This article was authored by Sheryl Estrada, Senior Reporter at Fortune, and originally published in Fortune CFO Daily.
KPIs, or key performance indicators, measure how effectively a company is achieving key business goals. Right now all companies—whether they’ve been around for 100 years or are just emerging—are focusing on KPIs that reflect modern technologies.
Legacy KPIs need to be revised by organizations that want to take advantage of new data, new technologies, and novel algorithms, according to Michael Schrage, a research fellow at the MIT Sloan School Initiative on the Digital Economy.
During Fortune’s Emerging CFO event on Wednesday, in partnership with Workday, Schrage discussed his assessments with Harmit Singh, EVP and CFO at Levi Strauss & Co. and Alka Tandan, CFO at Gainsight, Inc., who shared their perspectives as finance chiefs.
“One of the classic works in KPIs is the Norton and Kaplan balanced scorecard,” Schrage said. “They published that in 1992. Fundamentally, the work that they did 30 years ago, I think is very good and spot on. But the reality is digital transformation changes the economics of instrumentation, metrics, and measurement. The legacy notion of certain KPIs, sales, and profit, yeah, we’re going to keep them. But the way that people in the finance community, the marketing community, the HR community should engage and collaborate around those KPIs has to fundamentally change.” Some emerging KPIs Schrage noted include employee experience, customer experience, and customer lifetime value. He’s already found that KPI innovations lead to different kinds of dialogues and debates between CFOs and their colleagues.
“This is an important and critical area for Levi Strauss & Co,” Singh said. “It’s been around for 160 years. We have legacy systems. We have traditional approaches.” But a company that was primarily wholesale is now focused on growing its direct-to-consumer business, Singh said. “We have 3,000 stores, and we’re adding about a hundred a year. And direct to the consumer, will be how we lead. From a KPI perspective, we also embrace technology.” Singh continued, “As you think about understanding our stakeholders, employees, shareholders, and customers, our KPIs are evolving. Traditionally, it was revenue, profit, and cash, and now we’re going into more leading metrics—customer lifetime value is important, and CSAT [customer satisfaction] scores.”
“We started in 2013,” said Tandan of Gainsight, Inc., a tech company that offers a customer success software platform. “We can be considered an emerging company. So we’re definitely on the emerging KPI bandwagon for sure. We have this concept of success for all. We look at employee success. We look at customer success, and then we look at investor success. We are a customer success company. So we are often defining these KPIs for the industry as well.”
Schrage asked Tandan to share the company’s data-driven insight on what customer-led success means now that perhaps traditional marketing or salespeople don’t yet understand.
“Traditionally it’s been GRR—Gross Retention Rate—as the key customer success metric,” Tandan explained. “But it’s changing, especially in an economic environment like this. Our North Star metric right now is Net Retention Rate. That’s really looking at your customers and seeing, not just which ones are staying, but which ones are growing.” Tandan added, “In an environment, now, when it takes a lot more money to acquire a new customer, really looking at your current customer base and growing it that way becomes a lot more efficient. I think every CFO, as well as investors, could appreciate that.”
Some companies have started creating a community environment to discuss KPIs. “I’ve seen some organizations create Slack channels and communities around KPIs so that people can talk about results,” Schrage said. “That then becomes a resource. For example, the reason why the numbers are low is because of X, or there’s a real opportunity here that we’re missing.”
He continued, “One of the issues is, to what extent are KPIs siloed, and to what extent are they shared or enterprise-wide KPIs? And that’s not a bottom-up question, that’s a leadership question. How do you want people to align? They have to know what they’re aligning towards, and they need to hear the conversation around that. That’s why I think KPIs are really interesting organizational principles for people, not just for leaders.”