The Cinderella tool of Performance Management and Business Intelligence

March 5th, 2010

smartKPIs.com Performance Architect update 9/2010

One of the skills we have as humans is the ability to find, create and select the appropriate tools to assist us in our activity. One way of grouping tools is by their form: physical or conceptual.

Performance Management as a human activity concerned with the achievement of desired outcomes makes no exception. It uses both types of tools. Physical tools can be considered the plans, reports and software system used as a business intelligence tool. Conceptual tools are performance measures, grouping of measures in scorecards and dashboard and the structure of performance management systems. More often than not, these tools are used in combination, as they complement each other: you need reports to make performance measures relevant same as you need performance measures and scorecards to populate a business intelligence system otherwise empty of content.

Some of the more talked about tools in Performance Management are the business intelligence software tools. At a conceptual level, the most popular so far proved to be the Balanced Scorecard.

But there is a tool that doesn’t get the level of attention it deserves compared to its benefits and utility.

It doesn’t benefit from big advertising budgets of the software giants of the world. It doesn’t get much media coverage, the attention of research analysts or user conferences. It is not a recipient of worldwide executive management exposure through the publications of Harvard Business Publishing. It doesn’t support an industry of consultants. There are no training courses available for users and no user certification is available.

However, it is simple. It is cheap. It is easy to use. It has an impact. It works.

So who is this “Cinderella tool” of Performance Management and Business Intelligence?

Many years ago I worked as a recruiter for a small consulting company. One of the rituals we had each day was updating our scores on the whiteboard: number of active requisitions, preselected candidates, submitted candidates and placed candidates. A few months ago, while visiting an office I came across a similar table on a whiteboard: number of phone calls, number of meetings and number of sales completed. A few weeks ago, while taking to a friend, the whiteboard emerged again as a useful tool for keeping track of important performance measures.

What makes it so special?

  • It is beautiful in its simplicity and effectiveness. It achieves its purpose. It facilitates communication of performance data and it makes the information actionable.
  • It only has enough space for the most important data, so it filters through complexity.
  • It is noticeable by the entire team. Being in sight all day and available instantly, without the need to turn on a computer or logging in, it delivers its message more directly and frequently than any other tool.
  • It motivates. You see your targets and results every day, at least when you get to the office and when you leave the office. It makes performance real.
  • It provides value for money and utility for effort ratios that are difficult to match. Yet, it is almost ignored in Performance Management and Business Intelligence circles.

It doesn’t have the bells and whistles of the latest generation analytical software tools. But it does plenty with less. And considering the number of small businesses, the level of usage and sales at international level, whiteboards might also be some of the most used Performance Management tools.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

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Performance in Social Media marketing: Tweet, but don’t forget to measure!

March 4th, 2010

A recent Mzinga and Babson Executive Education survey on the topic of social software in business, comprising over 900 executives, managers and individual contributors identified what they call Social Media Customer Leaders (SMC Leaders). According to them, SMC Leaders are companies where employees “strongly agree” with the following statement within the survey: “our organization has embraced social media (like Twitter, blogs and Facebook) to improve its responsiveness to customer needs”. In these companies, it’s common for the employees to „tweet” a great deal in order to better know and understand their customers and better satisfy their needs. Further on, the researchers outline the fact that these companies have proved to attain better results in terms of sales or efficiency in meeting customer needs, unlike their “non-tweeting” peers – which they call SMC Laggards.

Without any doubt, social media is one of the hottest topics in marketing practice and businesses, both large and small, use it to leverage their marketing efforts. Benefits are obvious and they rely mainly on the “viral” characteristic that social media platforms enhance.

But what many of the companies engaged in social media marketing lack to do is measure and track the results of their efforts. According to the same study mentioned above, only 16 % of the companies in the survey said they currently measured the ROI of their social media programs.

Performance appraisal in the context of social media marketing should, in our opinion, envisage three levels of metrics covered:

  • On-site behavior/action metrics, that would track the efficiency of social media programs in terms of immediate actions performed online. There are an enormous amount of metrics that could be used in this context; we mention some of them below:

# Total contributors and % Active contributors
# Comments, # Bookmarks, # Downloads, # Uploads
# Email subscriptions, # Followers
# Average time spent on key page, # Time spent on site

  • Off-site action metrics that would monitor the impact the social media program has on customer behavior in the market. These would track customer aspects such as # New customers, # Frequency of purchase, $ Average purchase value, all of these attributable to the social media program.
  • Finally, it all ends up with the assessment of the returns from the social media investment. It’s not enough to measure the benefits, if not compared to the costs. The social media ROI can be calculated like in the case of any kind of investment, as the result of the value generated by the investment minus cost of investment, divided by the cost of the investment.

To sum up, in a social media program appraisal, you should measure not only the immediate impact of social media marketing, but also the financial impact that comes afterward. You’ll have to analyze the whole picture from clicks, subscriptions, comments, testimonials and so on, up to the frequency and volume of purchases and finally, the added-value and the return from the social media investment. The measurement process should have a framework that would consist not only in the metrics chosen, but also in the baseline chosen to reflect the improvement attributable to the social media program or the time horizon considered to reflect the social media impact.

Further recommendations:

For further documentation, we suggest a presentation by Olivier Blanchard on the basics of social media ROI, available at:

http://www.slideshare.net/thebrandbuilder/olivier-blanchard-basics-of-social-media-roi

References:

Wilson, H., G. (2010) “Social Media Customer Leaders: Some Early Performance Data”, available at: http://blogs.hbr.org/research/2010/02/social-media-customer-leaders.html (accessed 6 March 2010).

Lake, C. (2009) “35 social media KPIs to help measure engagement”, available at: http://econsultancy.com/blog/4887-35-social-media-kpis-to-help-measure-engagement (accessed 6 March 2010).

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Employee Engagement Index

March 3rd, 2010

In the last decade Employee Engagement has become a hot topic both in academic literature and in practice. The debate goes mostly around the implications that employee engagement can have on the success and bottom line of a company (Sacks, 2006).

It is widely known that organizations have traditionally relied on financial measures to determine their organizational value, success and financial performance through measures such as profitability, revenue or return on investment. It is also known that many soft measures or human oriented measures of traits, attitudes and behavior became in the last two decades more and more important determinants of employees and organizational performance (Peterson et al, 2001).

Many studies have shown the relationship that forms between employee cognitive attitudes, personality traits and job performance. However it was not clear until recently what is precisely the connection between all these components and how they can drive and determine organizational performance outcomes.

After 25 years of interviewing and surveying employees and managers the Gallup Organization has coined Employee Engagement Index as a driving force of the organization success and performance. (Little et al, 2006). The studies show that Employee Engagement Index has a significant implications for customer satisfaction, sustainable growth, real profit increase, stock increase, productivity and employee retention among the most important influenced factors (Gallup Consulting, 2008).

What is Employee Engagement?

Many academics and consultants tried to come with a definition of how employee engagement can be actually defined. Debates and research are still underway, but a common framework seems to emerge from the research work.

Many practitioners consider employee engagement a measure that reflects the extent to which employees contribute through their effort and enthusiasm to the success and performance of their organization.

In the same line of thought Crim et al (2006) consider that an engaged employee is a person inspired, fascinated, fully involved, and committed for its work and willing to see the organization succeeding in its mission. Accordingly, Sacks (2006) associates employee engagement with a sustainable workload, feelings of choice and control, recognition, fairness and justice, a supportive work community and meaningful and valued work.

How is Employee Engagement Index measured?

Employee Engaged Index is based on a survey questionnaire that assess the employees effort and enthusiasm at work and can vary from organization to organization. According with the researchers and consultants from Burke, a leading international research and consulting firm, there are 6 important engagement components that determine a substantive Employee Engagement Index:

• Company: satisfaction with the working environment and likeliness to withstand other job offers on the market

• Manager: satisfaction with the mangers

• Work group: satisfaction with the current working group: colleagues and managers

• The job: satisfaction with the job

• Career/ Profession : satisfaction with the choice of career and career perspectives

• Customer: Satisfaction with the working relationship had with customers/clients

Employee Engagement Index: Analysis and outcomes

According with the research studies underpinned by the Gallup Organization it appears that engaged employees are more productive, more customer focused and more likely to withstand temptations to leave the organization.

The same studies frame employees in three categories:

• engaged – work with passion and are profoundly connected to the organization values

• not engaged – put time but not passion in their work and they are not connected to the organizational values

• actively disengaged – employee busy to act out their unhappiness and undermine what their engaged colleagues try to accomplish ( Crim et al, 2006)

Based on these categories Gallup built the Engagement ratio which according with them is a macro level indicator that allows organizations to track the ratio of engaged to actively disengaged employees.

The results show that:

• In average the ratio of engaged to actively disengaged employees is 1,5 to 1

• In world class organization (successful organizations) the ratio of engaged to actively disengaged employees is 8 to 1

This difference between the engagement ratio for average and world class organizations is translated in the way a suite of  performance indicators are affected by employee engagement and how in the end they affect consequently the bottom line of the organization. (see graph below, Gallup – Employee Engagement)

As we have seen above employee engagement has a direct influence on a series of other performance measures which in the end consequently determine and drive the performance outcome of an organization. In this context, as the Gallup researchers acknowledge, for successful organizations the Employee Engagement Index transcends from a human resource initiative, “into a strategic approach supported by tactics for driving improvement and organizational change”

For more resources and information on human resource management please visit our performance measures and KPIs database on smartkpis.com.

References:

  • Sacks, M. Allen (2006): Antecedents and consequence of employee engagement, Journal of Managerial Psychology, Vol 21, No 7, pp 606-619
  • Peterson, J. Suzanne and Luthans, Fred (2002): Implications for managerial effectiveness and development, Journal of Management Development, Vol 21, No 5, pp 376-387
  • Crim, Dan and Seijts, H. Gerrard (2006): What engages employees the most or, The ten C’s of employee engagement, Ivey Business Journal, March/April
  • Little, Beverly and Little, Philip (2006): Employee engagement: Conceptual issues, Journal of Organizational Culture, Communication and Conflict, Vol 10, No 1, pp 111-120
  • Employee Engagement and Retention Management – Burke: available at www.burke.com
  • Employee Engagement: What’s your engagement ratio? – Gallup: available at www.gallup.com

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Several considerations on performance measurement and metrics in current marketing reality

March 2nd, 2010

Although argued that marketing, as functional area, generates rather intangible outcomes, thus assessment being quite problematic, our series of blog posts on marketing put under attention metrics that capture performance in various marketing dimensions.

smartKPIs.com contains a comprehensive online repository of more than 100 KPIs in marketing functional area, measures that focus on the market (share, concentration etc.), on customer (loyalty, profitability etc.), on marketing activity and processes (relationship marketing initiatives) and many other aspects.

In today’s blog post, we intend to present some considerations on the most recent research and developments in applying performance appraisal in marketing practice.

In their 2009 joint-venture study on marketing performance,  CMG Partners and Chandwick Martin Bailey suggest that Marketing Performance Management is “the practice of measuring, learning from and improving upon marketing strategies and tactics over time”.  Based on their research conducted on more than 400 people involved in marketing activities, they suggest several best practices to be used when employing marketing appraisal:

  • Engage senior level buy in
  • Ensure the strategic alignment with all corporate goals and objectives
  • Develop and employ strong processes to ensure that the cycle measure-learn-improve is complete
  • Leverage marketing performance organization-wide for improved cross-functional decision-making

Indeed, in today’s business paradigm, we believe that there is no such thing as “one discipline” or ”one department” any more. Everything within the organization is interconnected and the word of order is multidisciplinarity. The marketer’s role is gaining increased influence within organizations, which requests further reflections on accountability and assessment.

A study conducted by The Prophet in collaboration with the Association of National Advertisers (2009) analyzes what they call “the shift in marketing study”. After surveying about 150 marketers at different levels of the hierarchy and from various types of organizations, they conclude that a change is on its way, positioning the marketer on the visionary edge of the organization, driving and not just supporting business growth.

The marketer’s role shifts from the tactician that creates and deploys marketing strategies, sometimes in his own closed “silo” within the organization, to the visionary that manages valuable customer insights and business analytics, thus diving business impact. In this context, marketing itself evolves from a functional area, to a cross-functional, customer-centered collaborative way of working.

Nevertheless, all these mutations lead to a shift in the way appraisal and accountability is made: focus from incremental improvements is shifted to “pervasive innovation” (innovation that comes from anywhere and has impact everywhere) and the traditional marketing measures are replaced with sophisticated measurement tools.

The Australian Marketing Institute has argued even since 2004 the need to go beyond the marketing department and create widespread validity and value of marketing metrics within organizations. Secondly, they argued that standardization of metrics is a must in order to create a common framework and understanding of the marketer’s role and the marketing’s department realizations. It is admitted the fact that a one-fit-all approach is not possible, nor desired, but a general framework must be followed. They suggest a two-directions framework, with focus towards the customer (measuring processes and outcomes), on one hand and towards the shareholders (measuring current and future cash-flows), on the other hand.

Considering these recent developments, our recommendations for those involved in marketing performance appraisals would be the following:

  • Use traditional marketing metrics, but capture data also on more sophisticated and refined marketing implications

Do not give up on the constant monitoring of the market share or the average number of customer purchases per week and do not lack to track the efficiency of a well-defined advertising campaign in terms of reach or costs. However, do monitor for instance the marketer’s role and impact as a strategist and visionary within the organization. You can follow the number of executive meetings he participates in or the cross-functional initiatives he engages in.

  • Measure results externally, but do not miss internal impact of marketing

An increased internal role of marketing is requested, as employer branding generates valuable competitive advantage both on labor force markets and consumers markets (consumers tending to analyze the companies they buy products from in the shed of responsible and carrying employers). Thus, marketing should enforce and even direct HR department initiatives and make sure that employees embrace the value proposition and that the company caters for them.

  • Try to use wide-known, standardized metrics

For a fair and accurate appraisal and to make possible the use of benchmarking, use preponderantly metrics employed by other companies, too. It is important to have a framework that allows comparison to other similar organizations, as if you do poor at something that the others on the market do well and you don’t know why things are wrong, it might because you are not measuring the right things.

  • Document and learn from others and stay up to date to the developments in the field of marketing performance measurement

Marketing practice and also performance measurement in this area are of significant dynamic, keeping up to date with developments being essential for success. The Internet provides valuable resources in this respect and membership to a professional association in marketing could be of use. For those with little time and the desire to do much in a condensed time, participating at events and conferences on this topic might be a solution more at hand.

References:

CMG Partners, Chadwick Martin Bailey (2009), “The Marketing Performance Advantage. Improving Effectiveness and Accountability”, available for download at: http://www.marketingperformanceadvantage.com/.

The Prophet, Association of National Advertisers (2009), “The State of Marketing Study”, available at: http://www.ami.org.au/librarymanager/libs/31/2009_State_of_Marketing_Study.pdf (accessed 28 February 2009).

Styles, C., Withford, M. (2004), “What value marketing? A position paper on marketing metrics in Australia”, Australian Marketing Institute.

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The 100 Top Hospitals Performance Matrix

March 1st, 2010

Hospital Management is an important part of healthcare administration, that represents the sum of all administration and management activities of hospitals, hospital networks or medical centers. As a discipline, it has developed empirically, due to hospitals being established as private charitable community resources, for religious missions, by physicians to have a place to practice, or as governmental driven entities. Hospitals have traditionally been operated and managed through a variety of means, each of them developing a different management philosophy and style.

Throughout the years, different tools have been developed not only for supporting the management of hospitals, but also for assessing their performance. An example used in the United States for assessing and ranking the hospitals is the 100 Top Hospitals Performance Matrix, by Thomson Reuters.

This tool provides an executive-level scorecard that aims to measure the leadership effectiveness, the success of organizational improvement strategies, and impact of executive decisions. The analysis of the hospitals is based on short-term achievement and long-term rate of improvement compared to peers across the nation.

The ranking is based on long term of improvement,  current performance and specific metrics, such as:

  • Patient safety
  • Average length of stay
  • Mortality
  • Complications

This is an example of how performance indicators are used in practice. For more examples of healthcare and hospital management performance reprots, visit the Healthcare Industry section of the smartkpis.com KPIs in practice catalogue.

For specific performance indicators from Healthcare industry, visit the smartkpis.com Healthcare library of KPIs.

References:

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Sport Management and the Winter Olympic Games: Vancouver 2010

February 26th, 2010

What can we associate Olympic Games with, and what is the importance and place of the Olympic Games among other sport competitions?

If asked these questions to the large public some would say that Olympic Games is the oldest and most important sport competition taking place every four year. Others would say that is a celebration of sport, joy and peace between nations. While some would acknowledge the huge economical benefits and recognition, such a competition can bring for the organizing nation of the Games.

Without no doubt all of these remarks are right. But what can we add more is that Olympic Games above all  is a celebration of olympism and performance.

Starting from this last remark let’s have a look at the most important drivers of a successful Olympic Games edition and how can be performance in regards with such an event be best pictured?

Just a few days ago a new edition of the Winter Olympic Games, has witnessed its 21st opening with a grandiose ceremony in Vancouver, Canada. It was for the first time in the history of Olympic Games when an opening ceremony was held in an enclosed stadium. And it was for the first time in the history of Winter Olympic Games when more than 60.000 thousand spectators were present in the stadium premises for the opening ceremony and other 3 billion watched it from behind the TV screens.

If looking only at these figures and we couple them with athletes performance during olympic competitions we could say that the Winter Olympic Games, Vancouver 2010 should be considered a big success. But is that right?

Beyond the unprecedentedly media coverage of the event, beyond the athletes’ performance there are a lot of other factors that play an important role in the success of an Olympic Game edition. All of them are enabled by Sport Management as a business discipline. When applied well, it secures the success of a competition from both a sportive and administrative point of view. Listed below are some performance measures and their related figures which portrait Vancouver Winter Olympic Games 2010 edition from a performance management perspective:

• # Viewers per televised sport event: 34,5 million Americans viewed the opening ceremony in prime time, 2 out of 3 Canadians watched the event and overall it was projected that more than 3 billion people witnessed the opening event from behind the TV screens around the world.

• # Event tickets available: 1, 6 million tickets

• # Volunteers supporting the sport: 25,000 volunteers are supporting the Vancouver 2010 Olympic event (approximated figure)

• # Athletes and officials attending competition: More than 5,500 Olympic athletes and officials (approximated figure)

• # Countries participating in the sport event:  82 countries have qualified athletes and are attending the event.

• # Accredited media representatives:  10,000 media representatives have been accredited for different events during the Olympic Games (approximated figure)

• # Medal events during the competition: 86 medal awarding events held during the 16th days of competition.

• $ Sport event operating cost: $ 1, 76 billion estimated costs

• $ Sport event security costs:  $ 900 million estimated costs

• $ Athletes accomodation facilities development cost:  $ 167 million estimated cost of the Vancouver Olympic Village

• $ Venues renovation costs:  $ 365 million estimated renovation cost of the Olympic venue

• # Distance travelled by the Olympic torch:  45,000 kilometers across Canada

• # Olympic torch bearers: 12,000 Canadians were given the occasion to bear the Olympic torch

• # Olympic torch  relay duration:  106 days.

As we can acknowledge from the figures listed above the organization of an Olympic Games edition implies a great effort and resource allocation. However its success can be determined with precision only at its end, and what we have presented above is just a fraction of the performance indicators that can portrait a sport event. For more performance measures from sport management industry visit the smartkpis.com database.

Additional resources:

References:

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Applying Goal Setting Theory in practice: An action research exercise

February 25th, 2010

smartKPIs.com Performance Architect update 8/2010

In my previous updates I highlighted the importance of theory in performance management and introduced the goal setting theory as one of the most important informing the discipline. I also outlined the importance of understanding the complexities of setting targets.

At smartKPIs.com, we not only enjoy thinking and talking about performance management, but we also apply performance management concepts in our own work. Today’s update illustrates how goal setting theory was used in practice by the smartKPIs.com team through an action research exercise.

Situation: At the beginning of November 2009, the database of performance measures on www.smartKPIs.com had 600 published KPI examples. The growth rate of the database was constant in November and December, however limited and not optimized..

Challenge: To make the website content more relevant to the diverse profile of visitors, we needed to accelerate the rate at which new KPI examples were published.

Methodology: apply the Look, Think and Act routine of Action Research (Stringer, 2007)

  • Look – we gathered relevant information and developed a rich picture of the various functional areas and industries part of the smartKPIs.com taxonomy.
  • Think – we analyzed the documentation process and clarified the issues to be addressed
  • Act – we established a plan, implemented it and evaluated results

Theory: use Goals Setting Theory principles (Locke & Latham, 1990)

Application of Goal Setting Theory principles:

  • Challenging but attainable. We established an overall target for the entire documentation team: Double the number of published KPIs in one month. From 1000 at the end of December 2009 to 2000 published KPI examples by the end of January 2010.
  • Specific rather than vague. We were aware that such a challenging target might lead to a decrease in the quality of the content. This risk was addressed by clarifying that the target had to be achieved while respecting the high quality standards characterizing the KPI examples documented on http://www.smartKPIs.com. This was reinforced by the establishment of work package with clear quality and quantity specifications.
  • Involvement of team members in the process of setting their own targets. We decided to split this target by working days and established the daily target number of KPIs for the team. This was divided by team member, taking into account the proportion of working hours allocated to this task each day. These targets were discussed and some of the team members adjusted them upwards, based on the level of difficulty of their allocated work package.
  • Ensure targets are measurable in terms of being clearly understood by employees: quantity, quality, time and cost. A spreadsheet was established to clarify daily targets and keep track of the progress. Weekly meetings were used to discuss progress, share learnings and adjust work packages.

Results:

  • January 2010 – The target was met on the last day of the month: 1000 KPI examples were published in a 4 weeks period, as planned.
  • February 2010 – The target was met one week before the deadline, confirming that the previous month result was due to an improved process, easily replicated from one period to another.

Outcomes: Performance management is more than just ensuring outputs are delivered as planned. It is also about using such outputs to deliver outcomes that generate added value. Here is how the output of 2000 KPIs published as planned during the last two months is generating value for smartKPIs.com:

  1. The traffic to http://www.smartKPIs.com increased considerably. In February 2010, smartKPIs.com established a new site record in terms of daily visitors.
  2. The traffic to the website remained constant even after stopping the advertising campaign we rolled out last year. After a brief decrease, the volume of visitors started to gain momentum. While other factors contributed to this, certainly the quality content published over the last two months, had its share in attracting new visitors. Thus the financial value generated by the added content can be estimated as the equivalent of a large share of our advertising budget for two months.
  3. The continuous improvement of the quality and quantity of the content consolidated the recognition smartKPIs.com has started to have the international performance management community as a global platform for performance management knowledge integration.
  4. Internally, the learning experience team members shared during this exercise contributed to the generation of new ideas and innovation, such as the launch of the Performance Management IQ test.
  5. The experience itself and the achievement of targets confirmed the talent, dedication and work ethic of the smartKPIs.com team. It gave a sense of pride and satisfaction of getting the job done. Having the opportunity to plan, deliver and excel is in itself a powerful motivator and enabler of self efficacy. It is a story worth telling others: “…In December 2009, while working with the smartKPIs.com team on growing the website, we were faced with this challenge…We were a great team…And we did exceptional things…”

After all, as Albert Einstein said: “The value of achievement lies in the achieving.”

Notes:

  • No bonuses were paid for achieving the targets set as part of this exercise.
  • No paper was printed as part of the measure documentation process.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

References

Locke, E. A., & Latham, G. P. (1990). A theory of goal setting and task performance. Englewood Cliffs, NJ: Prentice Hall.

Stringer, E. T. (2007) “Action Research, 3rd Edition“, Thousand Oaks, CA, Sage Publications.

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Measuring company profitability with the Berry ratio

February 24th, 2010

Companies use profitability ratios in order to measures their ability to generate returns through effective allocation and use of available resources. KPIs in this area have often as main component profit or return. One of the most popular profitability ratios is the Berry ratio.

It was developed by Dr. Charles Berry (1930-2007), a specialist in industrial organization and applied microeconomics and professor at the Princeton University, in conjunction with a tax court case involving transfer pricing between a U.S. parent company and a foreign subsidiary. He consulted with dozens of government agencies, corporations and law firms on antitrust and regulatory matters, transfer pricing and corporate taxation before launching the ratio that carries his name.

The Berry ratio measures the ratio of a company’s gross profits to operating expenses and is used mostly by tax and transfer pricing analysts.

It is calculated by dividing $ Gross margin (which is basically the difference between $ Sales and $ Cost of goods sold) to the $ Operating expenses.

A ratio coefficient of 1 or more indicates that the company is earning a profit over and above its variable expenses; a coefficient below 1 indicates that the firm is losing money.

Although the Berry ratio is a simple profitability measure, it is probably one of the most misused ratios in analysis of transfer pricing. Due to failure in understanding its limitations, errors in interpreting it may appear. The Berry ratio cannot be applied to distributors that also perform manufacturing functions as it cannot capture the additional return earned by the manufacturing function.

Empirical studies have shown that distributors with low operating expense intensity (less than 10%-15% relative to sales ratios) show very high values of the Berry ratio when compared with distributors with higher operating expenses. Thus, an extra caution should be taken when comparing two distributors with a large gap between their operating expense intensities.

Using the Berry ratio together with other profit level indicators will provide a higher level of validity of the information.

Additional resources

smartKPIs.com library of KPIs: Finance > Profitability > # Berry ratio

Przysuski, M.,Lalapet, S. (2005), “A comprehensive look at the Berry Ratio in transfer pricing”, Tax analyst, Volume 40, Number 8, Reprinted from Tax Notes Int’l, November 21, 2005, p. 759, available at: http://www.bridging.uwaterloo.ca/mtax/documents/PrzysuskiM_BerryRatioPaper.pdf (accessed 24 February 2010)

Stevens, R. (2007), “Charles Berry, economist and ‘dedicated University citizen,’ dies”, Princeton Weekly Bulletin   September 16, 2007, Vol. 97, No. 1, available at: http://www.princeton.edu/pr/pwb/07/0916/berry/ (accessed 24 February 2010)

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Measuring Supply Chain Management Performance

February 23rd, 2010

Supply Chain Management (SCM) is the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole (Mentzer et al, 2001).

There are more aspects to consider when having a business line in Supply Chain Management, such as distribution strategy and network configuration, logistical and warehousing activities, inventory management and reverse logistics.

When considering specific Supply Chain Management activities and specific performance measures, these can be grouped in different subcategories.  www.smartKPIs.com suggests the following subcategories and specific performance indicators for Supply Chain Management:

Logistics / Distribution:

Inventory Management:

Procurement / Purchasing:

Contract Management:

Supply Chain Management:

To access over 300 Supply Chain, Procurement, Distribution KPI examples visit www.smartKPs.com

References

Mentzer, T.J. , (2001), Supply Chain Management,  Sage Publications Inc., London

eab group (2010), “KPI examples for the Supply Chain Management”, http://www.smartkpis.com/kpi/functional-areas/supply-chain-procurement-distribution (accessed 10 February 2010)

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Measuring advertising performance: a recommended set of 8 media metrics

February 22nd, 2010

As part of the promotion mix in marketing, advertising is one of the most dynamic and costly promotional activity. Although declined with about 2,6 % by comparison to the previous year, the U.S. advertising expenditure has still been above $ 130 billion dollars in 2008 (according to a The Nielsen Company report).

Performance management in advertising focuses on various levels, from research and planning the advertising campaign, to implementation and results assessment. Herein, when choosing the appropriate media for message deployment, several media metrics ought to be tracked in order to have an accurate view of the expected coverage and impact of the media program.

For a complete assessment of the media chosen, the most popular media metrics used in advertising are the following:

  1. Begin with the estimation of the # Advertising reach. Reach is the volume of the audience to whom the communication is directed. However, reach does not indicate the number of individuals or household the ad will actually be exposed to, it only reflects the potential actual exposure considering the number of households that have access to that media.
  2. For the individuals or the households that form the # Reach, calculate the average number of times they are exposed to the advertisement. You will then obtain the # Frequency metric.
  3. Having estimated # Reach and # Frequency, you can now calculate the # Opportunities-to-see, as the result of # Reach multiplied to # Frequency. # OTS is also called # Impressions and it reflects the total number of ad exposures as a function of unique individuals exposed and the number of times each individual has the chance to see the ad. In audio media, the # OTS is equivalent to # Opportunities-to-hear, reflecting the total number of ad exposures as a result of individuals exposed multiplied to average chances to hear.
  4. Further on, extracting from the total available impressions the percentage that is actually delivered by the media vehicle generates the # Rating points. One rating point means that one percent of the audience actually sees the ad.
  5. Adding up all rating points during campaign will result in the # Gross rating points, this measuring the total exposure the ad receives. However, if the ad is broadcast in a show with 10 rating points and also in one with 15 rating points, it does not mean that 25 % of the audience sees it because some viewers may see it both times.
  6. If the ad targets a particular group in the audience for that media (i.e women under 35 years), you will then use # Target rating points, which is the rating points considered for that particular group in the audience.
  7. Finally, after having quantified the audience, you will have to calculate your costs in order to make a decision of what media and show to choose for ad deployment. The metrics most commonly used is the $ Cost per mille (CPM), also called $ Cost per thousand, which is the cost to reach 1000 impressions. For calculation, you will have to divide the ad campaign cost to the number of impressions generated.
  8. In relation to $ Cost per mille, advertisers can also use the $ Cost per point (CPP), that equals the advertising cost divided to the number of rating points achieved.

To sum up, we have the following ad metrics:

For further Key Performance Indicator examples used in advertising practice, you can visit the smartKPIs.com KPIs in Advertising page.

A particular set of ad metrics refer to social media performance management, an area with an outstanding dynamic. Stay tuned on smartKPIs.com blog for a future post on social media metrics.

References:

Faris et al. (2006), Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, Upper Sadle River New Jersey.

„U.S. Ad Spending Fell 2.6% in 2008, Nielsen Reports”, available at: http://en-us.nielsen.com/main/news/news_releases/2009/march/u_s__ad_spending_fell (accessed 20 February 2010).

Further recommendations:

Measuring Advertising Performance 2010 Conference in London, UK.

Atlas Advertiser Suite of advertising measurement technologies from Microsoft.

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