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.
|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
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
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
||Senior management commits to reviewing actual results.
||You can develop the measures with line people (rather than
HQ staff only).