their own KPIs to stay competitive.
Digital disruption of the balanced scorecard
In a 1992 Harvard Business Review article, Robert S. Kaplan, a Harvard professor, and David P. Norton, a management consultant, explored the idea of a balanced scorecard and measures that drive performance. Then in 1996, they published the 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, said Schrage, an advisor on innovation issues and investments to major firms.
“It’s not just that we’re ‘rediscovering’ the balanced scorecard,” he explained. “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 said. Many companies are even deferring pricing decisions to algorithms, he said. “Now, you can end up with a kind of a worst-case scenario which happened with Zillow,” he explained. “Or you can end up with better case scenarios, where the data gives you better choices to make trade-offs.”
But when it comes to KPIs, “digital disruption is forcing organizations to come to grips with, how do we measure what value means?” Schrage said. “We are foolish if we look at individual KPIs, and we don’t look at our portfolio and the relationship between KPIs.” For example, “what is the trade-off we want between growth and margin, and Net Promoter Score?” A Net Promoter Score is a metric that measures the customer experience of a brand. “At least two-thirds of the Fortune 1000 use the Net Promoter Score, including most or all of the financial service companies, airlines, telecom companies, retailers, and others,” Fortune previously reported.
Schrage thinks “smart CFOs” are becoming like chief operating officers. “They’re saying if we’re going to do capital allocation for customer acquisition and for the [marketing and technology] stack, here are the kinds of measures we want to consider to assure that our capital is being effectively deployed—and that’s just not our financial capital; it’s our human capital, as well,” he said.
That’s where emerging KPIs come in—employee experience (EX), customer experience (CX) and “the big metric is customer lifetime value (CLV),” Schrage said. “What is the correlation between the employee experience, customer experience, and customer lifetime value?” he said. “That’s what I feel needs to be discussed.”
Leading vs. lagging
An industry that provides a look into EX, CX and CLV is retail. “The KPIs of tomorrow may be a little different,” Harmit Singh, EVP and CFO at Levi Strauss & Co., said. “They will be more leading versus lagging. Revenue growth, profit growth, and cash conversion are all good indicators, but they’re talking about what happened. Are you growing customer lifetime value? Are you driving more frequency? I think these topics will become more important.” He said that Levi’s is currently reviewing and going through a change in KPIs.
“As a metric, customer lifetime value has become important,” Singh said. “We are accelerating our direct-to-consumer business, which is stores and e-commerce. Those are channels where you can build relationships with customers.”
Through the direct-to-consumer business, a customer can build “a head-to-toe look, you get the assortments,” he said. “You can go to our stores, get that experience, and then we can engage with you and build that relationship,” Singh explained.
He said that the company has “invested significantly” in data and analytics to understand consumers’ shopping behavior, like purchase frequency and history, to provide personalized experiences on their website and mobile app. “So, when you come to our website, and you like a certain style, we can say, ‘You’ve normally bought this; this is what you like; here are some options,’” he said. “We make it more engaging. And I think the younger consumer really wants that.”
“Where the data is housed, how it is housed, and access is going to be very critical,” Singh said. “We’re doing an ERP [enterprise resource planning] upgrade where we’re taking our older SAP system and moving to the new SAP system on the cloud. The [technology team] reports to me through the CIO.”
Digital transformation
Schrage is a co-author of a recent report on how using the wrong KPIs can hamper digital transformation. The “easy way out” is just a “lift and shift,” Schrage said. Such as, “We’ll just take all the existing KPIs and we’ll just put them in the cloud,” he says.
He continued, “In theory and in practice, digital transformation should be about fundamentally changing the costs and capabilities of how you create value for and with your customers and clients. Do you really want legacy KPIs from 2010 describing and defining how you differentiate yourself? The CFOs I know care as much about human capital as financial capital.”
Prudential Financial, one of the world’s largest insurance companies, has been undergoing an enterprise-wide transformation since 2019. “As we go through transformation, our focus has been on improving the customer experience,” Prudential EVP and CFO Ken Tanji said. “Establishing clear KPIs is critical to track our progress.”
Tanji continued, “In recent years, we have developed the technology and capability to track, visualize, and analyze customer experience metrics such as ease of doing business and net promoter score, as well as profitability metrics such as value of new business. These analytics and insights allow us to react to business issues before they become material.”
Marketing and finance have also recently partnered to conduct “a look-back analysis on certain business segments to understand the correlation between customer experience, sales, and the value of new business,” he said. “Our understanding of the impact of customer experience-related decisions on financial performance will improve our decision-making on where to invest for the organization and other outcomes.”
“All the things that are transforming what CFOs need to do have been disrupted, and that’s why digital transformation is a big thing,” Schrage said. “I think really smart CFOs are going to become really good collaborators and colleagues.”
Or think of it this way. You wouldn’t wear a tracksuit to work and talk about the latest episode of “Seinfeld.” If your KPIs are similarly dated, perhaps it’s time for an upgrade.
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