What you measure is what you get. The organization’s measurement system strongly affects the behavior of managers and employees. The most fundamental reason to measure an activity is to improve it. Financial measures alone, like return-on-investment and earnings-per-share, can give misleading signals for continuous improvement and innovation – activities today’s competitive environment demands. Getting the metrics right is one of those “easy NOT to do” things. It’s not difficult, but does require some focused energy. The best news is that done well and embedded in the organization, it will pay major dividends.
Multiple Metrics are Needed to provide a Balanced Scorecard (BSC)
No single measure can provide a clear performance target or focus attention on the critical areas of the business. A balanced presentation of both financial and operational measures is needed. Made famous by Kaplan and Norton, and further improved by Schiemann & Lingle, The Balanced Scorecard links performance measures:
- Customers/Markets: Are we meeting customer or marketplace expectations?
- Financial: How do we look to shareholders?
- People: Are we deploying our human resources effectively, including employees, partners and suppliers?
- Operations: How efficiently are we running the enterprise?
- Adaptability: Are we responsive and innovative in our approach to changing requirements both internally and externally?
- Environment: Are we dealing with community, environmental and regulatory forces that define our playing field?
Context has the capability, working with management, to determine appropriate leading measures in the six key strategic areas, and to embed the balanced scorecard metrics into the organization and organization processes. Bringing metrics for these areas together in a single management report is crucial. It guards against sub-optimization. By forcing senior managers to consider all the important operational measures together, the balanced scorecard lets them see whether improvement in one area may have been achieved at the expense of another.
Measure Hard Results and the Soft Stuff Will Follow
What are key elements for implementation of a good Balanced Scorecard? Communication of strategic goals that are linked to individual objectives is critical. It allows organizations to link strategic goals with business unit targets, individual performance objectives and rewards and recognition. In addition, it allows companies to develop proper targets that verify and support your strategy. Secondly, BSC metrics must be integrated into the strategic planning and budgeting process. This step allows organizations to harmonize short- term financial performance with long-term strategic goals and growth opportunities. Finally, a solid set of BSC metrics must include a mechanism for continuous feedback – for strategic learning and for the occasion to adjust as new threats and opportunities arise.
Leading vs. Lagging Indicators
One clear advantage of BSC metrics is they allow us to effectively see the whole picture. We are all used to “lagging” indicators – i.e. the results we can measure after they’ve occurred – profit, market share, etc. They have a place, but are not useful for proactively making adjustments in season. “Leading” indicators, on the other hand, are ones you can measure in real time and are directly related to achieving the key business objectives. They require some thoughtful processing to identify as there is not a handy list that are “known to be right” for your business.
Know What to Expect – Focus on Implementation
Companies adopting and implementing a BSC model must determine what to measure in the 6 key strategic areas of customer markets, financial, people, operations, adaptability and environment. Then, they must embed the BSC metrics into the organization and its processes; link strategic measures to compensation, tie strategic measures to the performance management system, and track and manage strategic performance measures.
Although this sounds easy, it is not. Simplicity is often deceptive. This involves some hard questions, but a Balanced Scorecard of metrics is more than a measurement system; it is a cornerstone of strategic management.
The old adage, “Measure twice, cut once” reminds us how critical it is to measure effectively to both avoid making costly mistakes, and make the most out of our goals. Context is ready to help your company deploy metrics that will best assure positive performance. For more information, contact Context Partner, Mike Borel at email@example.com.
William A. Schiemann & John H. Lingle; Robert S. Kaplan & David P. Norton; William L. Simon; Tony Hope & Jeremy Hope; Peter F. Drucker