What is gap analysis?

Gap analysis is a methodology that can help you assess the overall position of your business vs. your aspirations. 

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A gap analysis, according to openai, is the process of identifying the difference between the actual performance of a company and its potential performance. It is often used as a tool to improve organizational efficiency and effectiveness.Gap analysis can be used to identify areas where a company may be underperforming in comparison to its potential. It can also be used to assess the effectiveness of current processes and procedures.

Additionally, gap analysis can help identify opportunities for improvement and potential areas of improvement.There are a number of different methods that can be used to conduct a gap analysis. One common method is to compare the current performance of a company to its performance in the past. This can help to identify areas where the company has improved or declined in performance.

Another common method is to compare the current performance of a company to its competitors. This can help to identify areas where the company may have an advantage or disadvantage.Gap analysis can be an important tool for companies to use to improve their performance. It can help to identify areas where a company may be underperforming and identify opportunities for improvement. Additionally, gap analysis can help assess the effectiveness of current processes and procedures

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In particular, it allows you to understand:

• What are the gaps between the current state of your business and where you want it to be
• How to close these gaps with targeted actions that are able to address the causes of these gaps

You can perform gap analysis using this template.

Where can you apply the gap analysis methodology?

You can apply the gap analysis methodology to any key component of your business, including your:

• products
• business processes
• IT systems
• brand and market positioning 
• customer perception
• …

Why you should conduct a periodic gap analysis on your IT systems?

It is particularly important to perform periodic gap analysis on your IT systems, as they are subject to fast technical obsolescence or become insufficient, when business grows materially.

In both cases IT systems can become a bottleneck, as they are no longer sufficient to meet your internal needs and those of your customers and suppliers. 

This often leads to difficulties to keep up to your competitors and ultimately reduces business growth.

Conducting an IT gap analysis can help you: 

• Understand which parts of the IT systems are no longer “fit for purpose”
• Quantify what is the business impact of the problem
• Determine which are the priorities for replacement / upgrade of current IT systems

The methodology to conduct gap analysis on IT is somewhat similar to the general one (described below), but it is normally made more complicated by the presence of interdependencies among its systems and components and the core processes.

The detailed questions that you should answer in your gap analysis 

Assess your Current State

Your current state encompasses financial and non financial metrics (generally referred as Key Performance Indicators or KPIs), that are important for your business:

• Sales or customer acquisition metrics (e.g. new customers acquired per quarter)
• Retention metrics (e.g. Customer satisfaction / Net Promoter Score or percentage of customers retained)
• Productivity metrics (e.g. Revenues per Employee)
• …

In larger organizations, these metrics are typically included in the Balance Score Card, on which management teams are assessed.

Start with one of these KPIs to “test and learn” the gap analysis methodology:

• Select a metric
• Calculate the current value of the metric
• If possible, track how the metric has evolved in the past 3-5 years (in general it is easier to learn the methodology on financial metrics, as the raw data to calculate them will be in your accounting system)

Then repeat it for all metrics in scope.

Identify your Future State

Identifying your future state means setting a goal for each of your metrics in 3 to 5 years from now (it may be shorter once you learn how to apply this methodology) and possibly in one year from now.

How do you set these targets? How can you ensure that they are realistic and achievable?

• In entrepreneurial contexts and start ups, targets are often “aspirational” and based on the vision of the entrepreneur (e.g. I want to become a Unicorn within 5 years)
• In larger organizations, as targets generally become the objectives of the management team and are linked to compensation, they are set by comparison to other players in the industry, with a methodology called benchmarking or “best practices” (this methodology is also generally used for IT gap analysis)
• For this reason the metrics selected are typically financial and not too granular, so they can be potentially compared to those of “peers”, based on public or quasi public information. A good example could be

• Productivity measures, such as revenues per employee
• Sales metrics, such as revenue growth,…

Quantify the gaps and understand what causes them

The understanding of the gaps is the most difficult part of the gap analysis activity.

You can calculate the gap as the difference between a metric’s current state and future state, so this is actually quite straightforward!

You then need to understand the causes of the gap, in order to be able to address it, and this is the difficult part, as you need to dig deeper in the reasons why the gap exists.

For example: if your revenues per employees are 30% lower today than in the future state:

• Does this depend on pricing or volumes or both? 
• Or does it depend on the fact that you have too many employees?
• If so, why do you have too many employees?
• …

You will need to often go two or three levels down to identify the root cause and be able to address it.

• You can apply specific methodologies, such as root cause analysis, to explain the gap and what causes it.
• Do not move to the next step until you are very sure about your root causes! 

Definite how you plan to close the gaps and prioritize your efforts

Now that you have defined the gaps and their root causes, you will need to determine the actions to address these root causes in order to close them.

In order to improve the probability of success, you need to quantify the cost, the effort and time required to implementation the solution that will close the gap:

• If you do not have all the data upfront, at least conduct a top down assessment and cluster them into “High”, “Medium” and “Low”
• If you are really inexperienced in a certain business area (or IT), you may need to hire an external expert

You will then need to compare the benefits (business impact of closing the gap) to the costs (cost of closing the gap) and try to prioritize them on financial and non financial criteria. 

For example spending money to comply with new regulations may need to be prioritized, as you may get fined if you do not comply with them by the deadline (not due to the positive business impact that they bring!).

Remember! You may not be able to fix them all the gaps you found at once, as you do not have enough resources (financial, human, …) or management bandwidth, so also these elements should be considered in the prioritization exercise.

Once you have set the priorities, you need to create a comprehensive implementation plan.

Having a plan (with dates and milestones) is crucial to achieve successful implementation, as it can be monitored and corrective actions can be put in place, if required.

Learn more on how to develop an action plan,

Getting into action

Once the plan is ready, you will quickly need to move from theory to action: 

• Define the accountability of the team members on the different targets and corrective actions
• Agree methodology and frequency to report on the progress of the plan (weekly, monthly,..)
• Meet to discuss the progress, at least once a quarter (ideally once a month)
• Draw clear decisions and corrective actions at the end of each meeting
• Monitor their implementation at the beginning of the subsequent meeting

This is not easy, and will require a lot of time and effort, but you need to remain focused on the target: closing all the gaps and achieve your potential!