This blog is intended to discusshow to create SAP Predictive Analysis models on top of a performance management solution, for instance based upon the Balanced Scorecard methodology, using SAP Strategy Management. Using this approach gives some benefits when leveraging Predictive Analysis to measure the actual correlation strength between KPIs in different perspectives in a Balanced Scorecard. One of the greatest benefits of the Scorecard is the way it tells a story with the visualized cause-and-effect between KPIs in different perspectives. Using statistical analytics as shown in this article to validate selected KPIs could make this story telling even more trustworthy.
The gained knowledge using Predictive Analysis statistical functionality can be an important supplement on how one can manage and select KPIs for a Performance Management solution for instance when using Balanced Scorecard. The result from the exercise can for instance be used to validate, redesign and simplify the KPIs in a Balanced Scorecard. Evaluating and actually measuring the hypothesis of cause and effects of KPIs in different perspectives in a Balanced Scorecard could imply a higher possibility of getting the right measures and in essence the ability of being more proactive.
The cause of less than optimum performance management solutions such as Balanced Scorecards has in some cases been
identified as related to design and hypothesis of the KPIs. Moreover these KPIs are usually chosen based on gut feeling and of course also industry specific knowledge.
The obvious question here is how if we could devise a method to continuous evaluated and improve the selection of KPIs to a
performance management approach for instance using the Balanced Scorecard and in specific strategy maps with illustrations of cause and effects between KPIs in the chosen perspectives? This process will also be discussed and illustrated with an example.
Figure: Overview of a Scorecard. Created in GOAL diagram shown in SAP Strategy Management
Below I have illustrated how the use of statistical algorithms could help in showing the strength of relations between KPIs and in essence underline the story telling using strategy maps. As shown the expected final result of evidence reasoned based strategy map incl. numeric value of the explanatory power of the correlation between KPIs in different perspectives:
Figure: Uncovering the driving indicators using SAP Predictive Analysis to determine the strength between KPIs.
How did I do this:
SAP Predictive Analysis have built in capabilities to use CNR Tree algorithm which uses recursive partitioning to split the training records into segments with similar output field values.
The CNR Tree node starts by examining the input fields to find the best split, measured by the reduction in an impurity index that results from the split. The split defines two subgroups, each of which is subsequently split into two more subgroups, and so on, until one of the stopping criteria is triggered. All splits are binary i.e. only two subgroups.
CNR Tree uses classification trees for discrete outcomes and regression trees for continuous outcomes.
In practice this means that a factor analysis, for example SAP Predictive Analysis will be able to identify the KPIs that have the biggest impact on a critical success factor and again further up in the hierarchy of objectives for the strategic objectives. This could be used to communicate what is important to focus on, for the company to achieve its strategic objectives. Furthermore, the number of KPIs could probably be reduced and continuously evaluated in relation to the advancement of the Balanced Scorecard strategy cards. As shown in the example E1 Employee Satisfaction the relative most impact on the P2 Efficiency in processes. E5 Employee education has the next highest impact on P2 etc.
What benefits could this method of Predictive Analysis on performance management approach such as a balanced scorecard imply?
• Predicting the outcome based on historical KPI’s and especially determining if a number of independent KPI’s change will have an impact months later on other dependant KPI.
• Measuring the correlation strength of KPI’s it could help select the right KPI’s to a Scorecard.
• Using statistical methodology to actual proving the correlation between KPI’s could uncover else unknown information and in specific relations between different KPI’s in a strategy map approach.
• Sanitation of KPI’s in a Scorecard – many times a lot of KPI’s are “for a safe or organisational-reasons-sake” put into a Scorecard. Evaluating if there is actually a need for all these KPI’s could lead to fewer KPI’s to monitor. This could also lead to higher transparency and less need for maintenance and data preparation.
• Increase the trustworthy including evidenced based reasoning of the story told in a strategy map.
This was just one example of how SAP Predictive Analysis with just one algorithm can enhance a performance management solution. Besides providing statistical proven reasoning to the strategymap Predictive Analysis could also assist many other areas which I will explorer in this blog.
Please feel free to comment.