Rethinking KPIs in the digital era

“One of the classic works in KPIs is the Norton and Kaplan balanced scorecard,” said Michael Schrage, a research fellow at the MIT Sloan School Initiative on the Digital Economy. “They published that in 1992. Fundamentally, the work that they did 30 years ago I think is very good and spot on, but the reality is digital transformation changes the economics of instrumentation, metrics, and measurement.”

In other words, companies will always track certain KPIs, but new ones must be added and new approaches need to be taken. 

“The legacy notion of certain KPIs—sales and profit—yeah, we’re going to keep them,” Schrage added. “But the way that people in the finance community, the marketing community, the HR community should engage and collaborate around those KPIs has to fundamentally change.”

That was the crux of a virtual panel on Wednesday, hosted by Fortune, about the evolving role of the CFO. Schrage offered insight alongside Harmit Singh, executive vice president and chief financial officer at Levi Strauss & Co., and Alka Tandan, chief financial officer at Gainsight, during a conversation about how to rethink KPIs in the digital era. 

One of the key takeaways was the need for growth in consumer-facing KPIs. Rather than simply track sales or profit, Schrage has seen a push in KPIs surrounding the customer experience. 

“This is an important and critical area for Levi Strauss & Co.,” Singh said. “It’s been around for 160 years. We have legacy systems. We have traditional approaches.” 

But Singh said that the clothing company, which used to provide jeans wholesale, is now switching to a direct-to-consumer business model, adding 100 new brick-and-mortar stores each year. It currently has about 3,000 locations.

And in keeping with that transition, the company’s KPIs are changing too. 

“As you think about understanding our stakeholders, employees, shareholders, and customers, our KPIs are evolving,” Singh added. “Traditionally, it was revenue, profit, and cash, and now we’re going into more leading metrics—customer lifetime value is important, and CSAT [customer satisfaction] scores.”

Gainsight is changing its approach, too. Founded in 2013, Gainsight is a tech company with a customer success software platform. 

“So we’re definitely on the emerging KPI bandwagon for sure,” Tandan said. “We have this concept of success for all. We look at employee success. We look at customer success, and then we look at investor success. We are a customer success company. So we are often defining these KPIs for the industry as well.”

In the past, one of the KPIs used to measure customer success was the company’s gross retention rate, she said. 

“But it’s changing, especially in an economic environment like this,” she said. “Our North Star metric right now is net retention rate. That’s really looking at your customers and seeing not just which ones are staying, but which ones are growing.” 

This kind of KPI not only allows Gainsight to measure its growth but also make changes to its approach to improve efficiency.

“In an environment, now, when it takes a lot more money to acquire a new customer, really looking at your current customer base and growing it that way becomes a lot more efficient. I think every CFO, as well as investors, could appreciate that,” Tandan said. 

That’s one of the areas Schrage believes will change in the future. While KPIs are great at demonstrating what the company has achieved, they don’t always provide a road map for where to go next.

Singh agrees. “Lagging data, that’s what this feed measures. Leading data is what they expect in terms of guidance,” Singh said. “But how do you get to guidance? What are your indicators that get to you to say, ‘Okay, this is a forecast for the future.’”

Using KPIs in this way will require that data is shared across companies. As it stands, Schrage says, data is often siloed, but technology has increased its shareability. Now it’s up to the humans who oversee that information to share it. 

“The idea that one organization can deny access to valid data. That means it’s unhealthy data governance…to me, the root issue here is data governance,” Schrage said.

Singh began the work of unlocking that data by converting to a single ERP (enterprise resource planning software system) for Levi Strauss, increasing access to the information. 

“You’ve got to think about this very differently, and as I said, it’s a little bit of a journey,” Singh said. 

Schrage said some companies have created Slack channels to discuss KPIs, which offers a collaborative way to engage with the information. 

“That then becomes a resource,” he said. “For example, the reason why the numbers are low is because of X, or there’s a real opportunity here that we’re missing.”

All agreed CFOs will need to step in here to ensure the data is shared and used appropriately going forward. 

“It’s a fantastic thing for CFOs to get together with the people and say, what are the three to four KPIs we use to manage guidance on a risk-adjusted basis? How good are they at managing guidance?” Schrage said. “Because some KPIs are relevant to meaningful guidance. They’re great for telling you what you’ve done. But guidance KPIs, that strikes me as a fantastic research opportunity and a predictive analytics opportunity.”