Analysis into Insights

The rise of data-driven decision-making has sharpened our focus on two increasingly important dimensions of business in the 21st century: analysis and insights.

”Leaders at all levels of government are seeking creative ways to use their resources more efficiently and effectively to serve the public. Attention to promising evidence-based practices has increased, as have efforts to eradicate inefficiency within the system. All these are being considered in the context of the organization’s larger mission.” – Harry Hatry & Elizabeth Davies, A Guide to Data-Driven Performance Reviews (2011) [1]

We saw in the previous activity that new cost management strategies are emerging because of, and with, new technologies. Performance decision-making has been particularly affected by increasingly accurate, efficient, and data-rich metrics and methods. Broadly framed, performance metrics include all forms of metrics a company might disclose—e.g. financial metrics, wider metrics set under internationally recognised frameworks, various policies, as well as metrics on decisions made at the company level.

Before we detail the ‘why’ of performance metrics, consider the following high-level overview. (Note the distinction between financial metrics and wider metrics but that both inform key performance indicators.)

Why integrate impact and financial metrics?

1. To evaluate investment opportunities to achieve an optimal balance of impact and financial return—eg with investments, products, services or customer segments are generating returns vs loss-making.
2. To identify what should be done differently in the short term and the long term—eg by asking, “What ways are impacts and our financial results aligned or misaligned?”.
3. To develop competitive products and services that deliver greater impact at a lower cost—eg developing market-relevant and customer-driven products, innovative solutions, etc.

There are three different monetary-based decision techniques organisations utilise over time: financial analysis, cost-effectiveness analysis (CEA), and cost-benefit analysis (CBA). Let’s consider each of them in turn before looking at some of the key characteristics of performance metrics and how best to present them.

Financial Analysis

Financial analysis assesses the impact of an organisation’s own financial costs and revenues. For significant financial proposals, organisations must conduct a financial analysis of the impacts of its budget.

A regulatory impact assessment (RIA) is required wherever proposals for regulations or legislations are published; they are intended to finalise decisions about whether the proposed measures are needed. If the financial impacts extend into the future, the net present value (NVP) approach should be used to determine the discounted present value. (In week two, we learned that some different tools and techniques can be used for financial analysis, which include financial statement analysis, financial ratio analysis, trend analysis, etc.)

Cost-effectiveness Analysis (CEA)

CEA is an assessment of the costs of alternative options that are aimed at achieving a target objective. The objective of this technique is to determine if the value of an intervention justifies its cost. CEA involves more than determining cost; it involves assignment of a value to the outcome.

Consider using CEA where the need for a project has already been established, but uncertainty remains over the best method to achieve it. (And remember to consider the opportunity costs and external costs.)

There are two methods to calculate the CEA ratio, which will enable you to compare two or more projects:

1. [text{Cost-effectiveness ratio} = frac{text{Costs of an alternative}}{text{Measure of effectiveness}}]
2. [text{Effectiveness-cost ratio} = frac{text{Effectiveness measure}}{text{Costs of an alternative}}]

Cost-benefit Analysis (CBA)

CBA is an assessment of all the costs and benefits of alternative options. It follows the economic concept of valuation based on a willingness to pay or accept. CBA, which can include both quantitative and qualitative metrics/factors, involves weighing costs associated with a decision against the benefits arising from that decision.

For decisions involving investment projects, CBA tends to be based on the cash flows associated with the investment—eg whether to hire staff to develop a new product or integrated solution, or to purchase a fixed asset such as machinery.

References

1. A Guide to Data-Driven Performance Reviews [Document]. The Business of Government; 2011. Available from: http://www.businessofgovernment.org/sites/default/files/A%20Guide%20to%20Data-Driven%20Performance%20Reviews.pdf