Index System Introduction
In this article, you will find an brief definition of Index system, how is it useful and how to build one on your own.
Further to my internship experience and my reading on the web, I have concluded some information about index system.
1. What is Index System?
For example, when deciding whether a company is worth investing, you would see comments like "This company has too much loans", "It is not making any profits". However in data-driven industries (like finance), you need to support your decisions with intuitive evidence. Instead of raw business data, an index should be used for demonstration purposes (e.g. Asset-liability ratio).In the above example, the index of asset-liability ration addresses the company's debt.
In real world problem, complicate problem could not be resolved by using one single index (e.g. Evaluating a company's future profitability), therefore a set of indexes is needed to describe the data subject from different perspectives and lead to a informed decision, that is where index system plays a role.
2. How is index system useful?
When evaluating one's health condition, we tend to use the indicators like body fat percentage, body temperature, blood pressure, etc. Considering these indicators together, one's health status could then be determined.
It's the same when using index system to evaluate a company. When something goes wrong, the index system should be able to reflect this abnormality. Tracing down the problematic index that goes wrong, the current problem in business should be clear. And then the relevant department could have the right direction to improve on.
In summary, the index system should achieve the following: 1. Monitor business situation 2. Find problems based on problematic index 3. Evaluate business and guide the future work.
3. How to build an index system?
The general approach is as following: 1. Understand company's / department's Key Performance Indicator (KPI), define Level-1 Index 2. Understand the business, dismantle Level-1 Index and define Level-2 Index 3. Sort out business processes, dismantle Level-2 Index and define Level-3 Index 4. Using reports to monitor index system, update it accordingly
4. Common mistakes when building index system
- Not understand the KPI
- No logic relationship between indexes
- Dissembled indexes has no business meaning
- Little or No communication between data department and business department