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BEST PRACTICES - Balanced Scorecard

The objective of a Balanced Scorecard is to measure key non-financial, forward looking or predictive metrics (while of course still providing more traditional financial measures). Some companies strictly adhere to defining measures for all four quadrants of the classic Kaplan & Norton model - Financial, Process, Customer, and Innovation/Learning. Other companies have loosened the definition, and created performance scorecards to capture non-financial or operational metrics. The real innovation with this approach is that it gets managers to think beyond purely financial measures.

If Implemented Well If Not Implemented Well
Can increases the degree of foresight or predictiveness provided by the plan and the planning process.

Can make the plan, and planning, more operationally relevant.

Managers more likely to become willing participants in the planning process, more likely to embrace planning as a tool to help them run their business.

Planning not viewed as "just a finance thing."

Since operational metrics are tracked along with financial data, variance explanations are more meaningful, and insight into the business is increased.
Actual data for each metric can be difficult, sometimes even impossible to reasonably track.

Actual data is sometimes rejected as not being accurate. How many times have you heard "that's not my number" with financial data? It can happen with non financial data as well.

The performance card measures must be very, very carefully selected, otherwise positive movement in the selected metrics may not improve sought after results after all.

The linkages between the performance scorecard measures and financial results must be made explicit, otherwise improvement in these metrics may not translate into improved shareholder value.

The interrelationships of the selected measures need to be well understood - and the efforts to improve them well coordinated - otherwise the organization will be pulled in different or even competing directions.

Can this work for my company?
This might surprise you, but in some respects your company is already employing a Balanced Scorecard. Consider this. Do operational managers look at productivity measures? Do human resource managers track retention rates? Do marketing managers try to understand if their customers are satisfied or not? Of course. In that respect your company has a balanced scorecard (however informal, and poorly communicated it may be).

The trouble is that these measures have been largely left out of the formal planning & management reporting process. In fact, for most companies, the annual plan produces a projected income statement, and that's it.

The beauty of a Balanced Scorecard approach is that it integrates important non-financial measures into the planning process. Instead of merely negotiating a set of financial outcomes, the process focuses on what the drivers of success in the business are, and how they are measured. Targets can be established for these measures, and projects and initiatives developed to achieve them. The plan, or budget, then becomes an outgrowth of these discussions. Yes, an income statement is still produced at the end of the process, but now its one that's grounded in operational reality, where every projection has a basis in action.

We don't necessarily recommend implementing the textbook version of Balanced Scorecard since the effort required is very high, and the results have been mixed. Instead, we often recommend a company relax the definition a bit and consider a Performance Scorecard that captures the key drivers of the business.

Our approach usually begins by facilitating a meeting with senior management in which they define the no-nonsense, half dozen things that drive success in the business. As an example from a recent engagement, one such driver was identified as "Innovation". Next, we define specific measures for each driver. Using the same example, the measure for "innovation" was defined as "The Percent of Sales Coming From Products Introduced in the Last Two Years."

Using a tree diagram, these measures are then broken down one or more levels based on a number of considerations. Different functional areas and departments can then take these measures and break them down even further based on their responsibilities. Next, both long term (strategic) and annual targets are established for each driver of success. Projects and initiatives are developed to achieve them, and resources are allocated during the budgeting process accordingly.

Keep in mind that there is a people side to all this. Every company has some pivotal operational numbers. What are your essential numbers? Operational numbers by definition vary from one industry to another. These days, plenty of companies make a point of posting some of these numbers. All this is great, as far as it goes. Sure, employees will keep an eye on them, but the tabulations are as likely to be a source of resentment – Big Brother is watching us – as they are a source of inspiration. If people don’t understand why they’re supposed to lower the defect rate or take those calls faster, pretty soon they’ll stop caring. Like traditional employees, they’ll do just what they have to get by. So you'll need to build some business literacy in your organization, so people understand the connections between operational figures and the financial measures that are critical to your business.

You may want to consider implementing a performance scorecard if your company meets this criteria:

You've got the management reporting systems to handle it.
You can integrate the performance measures into the planning process.
Senior management commits to reviewing actual results.
You can develop the measures with line people (rather than HQ staff only).