A balanced scorecard approach, combining financial metrics with quantitative nonfinancial metrics (e.g., efficiency and yield) and qualitative metrics (e.g., regulatory risk, people impact), is the most effective way to strike this balance.
Track the right KPIs of long-term value
As the definition of long-term value has expanded to include not only financial value but also customer, people and societal value, companies are striving to identify and measure the right KPIs to evaluate their performance across these categories. In selecting KPIs, CFOs need to understand what is most important to the company’s success and to its stakeholders and determine how to measure it.
CFOs are well aware of financial KPIs such as growth rate, free cash flow and return on invested capital. But other KPIs are increasingly critical. Among those that could be considered are:
- Customer value – satisfaction, trust and loyalty, and brand value
- People value – engagement, employee loyalty, leadership, diversity and inclusion, and health and wellness
- Societal value – sustainability, total economic impact, carbon footprint, water consumption and ethics
There are a host of other metrics that can be measured. For example, the World Economic Forum’s International Business Council, with support from EY leadership, has proposed a set of common metrics to spur sustainable value creation. The key is to choose the KPIs that align with the company’s long-term strategy and mission statement in order to make capital allocation decisions that support the aspirational future state of the business.
Quantify qualitative metrics
CFOs in the EY survey named qualitative metrics such as safety and regulatory requirements, workforce impact, and alignment with corporate strategy as the most common qualitative measures they consider in their investment decision process. The impact on diversity or social goals and sustainability are also becoming increasingly important. However, a common concern related to qualitative metrics is that they can be subjective.
With the advancement of digital technologies, more and more qualitative aspects are becoming measurable (e.g., social media engagement). In the absence of having a completely unbiased quantitative method to measure, a balanced scorecard approach can incorporate qualitative factors. In the absence of quantitative data, qualitative metrics can be assigned a weighting, creating a data point or “score” that can be included on the balanced scorecard and utilized in the evaluation process.
Providing a consistent framework for the qualitative assessment of individual investments helps decision-makers compare alternatives.
Regularly review and refresh KPIs
Backtesting can help sort through the myriad of available qualitative and quantitative metrics to determine which KPIs actually drive value, based on the company’s strategic goals. Executives should look for past correlations with the results the company is trying to achieve and use those to inform decisions.
Companies should also regularly evaluate KPIs. As the pandemic showed, the future is uncertain, and the business environment can change without warning. Make sure your KPIs keep pace.
- Choose KPIs that reflect the company’s long-term value creation strategy.
- Use a balanced scorecard and assign weight to qualitative KPIs.
- Regularly refresh KPIs to make sure they still align with the long-term strategy.
Use your capital allocation strategy to drive long-term value
While the pandemic’s impact on individual companies has been unique, most executives agree that it has driven a renewed focus on capital allocation. CFOs have found they need to look beyond the bottom line and take a more holistic view of capital allocation, incorporate effective data management and analysis, and focus on building trust with stakeholders through effective communications.
In the current business environment, there is great opportunity to improve the capital allocation decision-making process. Striking the right balance between rigor and agility will enable companies to achieve their long-term strategy and value creation goals while navigating short-term disruptions.
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