Simplicient Controlling 9 – Financial vs. Operational KPIs – A Case for Merging Them

A new doitinvest.com blog focusing on whether we should mix financial and non-financial KPIs.

This Simplicient Controlling blog  will focus on the merger of the financial and operational KPI performance measurement. More exactly, on the pro’s and con’s of mixing the financial and non-financial indicators. In most companies’ practice, the various KPIs are often disconnected: whilst the Profit and Loss KPIs are firmly grounded in the financial department, the operational KPIs are often left in another silo – the Operations Management department, who anecdotically knows better and has the competences to develop them.

Separating operational KPIs (from the finance ones) is barely a good idea. It comes most likely from the realm of scientific management, from the times when Alfred Sloan professionalised General Motor’s management – in order to cope with its’ fast scaling up. Yet, six decades later the division is heavily entrenched in the corporate methods.

It is somehow a paradox: the modern corporate strategy embraces declaratively concepts such as digitalisation, transactional data clouds or synergies-building. Thus, one can argue that the majority of the companies are still in the inception phase of the strategic transformations, even nowadays, ten years after.

Despite the slow adoption, tech-savvy CFOs should (and will) hurry in adopting a merged strategy towards the two sets of KPIs. There are strong reasons for combining the operational and financial KPIs within the same performance measurement approach:

1. Data sources synergies – very often the sources of data are the same be it about ERPs, CRMs or other operational management systems. Furthermore the financial KPIs tracking is usually done within advanced BI systems, who have the ability to pull data out of various sources within the same processes – so why not merge the two sets of KPIs within the same BI data consolidations?

2. Professional competencies – performance measurement and tracking is deeply embeded in the controlling department. After all, the controllers/management accountants have been always reporting, updating and presenting the financial statements performance. Any qualified controller worth her/his salt will be able to set up from ground a business review tracking – so why not sharing tgeir financial expertise with the Operations department?

3. Systems consolidation – it is hardly efficient having two parallel reporting systems (or pieces of software) for KPIs reviewed by the very same management boards. Despite the obvious differences, many companies choose to leave the two processes alone, on the grounds of expertise. If the systems are merged, many hours and interpretation errors can be avoided by putting all KPIs in a common database which outputs the performance reviews in the same format – obviously merging the best of both worlds.

4. More focus – tracking 20+ financial KPIs and anothe 20+ operational KPIs is hardly an efficient use of a company’s management time. Having a unified framework for finance operations, with a logical drill-down hierarchy pre-built, will certainly help the corporate leaders take faster and cleaner decisions with regards to advacing the business priorities.

5. Cost savings – obviously elliminating personnel and systems redundancies helps streamline the internal reporting processes, standardize the reporting outputs and elliminate hidden double costs.

Given these advantages, the Simplicient Controlling blog argues that the two KPI sets should be unified under the controllers’ technical leadership. Obviously, the CFO as the corporate arbiter should make sure that the interpretation, actions and performance upgrades of the Operational KPIs should remain the responsibility of the Operations leaders. The finance departments have lite influence over how the manufacturing or service processes are run, so they should support as internal consultants.

Last but not least, why not use these principles in your personal financial decisions too? Should you be interested, please drop a comment here to our „Simplicient Controlling“ blog – and we will pick the topic up later.