A Practical Guide to Business Objectives and KPIs

on April 2, 2013
Business Objectives and KPIs

Are Business Objectives and KPIs the Same?

In a recent webinar on testing and improving business rules in our “Getting to the Best Decision” series, I received several questions on Key Performance Indicators (KPIs) as they relate to decision management. In particular, how do they relate to business objectives? You may have heard us or others use terms like KPIs, business objectives, metrics, calculations, characteristics, features and variables. Are they synonyms for the same thing?

I’d like to suggest ‘my’ definitions. Feel free to comment on whether you agree or not, and share any nuances your recommend.

What are Business Objectives?

Business objectives are the high level goals for an initiative or project. Example business objectives may include the following:

  • Increasing profitability
  • Reducing costs
  • Improving customer satisfaction
  • Adhering to compliance mandates

In addition to the “direction” of the expected outcome (increase or decrease), your business objectives may (and should) state a tangible, measurable goal. Examples include:

  • Achieving 80% automation
  • Decreasing fraud incidents by 10%

Business objectives are often defined by the management team before they invest in a project. While the corporation or institution usually captures business objectives in the business plan, they are often overlooked in any Decision Management initiatives. Therefore, as a business analyst, make sure you know what the business objectives are and document them well.

What are Metrics?

Metrics are measurements that support your Business Objectives. In other words, metrics tell you whether or not you’re achieving your goals.

For instance, if your objective is to increase profitability, the metrics that matters most will be those that define and calculate profitability. These metrics could include the following:

  • Gross Margin
  • Operating Margin
  • Net Profit Margin
  • Return on Assets (ROA)
  • Return on Equity (ROE)
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

Metrics for profitability are pretty straightforward. However, what if your objective is to improve customer satisfaction? You could measure that in numerous ways. For example:

  • The number and percentage of positive feedback reviews
  • The number and percentage of product returns
  • Results from customer surveys or sentiment analysis on your Twitter hashtag

In general, outside of what is necessary for compliance, there is no right or wrong way to define metrics. However, I recommend that you follow “SMART goals” (not to be confused with SMARTS™, our decision management system):

  • S for Simple
  • M for Measurable
  • A for Attainable
  • R for Relevant
  • T for Time-sensitive

Once you define the set of metrics that you can measure, make sure that the supporting data will be available and reliable.

What are KPIs?

KPIs or key performance indicators are a subset of the metrics that you track. They are used to monitor the health of your project or your business performance. While you may want to have visibility into a multitude of metrics on your business, only a handful will ultimately measure how well you are doing on your business objectives.

In the mid-90’s, I used to build dashboards. We defined hundreds of KPIs. The executive dashboard only displayed a handful, maybe a dozen, KPIs on a summary view. The other metrics were used to investigate, to drill down, as a top indicator turned red.

In the context of decision management and automated decisioning, KPIs may include:

  • Timeouts or errors
  • Min, Max, and Average time to complete transaction
  • Number and percentage of transactions that required additional verification or manual intervention

What are Calculations or Variables?

Metrics are calculations, in the sense that a formula dictates how to come up with the number or label. It does not mean that all calculations are metrics!

Many calculations exist in Decision Management projects for the purpose of combining or preprocessing data elements:

  • Mathematical formula: the ‘debt to income’ ratio for example
  • Statistics: the average number of accidents per driver for example
  • Binning: the age group or purchase category for example

These calculations are typically defined to support the business rules: business rules can refer to these calculations or variables in the same manner they also refer to the input fields.

Calculations may be tracked over time, like any other input field, to analyze whether the demographics are shifting. If the average age increases significantly as the population ages, you may want to rethink your decision logic that takes age into account. This is a useful data-point, but it would likely not make it into your KPIs.

What are Characteristics or Features?

Characteristics and features may be calculations or input fields that you take into account in your decision logic. This terminology is most often used by data scientists in charge of predictive modeling.

Learn how Sparkling Logic’s SMARTS™ makes defining and monitoring objectives and KPIs easy.

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Sparkling Logic Inc. is a Silicon Valley-based company dedicated to helping organizations automate and optimize key decisions in daily business operations and customer interactions in a low-code, no-code environment. Our core product, SMARTS™ Data-Powered Decision Manager, is an all-in-one decision management platform designed for business analysts to quickly automate and continuously optimize complex operational decisions. Learn more by requesting a live demo or free trial today.