Six Characteristics of Useful Information Pt 2

This entry on my blog continues my discussion of six characteristics of useful management information.

In the previous entry, I discussed three characteristics: (1) relevance, (2) comprehensibility, and (3) reliability.  This entry discusses the last three characteristics: (4) significance, (5) timeliness, and (6) action-orientation.

Significance – Useful management information should facilitate decision making that will make a palpable impact on the business.  Executive dashboards tend to have just a handful of metrics that the leadership team watch regularly, because those metrics correlate strongly with successful performance.  However important they may seem, metrics that will not have a significant impact on performance should not be included as useful management information.

For example, a former employer realized an order cancellation rate of 1%.  Further analysis showed that 50% of these cancellations occur in the first 24 hours as a result of buyer’s remorse.  We discussed whether it was valuable to report on the remaining cancellations, but rejected that thought.  The amount that might be saved from activities to reduce cancellation rates was insignificant relative to the amount of financial and non-financial resources required.  The reporting of cancellation rates was not significant to warrant inclusion as management information.

Timeliness – Useful management information is available in relative real-time, which depends on the industry and the need for real time reporting.  In the financial industry, management likely requires real time information to facilitate immediate response to market movements, where a delay could cost millions of dollars.  The direct marketing company in which I worked reported on a daily cycle, which reported the profitability of each TV advertising time slot, so that media management could plan which products to air on available channels and time slots.

This is a key characteristic that differentiates management accounting from financial accounting.  The financial accounting cycle is usually one month, so the previous month’s performance is not usually available until midway through the current month.  While financial accounting is considered accurate and auditable, this 4 to 6 week delay in reporting does not facilitate responsiveness to business conditions.  Management accounting reports can follow a weekly or even daily cadence because internal management information is not held to the same requirement of accuracy as external financial reporting.  In this way adverse situations can be identified and investigated quickly, and the business can react proactively.

Action-orientation – Management information exists to support management decision making.  Therefore management information should facilitate decisions that significantly impact the business.  My litmus test is to determine what reaction the nugget of information will evoke.  Will executives respond by saying “that’s interesting, but what can I do about it”?  Or will they respond with “we can determine a course of action to correct this situation”.

For example, at the above mentioned direct marketing company, my analysis of product refunds discovered that customer gender and age had a strong influence on the propensity to return a product.  Female customers were more likely to return a product than males.  And the return rate by age had a U-shape, with younger and older customers more likely to return products than middle-age customers.

This was interesting, but it was not actionable.  The information explained why some products had higher return rates than others, which was due to the demographic customer profile.  But the business could not influence the demographic profile of customers for specific products, and the business could not influence innate behaviour differences from gender and age.  As a stand alone piece of research it was enlightening, but it was not useful management information.

In conclusion, management information should be less rather than more.  But by using these characteristics you can ensure that management information is useful.  It should be mentioned that it is not a requirement that all six characteristics are met concurrently.  For example, there is a trade off between timeliness and accuracy.