CFOs guide to decoding data: How to separate signal from noise
There is an abundance of data available, and the challenge is no longer measuring it but rather understanding what to do with it, Anders Liu-Lindberg, co-founder and a partner at Business Partnering Institute discusses what this means in practical terms
If there’s one thing we are not short of in today’s world, it’s data. Everything from hardcore financial data to non-financial data throughout the value chain. And the amount of data is only expected to increase as we become more sophisticated at collecting it but also because rules and regulations require it eg. ESG push to gather even more.
Ultimately, having more data at hand is a good thing, however it doesn’t come without challenges. We want to enable data-driven decision-making yet are now challenged by separating signal from noise in all our data. They say you can’t manage what you don’t measure but there’s also a flipside to that. You cannot manage if you measure and showcase everything either.
The challenge is no longer to measure data but rather to understand what to do with the data we have available. And CFOs need to solve this challenge as owners of most data across the company. Solving it starts with flipping the challenge upside down. Instead of asking “how can we collect so and so data” CFOs should ask “what are the KPIs we should measure to track our progress?”.
Putting the “K” back in KPI
With the explosion in data availability, we’ve seen a similar explosion in dashboards across the company. Every Tom, Dick, and Harry has their own dashboard and because data is democratised there’s no central governance on what’s being measured and therefore managed. It’s time that CFOs push the pause button on this development and refocus the company’s measuring efforts.
Companies need to put the “K” back in KPIs (key performance indicators). It starts at strategic level by looking at what are the critical assumptions that would have to be true for our strategy to be a good strategy. Start tracking them as your leading indicators. In addition, define a set of lacking indicators that will ultimately define your success as a company.
The lacking indicators are those you report on to the board and the market. The leading indicators are those you use to manage company performance. While the lacking indicators can be tracked in set intervals i.e., monthly, quarterly, and annually, your leading indicators should be tracked in as close to real-time as possible.
This will help you understand when reality has moved too far away from your assumptions and drive you to act in this new reality. If you wait for the lacking indicators to come through it will often be too late.
Is your sales plan on track?
Let’s consider a simple example of a sales plan. Your lacking KPI is revenue of $1bn US Dollars. Your leading indicators are consumer confidence, the US two-year treasury rate, and inflation since analysis of historical numbers has revealed a correlation between these three and your revenue. If you wait for your revenue numbers to come in, you’ll be acting too late.
Instead, track your three leading KPIs as close as possible. Two of them may be monthly but even for consumer confidence and inflation you could find further leading indicators to track developments even closer. Now you’ll know on the spot when there are signs that your sales plan might be on thin ice.
This might sound like a simple approach but how many companies can you honestly point to that are doing this today. Is your company doing it? And of course, this example can be expanded to any other important process or goal that you have in your company.
Measure most things but only manage a few
The overall idea is not to gather less data. Set yourself up for collecting as much data as possible within a reasonable economic frame. Store it in your data warehouse or lake and organise it in a way that it’s ready for use if or when needed.
However, what makes it into the dashboards should only be metrics related to the overall goals you’re trying to achieve as a company, department or team. At each level you shouldn’t be managing more than three to five objectives and of those only one or two should be actively improved at any given time. This will ensure that your company focuses on what matters but stay ready in case priorities shift or the external environment forces a shift upon you.
No one can drive this development but the CFO and the finance team. They should take ownership of data (enabled by IT) and drive proper data-driven decision-making throughout the company. This will help separate signal from noise and make the best use of data in today’s data abundant environment.