When I watch sport, I pay close attention to the predictive events during the game. I like to follow the on-field leading indicators of the final result – corners, penalty counts, yards gained, foot faults. At key points in the game you can see the winners realising they can win, and the losers getting ready to lose. The idea of measuring and reporting the key events – the game breakers - that predict success as well as the outcome or final score, is used today in every type of organisation and profession. In FP&A we call it data analytics and use it for forecasting.
Accountants need to identify, measure, report and predict the game-makers and game-breakers in their business. Football teams set a clear goal for each game maker and measure progress toward that goal at the end of each game. On the playing fields of business, it isn’t always so rigorous.
Many years ago, reporting was backward-looking and financial. Managers relied on monthly management accounts to tell them about performance. Then, as non-financial measures became popular, we started to talk about management information systems. Today we talk about performance measurement systems, based on the idea that anything can be measured. People say that what you measure is what you get.
The 6-Sigma lean manufacturing movement of data-driven continuous improvement, originated by Motorola four decades ago, is based on four maxims all equally applicable to the world of sport.
- You can’t manage things you don’t understand.
- You can’t understand those things unless you measure them.
- What you don’t measure you can’t control.
- People deliver the things that are measured.
On the business scoreboard, key performance indicators and informed predictions don’t replace monthly financial statements. Instead, they partner with the financial figures to give you a total view of performance. Like professional coaches reviewing last weekend’s game, we need to present financial and non-financial metrics with comparisons against targets and prior periods, supported by forecasts based on analytics and scenarios.
Like good coaches, today’s accountants are expected to report past, present and future information, and to use this information to provide insights to players. Future information tells us what might happen, based on extrapolations and rolling forecasts. We use predictive techniques like probability analysis, simulation, modelling, scenario planning and optimisation.
Performance measurement practices morphed into a set of principles when Professor Robert Kaplan developed the "Balanced Scorecard “and publicized it through his book with David Norton. The familiar logic of a scorecard that provides a balanced and broad picture of performance is appealing to many managers. Today performance metrics are communicated through scorecards in every kind of organisation. In sports teams, each team player receives a personal scorecard rating after each game.
The coaching staff use alerts and performance dashboards to complement and support their scorecard systems. Dashboards provide players with financial and non-financial information, communicated in ways that can be understood and used at all levels in a business. The purpose of an alert is to identify changes in the game-makers in an organisation.
In the great game of commerce, many of today’s growth industries are based on intellectual, not physical, capital. We can measure break points in intellectual capital games using proxy or surrogate non-financial metrics. These surrogate measures give us insights into intangibles that are not possible or impractical to measure directly in financial terms. Surrogate measures can be combined with sampling techniques and opinion polls to arrive at reliable answers.
Accountants can debate the value of a national brand for hours but managers measure brand recognition using a surrogate measure - the percentage of people in a sample who recognise the brand within 30 seconds. A break point or penalty arises when this percentage is increasing or declining each year. A sample will reveal how a particular demographic group’s preference between two brands is changing from year to year.
I can’t tell you the value of a group of loyal customers, but I can measure customer loyalty through the number of customer visits and average spend in a retail outlet each month.
I don’t know the money value of the team of specialised and experienced staff you have built in your business, but I can measure length of service, employee morale and staff turnover.
How much more can accountants learn from great coaches and sports teams?