Lesson 1 of 5
Choosing KPIs
9 min
A process owner who cannot say how well the process performs cannot say whether a change made it better or worse. Key performance indicators (KPIs) are the answer, but only if they are chosen carefully. This lesson shows how to pick a small set of KPIs for order-to-cash (O2C), procure-to-pay (P2P) and record-to-report (R2R) that actually tell you something.
Outcome and efficiency KPIs
Two kinds of KPI matter. Outcome KPIs measure what the business and its customers experience: did the order arrive on time and complete, did the supplier get paid on time, did the books close on schedule. Efficiency KPIs measure how much effort the process takes: how many invoices needed manual handling, how many orders were changed after entry. You need both. Efficiency without outcome rewards cutting corners; outcome without efficiency hides how much manual effort is propping the process up.
A starter set for three processes
| Process | KPI | Type | Definition (agree your own) |
|---|---|---|---|
| O2C | Days sales outstanding (DSO) | Outcome | Receivables relative to revenue, expressed in days: how long customers take to pay |
| O2C | Perfect order rate | Outcome | Share of orders delivered on time, in full, undamaged and correctly invoiced |
| O2C | Order change rate | Efficiency | Share of orders changed after creation (quantity, price, date) |
| P2P | Touchless invoice rate | Efficiency | Share of supplier invoices posted and released without manual intervention |
| P2P | On-time payment rate | Outcome | Share of supplier invoices paid by the due date |
| P2P | Invoices blocked for payment | Driver | Share of invoices blocked for price or quantity variance |
| R2R | Days to close | Outcome | Working days from period end to books closed |
| R2R | Manual journal entries | Efficiency | Number and value of manually entered journal entries per period |
A starter KPI set. Definitions vary; write yours down and keep them stable.
Definitions are where KPIs live or die. Touchless invoice rate sounds simple until someone asks: does an invoice that arrived electronically but was parked for one minute count as touched? Does a credit memo count? Is the denominator all invoices, or only invoices with a purchase order? Write the answers down. For DSO, decide whether you use a simple ratio of receivables to revenue or a countback method, and over which period. For perfect order rate, decide what "on time" means: the first confirmed date or the customer's requested date. These choices change the number by several points, and changing them later breaks every comparison.
Also decide the granularity. A company-wide DSO hides the difference between fleet customers and aftermarket distributors; a perfect order rate for plant 1710 alone tells you nothing about Chicago. Most KPIs are worth tracking by one or two dimensions the process owner can act on, such as sales area, plant, customer group or supplier.
Avoiding vanity metrics
A vanity metric looks good on a slide but does not help anyone decide anything. Number of orders created, number of Fiori tiles in use, number of users logged in: these describe activity, not performance. Test each candidate KPI with three questions:
- Would a change in this number change a decision?Yes → keep testing it · No → vanity metric; drop it
- Can the process owner influence it?Yes → keep · No → monitor it, but do not own it as a process KPI
- Is the definition precise enough that two people would calculate the same value?Yes → adopt it · No → tighten the definition first
Keep the set small. Three to five KPIs per process are enough for a process owner to watch every week. More than that and none get attention.
What would you do?
Contoso's sales director proposes "orders created per day" as the main O2C KPI for the S/4HANA go-live. What should Maria and Dan suggest instead?
- Use outcome KPIs for what the business experiences and efficiency KPIs for the effort it takes.
- Starter set: DSO, perfect order rate, touchless invoice rate, on-time payment, days to close, manual journal entries.
- Drop vanity metrics: if the number would not change a decision, it is not a KPI.
- Keep three to five KPIs per process, with precise definitions, and pair them to prevent gaming.
Check your understanding · not graded
Lesson check
1. Which KPI best measures order-to-cash collection performance?
2. Which is an efficiency KPI?
3. Which is a vanity metric?
4. Why pair touchless invoice rate with invoices blocked for payment?