KPIs and the Pareto Principle

Paul Hoch

October 23rd, 2014

Welcome to part two of our blogging series about driver-based planning. In my last post, we discussed why traditional planning and forecasting is broken, and introduced the concept of driver-based planning.

Today we’ll dive into how to select key performance indicators (KPIs) allow you to more effectively manage your planning and forecasting processes by focusing on what truly matters and drives your business forward.

Focusing on the “vital few” is the first step in the strategic planning process, and allows you to identify your KPIs. According to the Pareto Principle (also known as the 80/20 rule), for most events, roughly 80 percent of the effects come from just 20 percent of the causes. The Pareto Principle is considered a common mode of operation in many business practices today – including driver-based planning.

To apply this rule, picture this: if 80 percent of expenses are caused by 20 percent of the line items in your budget, you would be better off focusing on getting that 20 percent right during the planning process. That’s not to say the other 80 percent doesn’t matter; just that once you’ve really nailed that 20 percent, only then should you turn your attention to the rest. There is a common misconception that the more details and the more decimal places somehow lead to a higher quality plan. Planners get mired in creating huge spreadsheet models to attempt to increase the accuracy of line items that barely amount to a fraction of the total corporate budget.

Working backwards from your KPIs, the second step is determining what measures are actionable – in other words, what can you control, and what will make the biggest impact? For example, if margins or profits are important, look at increasing the accuracy of your sales forecast and then controlling the costs that correspond to the forecast. This allows you to effectively start with a goal and then figure out what you need to support it. In another example, let’s say inventory is not one of your KPIs. Acknowledging this allows you to focus elsewhere and better drive what matters to your business, leaving inventory to averages, or assumptions.

When developing the KPIs and determining which items should be the main focus, it is important to involve people from all levels. While we want to distill our planning process down to the key drivers of the business, involving people throughout the organization will pay dividends in change management and could identify drivers that hadn’t been previously considered.

In my next post, I’ll provide some tips for developing plan assumptions.

Paul Hoch

About Paul Hoch

Paul Hoch has over 18 years of EPM and Hyperion experience, specializing in Essbase and Planning. He has successfully completed large-scale EPM implementations for clients in industries ranging from retail to government and financial services to health care. Paul has served as solution architect and team lead for implementations and he has developed and delivered advanced team training. He also blogs and presents regularly on EPM topics, including Essbase, Planning, Hybrid Cloud implementations, PBCS, EPBCS, Smart View, Calc Manager, migrating to the cloud, and more.

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