What Data Should You Track To Optimize Your Business Performance?
Management guru Peter Drucker is often quoted as having said, “You can’t manage what you can’t measure.” Because of this, data and analytics (D&A) provide the necessary visibility required for businesses to measure and manage their performance. Measurements like KPIs (key performance indicators) drive business behavior, results and an organization’s culture. However, the most critical aspect of D&A is identifying exactly what data elements you should track.
Before you identify your measurement entity, you must first understand business data. Business data is the information needed to support your three main business objectives: operations, compliance and decision-making. To work toward growth in these objectives, you must leverage three main data types: reference data, master data and transactional data. Reference data represents business categories such as plants, currency and stores. Master data is information on business entities such as products, suppliers, assets and customers. Transactional data relates to business events or actions like orders, invoices and price lists.
Now, let’s go back to our initial question: What data type should you measure? Reference data and master data are reasonably static in nature and low in number. Transactional data, on the other hand, is time-sensitive and large in volume, which makes it much more suited for measurement. Consider the following five reasons why transactional data is ripe for measurement:
- Businesses are often constrained by resources like capital, time, skills, machinery and more. Transactional data represents the consumption of these business assets and can provide insight into how these resources are managed.
- Transactional data, unlike reference data and master data, represents monetary value that could impact your business’s bottom line. There might be 500,000 customers (master data) in your CRM system, but how many of these customers placed orders (transactional data) in the last 12 months?
- Transactional data has a two-fold effect in accounting: For every value received, there is an equal value given This means compliance with accounting standards like IFRS and GAPP are based on transactional data.
- Transactional data serves as a legal record or binding document in the case of invoices, orders, remittance advice, shipments and more between counterparties.
- Transactional data promotes performance comparisons and decision-making. Striving for measurement is best when there is quantitative data to process or track. Transactional data is generally quantitative by nature and can help your assessment of KPIs such as accuracy, range, precision, outliers and confidence intervals.
There are many types of transactional data, but not all of them provide the same business value. So, how can you start measuring transactional data to better manage your business performance?
First, the transactional data you measure should be strongly tied to one or more of the three strategic goals of your enterprise (increasing profitability, reducing expenses or reducing risk. Performance frameworks such as balanced scorecard (BSC) and goal-question-metric (GQM) can be leveraged to help you formulate a concrete goal statement.
Second, the performance of the transactional data you track should be under your influence and control. For example, the price of crude oil is transactional data for an oil company. However, these prices are generally determined by global supply and demand, which means the business has very little influence or control over them. Thus, trying to measure oil prices would offer that business very little utility. Alternatively, measuring purchase orders could help that business better control item quantities, prices, vendor statistics and more.
Third, the transactional data you measure should lend itself to optimization. It should not be tied to activities outside your company’s usual activities. Along these same lines, if the data is not factored into the operating income of your business or its EBIT (earnings before interest and taxes), measuring it might not be useful.
Today, the rules of business are changing rapidly. If businesses are slow to adapt to the insights they glean from their transactional data, they will ultimately fail. Hence, measuring your performance based on transactional data should not be a one-time event; it should be a continuous process.
Measurement is an integral part of modern science. In today’s VUCA (volatility, uncertainty, complexity and ambiguity) world, performance measurement is essential to optimization. This process will help you better identify your business capabilities, set benchmarks and strive toward improvement in an effort to adapt to the changing needs of your business down the line.
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