The ‘why’ behind the KPIs: driver-based planning

Driver-based planning begins with defining where the organisation is headed and how it wants to approach reaching this destination.

The most essential drivers to fulfilling this goal are then identified.

A typical organisation will have hundreds of business drivers across the functions. But, as always, Pareto’s principle applies – 80% of performance is generated by 20% of those drivers.

Identify and educate

Business drivers can be internal or external factors, but they must be measurable. Identifying them requires essential collaboration amongst business stakeholders. The key business drivers for any organisation should be:

• Selected carefully with the 80:20 principle in mind
• Cascaded from strategy to operation
• Quantifiable through easily obtained measurement.

For driver-based planning to successfully cross from strategy into operation, it needs to be widely understood across the business. It cannot be a siloed focus for just the FP&A team and relevant stakeholders. To achieve this, education around the drivers and the way they impact performance may be required for other functions in the organisation.

Ultimately, to be effective, key business drivers need to be understood at a glance and used to drive consensus.

Not all KPIs are business drivers

A business will likely have multiple key performance indicators. However, these will not automatically become fundamental drivers within the planning model. For instance, a measure for employee satisfaction will often appear on board reports but in terms of planning and forecasting, it can be difficult to plot a causal relationship around this factor – there isn’t a clear measurable driver to focus on.

To identify the key drivers that are likely to impact upon an organisation’s KPIs, a logical series of steps would be:

• Review past financial statements. What drives each line item?
• What are the external factors?
• What are the internal factors?
• Can those factors be connected to anything else?
• Start looking for causal relationships, using sensitivity analysis to define the most important
• Collaborate with key functions to build further understanding
• Ensure the drivers are measurable and easily obtainable.

These steps can be taken when the FP&A function work alongside operational stakeholders to progress backwards down the value chain towards key drivers.

Where is the impact coming from?

Consider that measure of employee satisfaction. In itself, it’s not a business driver, merely an indicator of what’s going on. But it has a knock-on effect on customer satisfaction which in turn effects retention and, eventually, the bottom line. Although you cannot use available data to make a linear connection from employee satisfaction to retention, it does indicate something on going elsewhere in the business and can form the starting point for identifying key drivers.

For instance, if, when following the value chain, a spike in calls to customer services is then uncovered the business can ask: What is driving these calls? Who is calling? What information do we need to capture for this driver to integrate it into the forecast? Once the information is understood, FP&A can educate other functions around the causal relationships between action elsewhere in the business and the corresponding impact on customer services and therefore employee satisfaction.

Getting the most out of business drivers

There’s no point in identifying business drivers if they’re then not going to be used effectively. Achieving the full potential value requires businesses to:

• Automate data collections
• Use drivers as the language of performance
• Secure buy-in from leadership and the wider organisation.

Approaching planning from the perspective of ‘why’ by concentrating on key business drivers leads to a consistency of focus across the entire organisation. Functions can all become better aligned, the information and feedback can be produced quickly, and this approach lends itself to more effective scenario planning.

Ultimately, driver-based planning helps businesses to become quicker, more dynamic and agile in their planning. FP&A and BI join together to act upon the implications of key business drivers to push profitable decision making based around the organisation’s end goals.

To discover the impact driver-based planning could have on your organisation and how you can implement it using Planning Analytics, get in touch today.