In our previous blog we explored the origins of the balanced scorecard and how it grew from its early applications in the firm Analog Devices, via Kaplan and Norton before reaching global recognition.
Regardless of its exact origins, the fact remains that many organisations of varying shapes, sizes and industry sectors still rely on balanced scorecards to drive their operational performance. Let's consider some of the main takeouts and benefits of the approach:
Measure what you want to manage
Kaplan and Norton's 1992 article opens with the phase "what you measure is what you get" highlighting the need for a balanced presentation of both financial and operational measures. The model of cause and effect does make a big difference but organisations tend to try to shape their performance around the things that the think they can measure or the KPIs that are easily accessible or available in existing dashboard reports. Rather they should be basing their measurement on the outcomes they are trying to achieve. So we would advocate you start with objectives rather than measures - hence measure what you want to manage.
Scorecard measures aren't in isolation
When organisations originally implemented the balanced scorecard, it was assumed that each of the four areas were independent of the others. Over time, however it has become evident that the way they are ordered can be important. If you train your employees and build a pervasive culture of information sharing they’ll make your company perform better internally to deliver better outcomes for customers who will in turn buy more of your products and services.
Don't track too many measures
It’s important to choose a small number of the right measures to track. By focusing on one or two measures per area you'll be better able to focus on the things that matter most. All of your desired behaviours must be considered and a balanced set of KPIs produced that gives equal weight to all factors. Where you would like additional metrics these can be used to inform coaching and individual or organisational performance but should not be included within a balanced scorecard.
Be aware of strategy and operation
It's important to note that the balanced scorecard is not a strategy-development tool. For organisational performance to be more than the sum of its parts (or indeed the sum of its measures) the activities each scorecard area must be linked and comprehensively considered via your organisational strategy. Strategic themes will help your organisation reflect what must be done internally to achieve the strategic outcomes you are targeting; and provide a way of segmenting your strategy into several flavours or initiatives (transformation for example). The balanced scorecard can be useful when developing strategic themes, as a tool to crystallise what is important to your organisation (i.e. what outcomes you want to achieve) and the associated values, ideas, beliefs or actions that might be required to help achieve it. Your scorecard (particularly when developed at a Corporate level) can be shared throughout different departments and business units, and may stimulate individual business areas to define their own contribution to overall strategy execution (in achieving the balanced scorecard).
Get employees involved
It can be all too common to view the balanced scorecard as a corporate, top-down initiative that is all about demonstrating company performance to the internal business, or indeed outwardly to shareholders. Kaplan and Norton emphasise the importance of all employees understanding the strategy and going about their business in a way that contributes to its mission and objectives (and measures). To make this happen you need to communicate and educate your employees and make them feel a part of its implementation (and overall success). Personal and team objectives (that link to the balanced scorecard) also help to reinforce the individual benefits, alongside incentives and rewards based on shared performance.
Keep it fluid
A balanced scorecard, and the strategy it relates to isn't set in stone. As your internal or external operating conditions change your business strategy and measures may also change with it. Companies who get the most benefit from balanced scorecards implement a structured continual process for strategy management, supported by objective assessment of the measures and outcomes they are looking to achieve. Remember that if the strategy is inappropriate or invalidated a balanced scorecard approach should allow for organisational learning as it will be an indicator of where the strategy is underperforming. The performance measurement system will provide appropriate information to help management challenge and amend existing assumptions, so resist the temptation to through the balanced scorecard out with the old strategy!
Don't stop the process
We've seen a number of organisations who kick off a company-wide exercise involving leadership and management staff, workshops, roadshows and events to develop a new target operating model, transformation programme or cost saving initiative, only to halt the process (and the engagement) when it has been designed or initially implemented. We recommend that once developed and fully delivered into your business, you use the balanced scorecard to continue to improve performance and review performance levels and metrics over time. Stick with the process and get your performance management system working like a well oiled machine that is embraced by your employees.
Keep testing your strategy in real terms
There is very little benefit in setting yourself targets that are too easy to achieve (or aren't benchmarked against how your competitors are delivering). Likewise if your strategy isn't working there is no real value in delivering against the balanced scorecard that supports it. Use a range of analytical methods and scenario modelling to keep testing your thinking and use external thinking to avoid getting entrenched in your approach.
Be sure to get senior staff involved
As Kaplan and Norton have been keen to emphasise, a balanced scorecard can represent a fundamental change in your underlying assumptions about performance measurement. Senior managers (who have the most complete picture of your organisation's vision and priorities) must be involved in this to help put strategy and vision, not control, at the center. A scorecard should establish goals and assume that people will adopt whatever behaviors and take whatever actions are necessary to arrive at those goals, effectively pulling your staff toward the overall vision. As a result your senior staff and managers will need to be involved and stay involved to make it happen.
We'll write more about the value of a strong performance management system in some of our future blogs. Whilst you're here, why not have a look around some of our other blogs on Business Transformation, Change Management and Operations Management.