How to transform legacy KPI practices

Using artificial intelligence to generate key performance indicators can transform a company from the inside out. These “smart KPIs” can strategically align people and processes, provide valuable predictive insights, and improve inventory management, new research shows.

A global survey of 3,000 managers by MIT Sloan Management Review and Boston Consulting Group found that companies that were using AI to revise their KPIs were 4.3 times more likely to have seen improved alignment between functions than those that had not relied on AI.

“Our research finds organizations across industries using AI to revisit their KPI fundamentals and discover latent or undervalued performance features,” according to the research report’s co-authors, among them Michael Schrage, a research fellow with the MIT Initiative on the Digital Economy.

For example, online furniture retailer Wayfair used AI to reexamine lost sales. The company used to believe that if it lost a sale on a particular product, it was a loss to the company. After more investigation, Wayfair realized that the “lost sale” was often due to the customer buying something else in the same product category.

This insight led Wayfair to rejigger its lost-sales KPI into a more valuable metric that looked at category-based retention of sales. From there, Wayfair could make more effective furniture recommendations that incorporated customer preferences when suggesting next-best offers.

Using smart KPIs requires a shift in thinking. Here are six changes to make when using AI to transform legacy KPI practices, according to the new report.

‘Performance Tracking’ to ‘Redefining Performance’

The research suggests that there is little benefit in tracking the performance of existing legacy KPIs. On the other hand, using AI to improve KPIs can help companies think outside the box and provide new definitions of performance. At Google, for example, the company’s unsupervised learning algorithms identified completely unexpected performance markers for its media buys.

‘Static Benchmarks’ to ‘Dynamic Predictors’

Smart KPIs can be used to anticipate market conditions, consumer behavior, and supply chain challenges with greater precision, the authors write. For example, Schneider Electric’s dynamic KPIs help the company anticipate and respond more effectively to volatile weather, which influences energy costs and carbon footprints. High-frequency algorithmic trading and programmatic advertising marketplaces are other areas where dynamically predictive KPIs hold lots of promise, the authors write.

‘Judgment First’ to ‘Algorithmically Defined’ Strategic Metrics

Traditionally, executives designed and defined KPIs by relying on factors such as experience, market trends, and business objectives. However, AI can help identify new, previously unimagined metrics for aligning and assessing performance with a company’s values and objectives.

‘KPI Management’ to ‘Smart KPI Governance and Oversight’

It’s important that business leaders have a deep behind-the-scenes understanding of how smart KPIs operate and learn to improve.

“Businesses need KPIs for their KPIs — intelligent metrics and standards to reliably evaluate the effectiveness, efficiency, and alignment of the KPIs themselves,” the authors write.

Smart KPI governance includes not just optimizing individual KPIs but strategic KPI portfolios (the group of KPIs that best represent strategic aspirations, objectives, and outcomes). Good KPI governance mechanisms also maintain detailed, accurate, and relevant performance data over time.

‘Keeping an Eye on KPIs’ to ‘KPI Dialogues and Discussions’

Daily monitoring of KPIs on detailed, visually compelling dashboards is common practice in offices around the world. But truly intelligent algorithms can transform these dashboards into active machine learning platforms that enable real-time dialogues between managers and their KPIs, the authors write.

For example, equipping KPIs with generative AI capabilities makes it possible for managers to design dashboards to produce counterfactual scenarios for financial planning or inventory management.

‘Strategy With KPIs’ to ‘Strategy for and With KPIs’

Traditional KPI strategic management approaches involve tangible, measurable objectives with business goals determined by executives. However, smart KPIs demand a new paradigm and strategy for development and optimization over time.

“Having a strategy for, as well as with, KPIs encourages strategists to attend not only to measurable objectives but to measurably enhanced KPIs,” the authors write.

Read the full report: “The Future of Strategic Measurement — Enhancing KPIs with AI”