Once again we will tackle the challenge of reducing the 1,000+ metrics shipped "out-of-the box" with business intelligence and performance management applications to a manageable 10 to 15 key performance indicators (KPIs). Last month we discussed affinity analysis as one potential approach. This month the focus will be on a Six Sigma technique called correlation analysis, which will allow us to understand the relationships between individual metrics while simultaneously identifying potential KPI candidates. The e-commerce case study in this column will illustrate how correlation analysis can highlight the relationships between Web metrics and bottom-line financials. The approach is to first determine which metrics are related to the business financial drivers. The second step is to discover the interrelationships that exist among the Web metrics themselves. This prevents the inclusion of any two Web metrics that might be measuring the same process or outcome. The result of the analyses will be a reduced set of KPI metrics that are uncorrelated with each other, and yet related to financial impact.
Correlation analysis allows us to measure the degree of linear relationship between two variables. As you may recall from STAT 101, the correlation coefficient may take on any value between plus and minus one. The sign of the correlation coefficient (+ or -) defines the direction of the relationship, either positive or negative. A positive correlation means that as the value of one variable increases, the value of the other increases; as one decreases the other decreases. A negative correlation coefficient indicates that as one variable increases, the other decreases; as one decreases the other increases. Alternatively, the absolute value of the correlation coefficient measures the strength of the relationship. A correlation coefficient of r =.8 indicates a strong positive relationship between two measures, whereas a correlation coefficient of r =-.6 indicates a less powerful, albeit strong negative relationship between the two measures.
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