Success with Value-Based Design: Identifying Critical Factors of a Key Value Indicator (KVI)

AnyData Solutions

Spend Matters welcomes this guest post from Paul Staelin, senior vice president of go-to-market for business intelligence and analytics at Birst, an Infor company.

Value-based design (VBD) — a methodology that uses analytics to drive meaningful results — has proven to have a great impact on a company’s bottom line. When it comes to VBD, the most important metric for any group of people within a company is the key value indicator (KVI). This metric is often used to evaluate the group manager’s performance, resulting in great reward or potential termination. Once KVIs are identified, they are then arranged into a value plan, which is later addressed and tracked via an analytics solution.

After pinpointing a group’s KVI, it must be turned into an insightful, role-based dashboard that the organization can utilize to improve performance. To do this, teams must identify which metrics have the most impact — both negatively and positively — on their KVIs. These are known as drivers. For example, the KVI of an e-commerce business could be revenue. This KVI can be driven by the number of site visitors, percentage of carts made, percentage of completed purchases or the average transaction amount. By improving any of these metrics, it can improve the overall performance of the KVI, revenue.

The best way to identify KVI drivers is by aligning with business leaders who can best distinguish which factors have the greatest influence on their group’s KVI. If these leaders are not aware of the drivers for their group, however, it can be uncovered by simply asking which numbers were analyzed at the beginning of the quarter to determine if forecasts were met at the conclusion of that given quarter. This is often the primary KVI driver.

After identifying the drivers, it is important to verify that all relevant metrics have been identified by determining if the KVI can be expressed as a formula of the drivers. Often, the KVI is an output of a business process, which can usually be expressed as a function of the number of items entering the process, the percentage of items that complete the process, and the average value of the items completing the process.

In the previous example, revenue was equal to the number of website visitors, multiplied by the percentage of visitors creating shopping carts, times the percentage of completed purchases and the average dollar value of a completed transaction. While this relationship exists for many KVIs, it is not the standard across all businesses. An example of this is with retail stock-outs. When an item is out of stock, the business loses revenue. It is difficult, however, to determine exactly how much revenue is lost. Given this, it is ideal to express the KVI as a function of all or some of the drivers — but this may not always be achievable.

The next step in the process is to identify action points. These are the attributes that have the most influence on a business leader’s decisions when working to improve a KVI. Action points are often more internally focused than external, as it is easier to change things internally. While specific action points can only be uncovered through discussions with the business, there are distinct patterns to help uncover them.

Action points are typically found through the following: people, product and process.

  • People. The first point considered is usually people — more specifically the people within an organization who help to manage the various parts of the overall business. For example, a sales leader usually wants to know who the top and lowest performers are when trying to improve overall performance. Varying levels of performance help to inform the group leader’s decisions, which is why people must be an action point.
  • Product. Most companies offer various products that react differently when they are played against each other. For instance, a software company’s decisions vary depending on if it is dealing with high- or low-margin software licenses and professional services. Product can dramatically influence a customer’s decisions, therefore making it a critical action point.
  • Process: Many KVIs measure the output of a business process. The steps included in that process are an action point. Those sales organizations that are responsible for revenue will find the steps in the process leading up to the revenue event or sale to be an important action point (e.g., sales stage). Similar to people and product, different decisions will be made based on how and where items in the process are being managed.

For each KVI, there must be a discussion with business leaders to determine the drivers and action points. These discussions should focus on the decisions that the business leaders make and the factors that most influence their decisions. These conversations must avoid diving into the reports currently used to map out business performance and instead focus on the decisions that managers and leaders must make to help improve overall performance. While each business is different, these rules of thumb will help you engage with your business leaders and drive more valuable decisions.

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