What Is Gap Analysis?
Gap analysis is the process companies use to examine their current performance with their desired, expected performance. This analysis is used to determine whether it is meeting expectations and using its resources effectively.
Gap analysis is the means by which a company can recognize its current state—by measuring time, money, and labor—and compare it to its target state. By defining and analyzing these gaps, the management team can create an action plan to move the organization forward and fill in the performance gaps.
[Important: The "gap" in gap analysis is the space between where an organization is and where it wants to be in the future.]
Understanding Gap Analysis
When organizations aren't making the best use of their resources, capital, and technology, they may not be able to reach their full potential. This is where gap analysis can help.
Gap analysis, which is also referred to as a needs analysis, is important for any type of organizational performance. It allows companies to determine where they are today and where they want to be in the future. Companies can re-examine their goals through gap analysis to figure out whether they are on the right track to accomplishing them.
Gap analysis was widely used in the 1980s, typically in tandem with duration analysis. It is considered harder to use and less widely implemented than duration analysis, but it can still be used to assess exposure to a variety of term structure movements.
There are four steps in gap analysis, ending in a compilation report that identifies areas of improvement and outlines an action plan to achieve increased company performance.
The Four Steps of Gap Analysis
The four steps to gap analysis are the construction of organizational goals, benchmarking the current state, analyzing the gap data, and compiling a gap report.
Step One: The first step is to accurately outline and define the organizational goals or targets, all of which need to be specific, measurable, attainable, realistic, and timely.
Step Two: In the second step, historical data is used to measure the current performance of the organization as it relates to its outlined goals.
Step Three: The third step is to analyze collected data which seeks to understand why the measured performance is below the desired levels.
Step Four: The fourth and final step is to compile a report based on the quantitative data collected and the qualitative reasons why the data is below the benchmark. The action items that are needed to achieve the organization's goals are identified in the report.
- Gap analysis is how organizations examine their current performance with its target performance.
- Gap analysis can be useful when companies aren't using their full resources, capital, or technology to their full potential.
- By defining the gap, a firm's management team can create a plan of action to move the organization forward and fill in the performance gaps.
Where Gap Analysis Is Used
Gap analysis can be used by organizations of varying degrees, from large corporations to small businesses. There is no limit to which areas can benefit from using this strategy including, but not limited to:
- Quality control
- Financial performance
- Human resources
- Employee satisfaction
Gap Analysis in Asset Management
Gap analysis is also a method of asset-liability management that can be used to assess interest rate risk (IRR) or liquidity risk, excluding credit risk. It is a simple IRR measurement method that conveys the difference between rate-sensitive assets and rate-sensitive liabilities over a given period of time.
This type of analysis works well if assets and liabilities are composed of fixed cash flows. Because of this, a significant shortcoming of gap analysis is that it cannot handle options, as options have uncertain cash flows.
Example of Gap Analysis
In 2016, Minnesota's Spring Valley announced it was partnering with the University of Minnesota to conduct a gap analysis to gain insight into future local business needs. The university was expected to conduct a retail gap analysis to quantify the impact of business growth on the local economy. The study was expected to be useful for business owners who wanted to obtain loans from local banks, thereby helping to increase the number of businesses in the area.