Gap Analysis – Defined
Gap analysis is a process by which tangible performance of a company is compared with the performance that is expected by the company. It is used to identify if the company is meeting the expectations and that it is spending the resources efficiently.
A Little More About Gap Analysis
Gap analysis obtains the information about the current status and the target status of a company or an organization. A business management team can identify and use these gaps for analysis and to make a plan of action to propel the organization in the forward direction. Essentially, the gap analysis can help a company in determining whether or not it is going in the right direction of achieving its goals.
It was used extensively in 1980s (along with the duration analysis). As compared to a duration analysis, the Gap analysis is more difficult to use and thus less-commonly implemented. But in assessing exposure to different term structure movements, gap analysis is still used.
Four Steps of Gap Analysis
Gap analysis includes four steps that in the end present a compiled report that gives information about the areas that need improvement. It also leads to an action plan that can be used to accomplish better company performance. The four steps of gap analysis are – defining goals of the organization, benchmarking the present status of the organization, highlighting and analyzing the gap between the two states, and generating a gap report.
• Defining Goals – The first step of gap analysis includes outlining the goals accurately and ensuring that they are specific, can be measured, they are attainable and timely, and most importantly that they are realistic.
• Benchmarking – The next step involves measuring the current performance of the organization in terms of the outlined goals by taking into account the historical data.
• Analysis – The third step analyses the data from present and identify the reason behind the lagging performance of the organization when compared with the expected performance.
• Gap Report – The final step of this analysis is compilation of a report that discusses the quantitative data collected and the qualitative reasons for a performance below the benchmark. It also discusses the action plan required to achieve the goals of the organization.
Gap Analysis in Asset Management
In asset management scenario, gap analysis is used to assess the interest rate-risk or the liquidity risk. This excludes the credit risk in asset-liability management. The difference between the rate-sensitive assets and the rate-sensitive liabilities over a set time period is measured by the IRR measurement method. This works only if the assets and liabilities comprise of fixed cash flow. This becomes an important drawback of using gap analysis. It cannot deal in options as they have cash flows that are uncertain.
As mentioned above, gap analysis is very important for any organization. An example of this is Minnesota’s Spring Valley partnership with University of Minnesota on July 20, 2016 to carry out a gap analysis so that it can comprehend the future local business needs. The university would conduct a retail gap analysis and give a report about the impact of the business growth on the local economy. It would tell local business whether or not to take loans from local banks. This would result in an improved local economy as the number of businesses in the area will be improved.
References for Gap Analysis