ERP and KPIs

When asked, just about every ERP vendor will say they provide Key Performance Indicator (KPI) reporting.  Yet there still remains confusion between metrics reporting and KPI reporting.  Unfortunately, using terms like KPI and metrics interchangeably does not help.   In the following blog cast and posting I will provide practical guidance regarding KPIs and the role ERP play in supporting KPI management.

Let’s expand upon the above blog cast.  Another method to identify KPIs is to take a bottom-up approach.  Consider the following illustration:

In this scenario, we have a defined scope (i.e. business process) where we desire to improve business process performance from a Capability Maturity Level Integrated (CMMI) level 3 to level 4.  Allow me to simply summarize the key characteristic of CMMI levels 3 and 4:

  • Level 3: The specific business process has “best practices (i.e. common) deployed.
  • Level 4: The management of the business process is data-driven.  Decisions are based on facts.

We now have to identify the gaps and manage the business requirements that must be fulfilled in order to meet our objective (CMMI Level 4).

First, KPIs should be our focus at the end of the performance gap requirements analysis.  The first area should be understanding the organizational change required to mature to a CMMI Level 4.  Becoming a data-driven organization does not happen at a “flip of a switch”.  ERP users and business leaders must trust the ERP solution and building that trust requires time and ERP reliability. 

Second, request the ERP vendor to provide the ERP feature set (i.e. features, reports) that will enable our business process to mature from a CMMI Level 3 to Level 4.  If the ERP vendor cannot provide us with this information then I would question how “invested” is the ERP vendor in assisting us in being successful.  There is a vast difference between an ERP vendor and an ERP partner.  A true ERP partner should be able to easily provide this information (sorry for the tough love).

Third, identify all the relevant operational metrics that we can leverage in monitoring business process performance.  Again, the ERP vendor should be able to provide the metrics and Out-Of-The-Box (OOTB) reporting.

Finally, identify the subset of operational metrics that we will actively manage as KPIs.  Practical guidance I give to my customers is that you should have no more than 3 KPIs per business process.  KPIs are metrics that we actively manage.  KPIs should ONLY be forward looking, in my humble opinion.  Now please do not misunderstand me that I suggest we disregard lagging and trending indicators.  I typically use a car analogy with my customers regarding KPIs and lagging metrics.  My dashboard window represents my KPIs.  KPIs are forward looking.  KPIs should be tied to an incentive compensation plan.  KPIs should be a stretch goal and not “status quo” maintenance.  Just with the rear-view mirror and side mirrors in a car, operational metrics are artifacts we need to view on an “exception” basis.  It is important that we have an ERP solution that can establish an acceptable range for operational metrics and provide OOTB reporting on performance exceptions.  This is a reasonable expectation of any competent ERP vendor.

Key Capabilities ERP can provide to identify KPI performance gaps

Recall the question I asked in the blog cast “What if ERP could automatically identify the gaps?”.  Having done this activity using traditional methods (i.e. manual), following is what I would consider as the foundational requirements that will enable ERP to provide a preliminary KPI gap assessment:

This is by no means a comprehensive list but it does highlight some of the “critical path” requirements that we can use to evaluate how committed are ERP vendors to customers’ operational success.

Summary

I download an app on my iPhone called “36,000 KPIs”. 

Now, the appropriate name should be “36K Metrics” but I digress.  It is a neat little (free) application that provide a definition of the metric.  I cannot speak to the complete accuracy but it is a good reference that I have utilized as a metrics dictionary.  The point to make here is that competent ERP solutions must provide a comprehensive set of operational metrics that can be utilized for exception and KPI reporting. Without metrics, one will have a hard time defining performance baselines. The greater the OOTB ERP metrics provided to your business, the more flexibility one has in business process management and strategies. 

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