You know that blue dot that you see moving along the map in your navigation app?
What would happen if your app only updated that blue dot every hour… or even worse, only at the end of every day? What would happen if it only gave you a general location — the region or perhaps the metro area — without the resolution to the street level?
You could end up so lost that you had no idea when or where you made a wrong turn.
Now imagine that the blue dot is your business and the map is your market. Do you know how much progress you are making toward your objectives, and how close you are to reaching your destinations? Those seem like easy questions to answer. But dig deeper, and you can quickly see how challenging it can be to find the right data to make those determinations, the right indicators to turn your data into insights, and the right interpretations to turn your insights into actions. That clarity is what enables a business to act with what we call informed agility. Without that clarity, you will have a hard time not only figuring out where you are, but also how far away you are from where you planned to be, and what courses of action you should follow.
The tool that accounting people use to achieve that clarity is called “variance analysis,” but we’ll stick with the simpler phrase “planned vs. actual.” As 2021 comes to an end and most businesses are assembling their budgets for 2022, they need to know their planned-vs.-actual for:
- Operational performance: production volume, capacity utilization throughput, downtime, energy consumption, etc.
- Costs: spending on equipment, materials, overhead, logistics, labor, and special fees or surcharges that may have come up thanks to recent events and trends (COVID, supply chain disruptions, inflation)
- Basic financial performance: revenue, profit, cash flow
For each area, they need the right data, the right indicators, and the right interpretation. Let’s explore these inputs one at a time:
The Right Data
You can’t imagine your way to the right data using manual notes and basic spreadsheets. Nor can you find answers if your data sits with individual teams in their silos. The right data is clear common data that you can share immediately and use efficiently to build consensus around both causes and solutions. That requires a platform. In the end, you can’t start finding your blue dot in your market unless everyone sees and agrees on the same data. This is what we call a single source of truth.
The Right Indicators
What will you compare your data to? You have several options for making relevant comparisons between your current state and your original plans.
- Periods: You can look at regular intervals, such as monthly, quarterly, and annually. You can also do before-and-after comparisons if your business has recently undergone a significant transformation such as an acquisition, a divestiture, or the launch of a step-change innovation.
- Operating areas: You can compare individual business units or regions, or you can look at the company in aggregate.
- Benchmarks: You can look at industry-wide accepted benchmarks such as standard costs. You can look at what you had originally planned.
But how vigilant you are makes the difference.
You need real-time tracking. But at the same time, you also need to avoid “paralysis by analysis” and myopia, which occur when you focus on too many small things and miss the overall picture. It’s true that “what gets measured gets done” but if you are measuring and scrutinizing too many things, nothing gets done.
In our experience, the best practice is to have a relatively small number of high-impact key performance indicators (KPIs) – no more than 8 or 10 — aimed at the critical factors for a given business, department, project, or area of responsibility. In the end, you can’t start tracking your blue dot unless everyone has the same points of reference and the same ability to look backward and forward. d.
The Right Interpretation
The Apollo spacecraft were supposedly always off course at any given moment. What saved the missions was NASA’s ability to recognize the deviations and then course-correct so that the astronauts reached the moon safely or came back safely in the case of Apollo 13. This is a classic example of informed agility.
Businesses need a similar level of informed agility. Deviations at any given moment don’t mean you are lost. But if you aren’t planning fluidly and monitoring constantly, you can compound small deviations and turn them (unnecessarily!) into problems that require riskier and more costly corrections.
Merely knowing a gap between planned and actual — whether it’s overperformance or underperformance — is not sufficient. You need to be able to draw insights and think about cause-and-effect relationships. In other words, you need contextual indicators.
Many businesses have numbers without math. They have isolated observations in the form of reports that serve one or maybe a couple of purposes, but they aren’t capable of being combined into indicators that can provide actionable intelligence. That intelligence only becomes visible when the business has linked several pieces of data together. You need to explore the reasons behind the gaps between planned and actual, and to be able to use that exploration both as the basis for short-term course corrections to follow the navigational blue dot, as well as and for long-term efforts such as budgeting and strategic planning.
You can’t start trusting and checking that you are on course with your blue dot unless everyone has close to real-time insights so that they can quickly understand what needs to be corrected, what good practices and behaviors you should reinforce, and with what priorities… short, medium, and long term.
To act with informed agility, you need to make sure that the KPIs are more than just window dressing. They must drive decisions and actions. If they are believed, trusted, and relevant, then they will lead to the appropriate decisions and actions. You also need to ensure that incentives line up with measurements. People respond to the way they are measured only when incentives are properly aligned.