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Are Visual Formats For KPI Models Important? Using Natural Thought Processes to Promote Clarity
Can you figure out the number table right away?
Accountants seem to have this skill. For other ordinary mortals, lists are useful for marketing, and even that is a questionable proposition for the blokes among us.
What we need is a diagram that shows us the relationships between the numbers. Because we are naturally good at understanding the relationships between physical objects. It is difficult to connect in the human brain; it is an essential feature of life. It just comes naturally.
This is why the presentation format of the KPI model is so important.
A KPI model is presented as a diagram. It doesn’t matter if the diagram is drawn on a piece of paper, or as an Excel sheet on a computer screen. We understand the relationships it describes, the relationships between numbers.
The visual format is important for another reason. If I ask a group of people to describe what drives their business, they can do it. If I ask them to draw they can.
If I ask them to explain the same things using their financial statements, they often struggle.
There are two reasons for this. Understanding the columns of figures does not come naturally to humans; has learned, and many of us have not. More importantly, this is not the world we live in when we run a business. We live in a world of interactions with people, a world of decisions, pressures from customers, suppliers and unpredictable events. Accounting reports arrive after the event, sometimes a long, long time that affects the decisions that create the results they show.
The connections between the step-by-step decisions we make, and the financial impact on business performance at the moment we have to make them come to mind. We respond to other priorities. For many people who work at operational levels in business, these relationships have never been explained. All of my experience suggests that day-to-day operational decisions have a profound impact on the performance of most businesses. This may not be evident in the minimalist atmosphere of the boardroom, but it is always, in retrospect, there.
Operational decisions made with a well-informed understanding of the impact on business profitability will always be superior to those made in ignorance. If this level of understanding is achieved among auditors, a major impact on business performance will be achieved.
Can this be resolved?
A good solution deals with all these problems. It can be really simple.
When a small group of people work together to design their own KPI model, everyone gains a new perspective of the real world in which the business operates. Supervisors learn how their decisions affect profits, and how errors are compounded and amplified through the system.
Senior managers learn how decisions made around the board table affect shop floor operations, and the unintended consequences of systems that may seem reasonable at first but affect decision-making processes. They can evaluate and make simple changes to optimize the entire system.
Working together on model development and testing communicates the KPI hierarchy and allows them to be defined within functional areas of the business as well as across functions to get a “whole business” perspective. One understands how and why efforts to increase production in one area can cannibalize production in an adjacent area.
Efforts to optimize everything rarely optimize the entire business. The law of unintended consequences always prevails.
If we give people a visual framework, they find the theory easy to understand and easy to put into practice. It doesn’t matter if the visualization is a hand drawn diagram on a large piece of paper, or an Excel workbook with different views of the business in worksheets. The important things are:
- The data is presented in two boxes with a description at the top and a number at the bottom.
- Connections between 3, 4 or 5 boxes are shown with lines and arrows. Arrows always go from left to right on the page. Begin with the tapestry as a whole and work the fingers apart on the right side.
- The link formula is usually specified for each link +,- x,/. That is as hard as math.
- Color coding can help people follow links; I use blue for income streams, pink for expenses, and so on.
If you want examples of how I build a model just Google KPI Models and you will be able to see mine as a manual description or some useful Excel models that you can use as a basis for developing your own .
Is there a difference between a KPI Model and a KPI dashboard?
My opinion on this is that a table also presents data graphically, but most of them do not show the links between KPIs, or performance measures between KPIs that are part of the picture, but not that are so important to rank as KPIs. They are good for showing KPI trends, but you can also do this in a KPI model, using the charting tools in Excel, and plot the trends over time of the most important drivers of business returns.
A KPI dashboard is a good way to make sense of complex data sets. It just does a different job.
Summary of reasons for using the graphical form of the KPI model.
People interpret the graphic form as easily as breathing, and their confidence grows. They believe in numbers. They interpret the flow of activity and $ through the system as blood flowing through their veins. The diagram shows their personal map of the system in which they work. As their sense of freedom expands, their creative thinking flourishes. Their decisions are improved because they can understand the impact of alternative decisions on the system in which they work.
I believe that this is the reason for the flow of new ideas, to improve business performance, or better still to outshine the competitors.
Whenever I run a KPI Modeling workshop, I know that amazing results will follow. I hope I was able to tell you some of the reasons why it always happens.
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