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"The problem is that not everything that counts can be counted,

and not everything that can be counted counts."

 

The Balanced Scorecard & Performance Improvement:

Using the balanced scorecard to combine viewpoints of company success

 

By David Chaudron, PhD

 

Management often deludes itself that the “bottom line” is everything.  But as Polaroid’s millionaire inventor Edwin Land cautioned: “The ‘bottom line’ is in heaven !”

 

No manager can ignore the bottom line – the key indicator of what has happened (i.e., a “lagging indicator”).  But you need a “balanced scorecard” to measure not just how you’ve been doing, but also how well you are doing (“current indicators”) and can expect to do in the future (“leading indicators”).  Then you’ll have clear picture of reality.

 

Problems with just one measure of success

 

If you were to ask most anyone how they would measure company performance, they might give you a funny look and say, "How much money the company makes, of course! Isn't that obvious?" To a certain extent, they are right. Profitability, gross revenues, return on capital, etc. are the critical, "bottom line" kind of results that companies must deliver to survive. Unfortunately, if senior management only focuses on the financial health of the organization, several unfortunate consequences arise. One of these is that financial measures are "lagging indicators" of success. This means that how high or low these numbers go depends on a wide variety of events (talked about later) that may have happened months or years before and that you have no immediate control of in the present. Being in a plane falling from the sky is a bad time to realize that you should have done routine maintenance, and oh, by the way, filled it with gasoline!

 

Another of the consequences of just focusing on financial measures is that they have nothing to do directly with the customers who use your organization's product or service. Decisions may be made that help your organization financially, but hurt the long-term relationships with one's customers, who may eventually reduce the purchases or leave you altogether. We all may have been in the spot of paying for car repairs that we need, but we know that we are paying too much and will never go back to that service station again.

 

Instead of such a short-sighted, after-the-fact view of company performance, we need a more comprehensive view with an equal emphasis on outcome measures (the financial measures or lagging indicators), measures that will tell us how well the company is doing now (current indicators) and measures of how it might do in the future (leading indicators)

 

What is the balanced scorecard?

 

The balanced scorecard is just remedy for this kind of problem. First of all, the balanced scorecard is a way of:

 

·          measuring organizational, business unit or department success

 

·          balancing long-term and short-term actions

 

·          balancing different measures of success

 

• Financial
• Customer
• Internal Operations
• Human Resource Systems & Development (learning and growth)

 

·          A way of tying strategy to measures to action

 

Four Kinds of Measures

 

Under the balanced scorecard system, financial measures are the outcome, but do not give a good indication of what is or will be going on in the organization. Measures of customer satisfaction, growth and retention is the current indicator of company performance, and internal operations(efficiency, speed, reducing non-value added work, minimizing quality problems) and human resource systems and development are leading indicators of company performance.

 

Context and Strategy

 

Just as financial measures have to be put in context, so does measurement itself. Without a tie to a company strategy, more importantly, as the measure of company strategy, the balanced scorecard (or BSC) is useless. A mission, strategy and objectives must be defined, measures of that strategy (the BSC) must be agreed to and actions need to be performed for a measurement system to be fully effective. Otherwise, to use an American expression, the company is all dressed up but nowhere to go.

 

Finding the causes (drivers) of success

 

Once the company mission, strategy and measures have been defined and agreed upon, the next step is to understand fully the drivers(causes) behind movement (up and down) of your balanced scorecard. Without the specific knowledge of what drivers will affect your scorecard, your organization just might spend much time, money and effort and achieve very little.

 

These drivers fall into four categories:

 

·          Environmental - those factors outside the influence of your organization, such as governmental regulations, the economic cycle, local, national and global politics, etc.

 

·          Organizational - systems inside the organization such as company strategy, human resource systems, policies, procedures, organizational structure, pay, etc.

 

·          Group or departmental - work processes, group relationships, work responsibilities, work assignments

 

·          Individual - personality, management style, skills, behaviors.

 

A good method of outlining the causes and effects among these drivers is a flowchart or affinity diagram.

 

Creating SMART targets

 

After a full understanding the relationships among the drivers and between the drivers and measures is reached, the next step is to create a SMART target or objective. A SMART target is:

 

·          Specific

 

·          Measurable

 

·          Agreed upon

 

·          Realistic &

 

·          Time-bound

 

In reality, though, a SMART target is not enough. A SMART project must be created as shown in the following example describing not only the target, but the methods, timetables and resources needed to accomplish the task:

 

·          We will reduce the current cost-per-barrel by 20% by the end of April 2002 by:

 

·         Adding a 10% bonus to all employees salaries for every 10% drop of the cost-per-barrel

·         Moving to a completely asset- or area-based organizational structure

·         Creating a team to eliminate non-value-added steps from the administrative and operations functions, so that only critically essential functions are kept.

 

·          The implementation plans for these steps are attached, including personnel assignments, workloads, budget assignments, sequence of implementation, etc.

 

The equation

 

I look at the successful implementation of the Balanced Scorecard (BSC) as an equation:

 

Success = Measurement X Technique X Control X Focused Persistence X Consensus

 

Measurement

First of all, success is a function of what Measures you use. If you don't measure the right things and the measures don't reflect what is really going on, much will be done in an organization, but little will be accomplished.

 

Techniques

Second, what Techniques or methods also have a significant bearing on success. Techniques fall into two

 categories:

 

·          Large-scale, or major techniques:

Examples include restructuring, tying pay to measurements, putting added resources ($ and people), adding or changing customers or products, re-engineering processes, change of strategy, addition or change of core competencies, etc.

 

·          Small-scale, or minor techniques result in small changes in drivers:

Motivational speeches, problem-solving teams focused on technical issues, displaying graphs to employees on bulletin boards, etc.

 

The key to using these techniques is to realize that if major improvements in BSC measures are needed, then large-scale change techniques must be used. This facts usually causes great distress in the organization, because many think major improvements can be made only by tinkering with the organization, rather than making fundamental change. If management is willing only to use small-scale techniques, then they must expect only modest improvements in balanced scorecard measures.

 

Control

Another part of the equation is control. Once management has brainstormed a list of possible actions that might accomplish its SMART target, these actions need to be categorized into four levels:

 

·          Level 1 action: in control of action and effects are inside your organization

 

·          level 2: action: in control of action, but effects are outside your organization

 

·          level 3 action: not in control of action, but it affects your driver

 

·          level 4 action: not in control of action, but does not affect your driver

 

 

For management to be successful, they must

 

• Concentrate on level 1 & 2 actions

 

• Gain control of, or compensate for, level 3 actions

 

• And if they do not have sufficient control over the actions necessary to achieve their SMART target, then they must lower their expectations on what they can accomplish and either set a lower target, or abandon the target altogether. Otherwise, it just isn't SMART!

 

Focused Persistence

Focused persistence, otherwise known as project management, is another key in the equation. Project management includes having a timetable(beginning and end) for each task, periodic reviews of accomplishments, resources and people assigned to each task and most importantly, a sincere drive to accomplish the tasks. Use of such tools as Gantt charts, PERT charts, etc. are essential tools in this process.

 

Consensus

The last, but just as critical factor is consensus. The best laid plans, with a thorough knowledge of measures, drivers, and with sufficient resources will fail if there is not agreement enough among those with sufficient power to block BSC implementation. Key power brokers need to be involved in decision-making, and as many others as possible in the various stages and steps outlined here. Among some opportunities for involvement include:

 

·          Communicate with them on the importance and status of the project

 

·          As part of planning and decision-making

 

·          Implementation of action

 

·          Suggestions for improvement

 

 

In conclusion

 

Keeping in mind these factors when implementing the balanced scorecard will substantially increase your chances of success. Though every factor in the equation above does not have to be perfect, and can compensate for one another, all must be present to some extent for BSC to be implemented.

 

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Some links for your own research:

 

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David Chaudron, PhD, is managing partner of Organized Change:

Our skill is using our experience to help you zoom in on the indicators tied to your strategic objectives, indicators that clearly measure performance against those objectives.  We’ll also help you set “smart targets” – specific, realistic, measurable, agreed-upon and time-bound – so you get where you want to go.

Finally, you can count on us to stick with you as long as you need us at your side.  Because in the end, persistence and effective allies count, too.