Dr Spackman is a rare author. One who has discovered some ground breaking findings, practised them and has now shared his work with the world. The book is profound on a number of levels. Not only will it help you be more successful, as you yourself define success, but also happier, less likely to make repeat bad decisions to also helping you look in the right places for a loving relationship. This book will grow in importance over time. I predict it will, in my lifetime, be a multimillion seller. Well done Dr Spackman.

In this article, David Parmenter argues that the greatest danger of performance management is dysfunctional behavior and an organization with dysfunctional performance measures would function much better without them. Does your organization need this radical treatment? You can find out by simply using his checklist for assessing the damage poorly designed performance measures may be causing in your organization.

www.cutter.com/offers/parmenter.html

For anyone who wants to understand how you build high performing teams this is a must read book.  Interesting enough all the sporting gold mines are teams built on hunger and poor amenities.  It points out:

• the magic of the first 10,000 of practice being achieved ASAP
• great teams practice more
• providing comforts and great facilities maybe counter productive

Written by Rasmus Ankersen and accessible through this link.  I will be writing a more complete summary of the lessons for businesses in an article this year.

For anyone in business who wants to kick start a new product or service the tipping point is a must read book.  Written by Malcolm Gladwell and accessible through this link

Micheal Hammers article written in Spring 2007 MIT SLOAN MANAGEMENT REVIEW is simply brilliant  I rated in my top 10 articles I have ever read.

Open this link and print it today.Please read it asap.

Exhibit 5 for an example of this road test

Writer’s biography

David Parmenter is an international presenter who is known for his thought provoking and lively sessions, which have led to substantial change in many organisations. David is a leading expert in:  the development of winning KPIs, replacing the annual planning process with quarterly rolling planning, quick month-end processes and making reporting a decision based tool. 

His work on KPIs has received international recognition through; an award from the International Federation of Accountants, the popularity of his webcasts on www.bettermanagement.com, and the success of his KPI book.

He has speaking engagements as far afield as Auckland, Wellington, Sydney, Melbourne, Brisbane, Adelaide, Canberra, Perth, Darwin, Darussalam, Kuala Lumpur, Singapore, Johannesburg, Jeddah, Tehran, Prague, Rome, Dublin, London, Birmingham, Manchester and Edinburgh. 

John Wiley & Sons Inc have recently published two books titled “Winning CFOs: Implementing and Applying Better Practices” and “The leading-edge Manager’s guide to success – strategies and better practices”.  His “Key Performance Indicators – developing, implementing and using winning KPIs” is now in its second edition and is a best seller.

David has also worked for Ernst & Young, BP Oil Ltd, Arthur Andersen, and Price Waterhouse.  David is a fellow of the Institute of Chartered Accountants in England and Wales.

He has written over 50 articles for the accounting and management journals.  He has won two ‘article of merit’ awards from the International Federation of Accountants. (2007 and 2009).  His published articles titles include: “Quarterly rolling planning – removing the barriers to success”, “Throw away the annual budget”, “Beware corporate mergers”, “Implementing a Balanced Scorecard in 16 weeks not 16 months”, “Convert your monthly reporting to a management tool”, “Smash through the performance barrier”, “Is your board reporting process out of control?”  “Implementing winning Key Performance Indicators”, “Quick month end reporting” “conquest leadership- lessons from Sir Ernest Shackleton”  etc.

He can be contacted at parmenter@waymark.co.nz  or +64 4 499 0007. He has recently completed a series of white papers which can be purchased from his website www.davidparmenter.com

PBSs should avoid any linkage to share price movements

No bonus should be pegged to the stock market price as the stock market price does not reflect the contribution staff, management and CEO has made.

Only a fool believes that the current share price reflects the long term value of an organisation.  Just because a buyer, often ill informed, wants to pay a certain sum for a ‘packet’ of shares does not mean the total shareholding is worth that amount.

Providing share options is also giving away too much of shareholder’s wealth in a often disguised way. 

PBSs should be linked to a balanced performance

The balanced scorecard has offered another avenue to pay performance.  PBSs using a balanced scorecard are often flawed on a number of counts:

• The balanced scorecard is often based on only four perspectives ignoring the important ‘environment and community’ and ‘staff satisfaction’ perspectives
• the measures chosen are open to debate and manipulation
• there is seldom a linkage to progress in the organisation’s critical success factors
• weighting of measures leads to crazy performance agreements such as Exhibit3.

Exhibit 3: performance related pay systems that do not work

An alternative would be to link the PBS to the organisation’s critical success factors. See an example of an airline PBS in Exhibit 4.

Exhibit 4: How the performance related bonus would differ across teams (airline)

In this example all teams have the same weighting for the financial results.  Some readers will feel this is too low.  However when you research more on the balanced scorecard philosophy you will understand that the greatest impact to the bottom line, over the medium and long term, will be in the organisation’s critical success factors.

The operational team, at one of the airports, has a major focus on timely arrival and departure of planes.  You could argue that this should have a higher weighting such as 30%.  However, this team does impact in many other CSFs. This team clearly impacts the timely maintenance of planes by making them available on time, impacts the satisfaction of our first class, business class and gold card holders passengers.  The public’s perception of the airline is reflected in the interaction between staff and the public along with press releases and the timeliness of planes. 

Ensuring that staff are listened to, are engaged successfully, are constantly striving to do things better (Toyota’s “Kaizen”) is reflected in the weighting of “stay say strive” and “Encouraging innovation that matters”. There is no weighting for ‘accurate timely information which helps decisions’ because other teams such as IT and accounting are more responsible for this and I want to avoid using precise percentages such as 7% or 8% which tends to give the impression that a performance pay scheme can be a scientific based instrument.

The public relations team has a major focus of creating positive spin to the public and to the staff.  All great leaders focus in this area. You need not look past Richard Branson in this respect.  The weights for the PR team will focus them in the key areas that they can contribute.  By having innovation success stories and recognition celebrations staff will want to focus in this important area of constant improvement, which has been demonstrated so well in Toyota over the last couple of decades.

The maintenance and accounting teams focus is more narrowed. The accounting team has a higher weighting on “Stay say strive” and “Encouraging innovation that matters” to help focus their attention in these important areas. This will improve performance and benefit all the other teams they impact through their work.

PBSs should avoid having ‘deferral schemes’ for unrealised gains

All unrealised gains are just that. In many cases they are a mirage.  Whilst we need to reward those who got in first to a climbing stock we need to recognise that the extent of the gain is largely due to a bounce back.

Already some banks have adopted a deferral mechanism on unrealised gains.  Whilst this is understandable we need to consider likely the impacts:

• We do not want all stocks sold and bought back the next day as a window dressing exercise that dealers/brokers could easily arrange with each other.
• The financial sector is driven by individuals who worship the monetary unit, rather than any other more benevolent force.  This is a fact of life. A deferral system will be very difficult for them to accept. 
• Staff will worry about their share of the pool when they leave, the last thing you want is a team leaving so they can cash up their deferral pool while it is doing well.
• Dead wood may wish to hang around for future pay days out of their deferred bonus scheme

It is my belief that while some sectors may be able to successfully establish a deferral PBS the financial sector is fraught with difficulties.  I believe it would be better to focus on the other foundations stones especially the removal of super profits.

All PBSs should be tested to minimise risk of being ‘gamed’ by participants in the scheme

All schemes, where money is at stake, will be gamed.  Staff will find out ways to maximise the payment by undertaking actions that will often not be in the general interest of the organisation.

The testing of the new scheme should include the following:

• Rework bonuses paid to about five individuals over the last five years to see what would have been paid under the new scheme and compare against actual payments made.
• Consult with some clever staff and ask them ‘What actions would you undertake if this scheme was running?’
• Discuss with your peers in other companies better practices that work – this will help move the industry standard, at the same time as avoiding implementing a scheme that failed elsewhere.

PBSs should not be linked KPIs

KPIs are a special performance tool, it is imperative that these are not included in any performance related pay discussions.  KPIs are too important be gamed by individuals and teams to maximise bonuses.  Whilst KPIs will show; 24/7, daily or weekly how teams are performing it is essential to leave the KPIs uncorrupted by performance related pay.

In my book ‘Key Performance Indicators –developing, implementing and using winning KPIs’ I pointed out that not all measures were KPIs. In fact performance measures can neatly be broken into four types.

Certainly most teams will have some useful monthly summary measures which I call result indicators which will help teams track performance and be the basis any performance bonus scheme.

Communicating with staff using PR experts

All changes to such a fundamental issue as performance related pay needs to be sold through the emotional drivers of the audience.  With a PBS this will require different presentations when selling the change to the Board, CEO, senior management team (SMT) and the management and staff. They all have different emotional drivers. We need to note nothing is ever sold by logic e.g., remember that your last car purchase. 

Selling by Emotional Drivers: How a Car Sale is Made

Let us look how a second hand car salesperson sells cars using emotional drivers. Three customers over the same day arrive to look at the ‘car of the week’ that has been featured in the local paper. The first person is a young information technology guru, Y generation, with latest designer gear, baggy trousers part way down exposing a designer label on his shorts. The salesperson slowly walks up, all the time assessing the emotional drivers of this potential buyer, looking for clues, such as clothing, the car they arrived in, and so on. The opening line could be “I hope you have a clean licence, as I will not let you out in this beast if you have not. This car has 180 BHP, a twin turbo, and corners like it is on railway tracks.” SOLD.

The second person could be me, with my gray hair visible. The salesperson would say, “This car is five-star rated for safety, eight air bags, enough power to get you out of trouble, unbelievable braking when you have to avoid the idiots on the road, and tyres that will never fail you.” SOLD.

The third person, with designer clothing and bag, is addressed with “This car has won many awards for its design. Sit in the driver’s seat and see the quality of the finish. Everything is in the right place. I assure you that every time you drive this car you will feel a million dollars!” SOLD.

Thus, we need to radically alter the way we pitch the sale of the new performance related pay rules to the CEO, SMT, the board, and to the affected staff. We have to focus on the emotional drivers that matter to all these parties.  The emotional drivers will all be different.

Many change initiatives fail at this hurdle because we attempt to change the culture through selling logic, writing reports, and issuing commands via e-mail. It does not work. The new performance related pay scheme needs a public relations (PR) machine behind it. No presentation, e-mail, memo, or paper should go out unless it has been vetted by your PR expert. In addition I would also ‘road-test’ the delivery of all your presentations in front of the PR expert before going live.

(extract from “The leading-edge Manager’s guide to success – strategies and better practices”.  The book is available Amazon, see link on www.davidparmenter.com

 By David Parmenter

 Performance bonuses give away billions of dollars each year based on methodologies where little thought has been applied.  Who are the performance bonus experts? What qualifications do they possess to work in this important area other than prior experience in creating mayhem we currently have?

When one looks at their skill base one wonders how did they get listened to in the first place.  Which bright spark advised the hedge funds to pay a $1bn bonus to one fund manager who created a paper gain that never eventuated into cash?  These schemes were flawed from the start; ‘super’ profits were being paid out, there was no allowance made for the cost of capital and the bonus scheme was only ‘high side’ focused.

There are a number of foundation stones that need to be laid down and never undermined when building a performance bonus scheme (PBS) that makes sense and will move the organisation in the right direction.  These foundation stones are:

• §  PBSs need to be based on a relative measure rather than a fixed annual performance contract
• §  super profits should be excluded from a PBS as they need to be retained to cover the loss making years lying ahead
• §  the profits included in a PBS calculation should be free of all major ‘profit enhancing’ accounting adjustments
• §  all PBS, especially those in the finance sector, should take into account the full cost of capital
• §  any ‘at risk portion of salary’ should be separate from the PBS
• §  PBSs should avoid any linkage to share price movements
• §  PBSs should be linked to a ‘balanced’ performance
• §  PBSs should avoid having ‘deferral schemes’ for unrealised gains
• §  all PBSs should be tested to minimise risk of being ‘gamed’ by participants in the scheme
• §  PBSs should no be linked to KPIs
• §  PBSs need to be communicated with staff using PR experts
• §  PBSs should be ‘road tested’ on the last complete business cycle

Be based on a relative measure rather than a fixed annual performance contract

Most bonuses fail at this first hurdle.  Jeremy Hope and Robin Fraser, pioneers of the Beyond Budgeting methodology have pointed out the trap of an annual fixed performance contract. If you set a target in the future, you will never know if it was appropriate, given the particular conditions of that time. You often end up paying incentives to management when in fact you have lost market share. In other words, your rising sales did not keep up with the growth rate in the marketplace.

Relative performance targets measures are where we compare performance to the market place. Thus the financial institutions that are making super profits out of this artificial lower interest rate environment would have a higher benchmark set retrospectively, when the actual impact is known. As Jeremy Hope says “Not setting a target beforehand is not a problem as long as staff are given regular updates as to how they are progressing against the market.”  He argues if you do not know how hard you have to work to get a maximum bonus you will work as hard as you can.

Super profits should be excluded from a PBS and retained to cover the possible losses in the future

In boom times, annual performance targets give away too much.  These ‘super profit’ years come around infrequently and are needed to finance the dark times of a recession.  Yet, what do our ‘remuneration experts’ advise?  A package that includes a substantial slice of these super profits; yet no sharing in any downside.  This downside, of course, is borne solely by the shareholder.

Exhibit 1: retention of super profits

There needs to be recognition that the boom times have little or no correlation to the impact of the teams.  The organisation was always going to achieve this, no matter who was working for the firm.  As Exhibit 1 shows, if an organisation is to survive, super profits need to be retained.  If you look at Toyota’s great years the percentage paid to the Executive’s was a fraction of that paid to the State side Detroit ‘fat cats’, who had under performed.

This removal of super profits has a number of benefits:

• it avoids the need to have a deferral scheme for all unrealised gains
• it is defensible and understandable to employees
• can be calculated by reference to the market conditions relevant in the year. Where the market has got substantially larger, with all the main players reporting a great year, we can attribute a certain amount of period end performance as ‘super profits’.

When designing a bonus scheme the super profits component should be a deduction from the profits rather than create a ceiling for the bonus scheme.  If a bonus pool has ‘maxed out’ then staff will rather play golf than go hard to win further business.  The ceiling in Exhibit 1 is shown for illustration purposes only.

The profits included in a PBS calculation should be free of all major ‘profit enhancing’ accounting adjustments

Many banks will be making super profits in 2010 -2012 as the massive write downs are written back when loans are recovered to some extent. This will happen as sure as night follows day.

I remember a classic case in New Zealand where a merciless CEO was rewarded solely on a successful sale of a publically owned bank.  The loan book was written down to such an extent that the purchasing bank merely had to realise these write downs to report a profit in the first year that equated to nearly the full purchase price.

This activity is no different to many other white collar crimes that occur under the eyes of poorly performing directors.

One simple step you can take is to eliminate all short term accounting adjustments from the bonus scheme profit pool of senior management and the CEO.  These eliminations should include:

• §  Recovery of written off debt
• §  Profit on sale of assets

The aim is to avoid the situation where management in a bad year will take a massive hit to their loan book so they can feather their nest on the recovery.  This type of activity will be alive and well around the globe.

These adjustments do not have to be made for the loan team’s bonus calculations.  We still want them motivated to turn around non performing loans.

Taking into account the full cost of capital

The full cost of capital should be taken into account when calculating any bonus pool.  A trader can only trade in the vast sums involved because they have a bank’s balance sheet behind them.  If this was not so, then the traders could operate at home and be among the many solo traders who also play in the market. These individuals cannot hope to make as much profit due to the much smaller positions their personal cash resources facilitate.

Each department in a bank should have a cost of capital, which takes into account the full risks involved.  In today’s unusual environment the cost of capital should be based on a five year average cost of debt and a risk weighting associated with the risks involved. With the losses that bank shareholders have had to stomach the cost of capital should be set in some ‘higher risk’ departments as high as 25%.

With the current artificially low base rate, a fool could run a bank and make a huge bottom line. All banks should thus be adjusting their cost of capital based on a five year average in thier PBSs.

Any ‘at risk portion of salary’ should be separate from the PBS

In the finance sector it is traditional for employees to have a substantial share of their salary at risk.  The bonus calculation has been a very primitive calculation.

I propose that the at risk portion of the salary should be paid when the expected profits figure has been met, see Exhibit 2. Note that as already mentioned this target will be set as a relative measure, set retrospectively when actual information is known.

Where the relative target has been met or exceeded the ‘at risk’ portion of the salary will be paid. The surplus over the relative measure will then create a bonus pool for a further payment which will be calculated, taking into account the adjustments already discussed.

Exhibit 2: At risk component of salary

Those in the finance function may not be natural marketers of their own value to the organisation. But they can – and should – learn, as David Parmenter explains*.

David Parmenter is an international presenter and writer.  parmenter@waymark.co.nz

* This article is an extract from Winning CFOs: Implementing and Applying Better Practices published by John Wiley & Sons Inc.

Finance teams, and those within them, can never do enough marketing. Lack of marketing is the main reason many of them are not appreciated fully by management and why  finance team implementations often take longer and are less successful than anticipated.

 Yet the necessary marketing doesn’t usually come naturally: if accountants were good marketers, many may well have chosen a different career path.  So how can finance functions – and the individuals within them – market themselves better?

An active marketing programme

It is important that those in finance recognise these shortcomings and commence an active marketing programme that puts the finance team in the spotlight. As a starter I would recommend the following:

•         learn how to sell change;
•         network within your organisation;
•         give recognitions more freely;
•         get yourself a cluster of mentors;
•         contribute to your organisation’s newsletter and intranet;
•         celebrate more;
•         be great on your feet;
•         learn to see the woods for the trees; and
•         look a million dollars

Below, I deal with each of these in turn.

Selling Change

It is through your audience’s emotional drivers, rather than logic, that something is sold. This has been the pitfall of many an accountant’s selling pitch.

All major projects need a public relations (PR) machine behind them. No presentation, email, memo, or paper related to a major change should go out unless it has been vetted by a PR expert Even if you are a SME you can afford an hour or two with a local PR expert who are as important as your lawyer.. They will doubtless rewrite most of your content, so do not get offended.  Instead, observe their genius and claim all the credit when the sale process works – just as everybody else does!

Avoid writing long reports, as nothing was ever changed by a report; it is the sales presentation and follow-up action that make the change. Thus all your presentations should be road-tested in front of the PR expert. Your PR strategy should include selling to staff, budget holders, the senior management team (SMT) and the board.

You need to radically alter the way you pitch a sale to the SMT and the board. It should go as follows:

1. make sure you have a good proposal with a sound focus on the emotional drivers that matter to your audience;
2. focus on selling to the thought leader on the SMT and board before  presenting the proposal. This may take months of informal meetings, sending copies of appropriate articles, telling ‘better practice’ stories, and so on, to awaken interest. (It is worth noting, here, that the thought leaders of the SMT and board may not necessarily be, respectively, the CEO and chairperson); and.
3. Finally, having presold the change to the thought leader and then made the presentation, sit back and watch how the attendees  turn to listen to the thought leader’s speech of support.

Your proposal now has the best possible chance of a positive vote.

Networking

Only a fool believes that achievements speak for themselves -  finance needs to walk about more. Encourage all of the team to spend more time on proactive visits.  Spend time adding value to the senior management team by increasing their understanding of the business. Ways of doing this include: 

• use morning or afternoon break times for networking with budget holders and other stakeholders (You should  count working through a coffee break as a lost opportunity rather than a badge of honour);
• make the revenue forecasting process a good way to learn about what your major customers need from your organisation. A good place to start is interviewing your top five customers and assessing their demand for the next year;
• invite new staff from major subsidiaries or departments to call in when they are next in the head office;
• consider running events where the finance team organises a coffee break to raise funds for a local charity, with budget holders donating a pound or so to enjoy some hospitality in the finance offices. You will win points just by organising such an event; and

• ensure that you talk positively to others. Popular people are seldom known for their negative thoughts — so learn to keep yours private.

Finally, no matter how much pressure you are under,  remember to smile every time someone comes to your desk.

Give recognitions more freely

I have long been aware of the significance of recognition, but only recently did I realise that it is a fundamental foundation stone to all our relationships. The ability to appreciate and recognise all those we come in contact with defines us as a person and defines how successful, in the broadest terms, we can be.

Giving recognition freely makes us a person people like to work for and with, and one to whom they  naturally gravitate.

However, for some of us, recognising all the types of support we receive will be unnatural to begin with. You may need to count the recognitions you give, until ‘recognising’ becomes natural. And if you find it difficult to think of contributions in the first place, think of those who have provided guidance that has been helpful, those actions done by others that make your life easier and lastly the unwavering support and commitment by others.

Do not underestimate the power of the signed memo or letter recognising superior performance.

And remember, Giving recognition will  attract a more positive view of your own performance!

Have a cluster of mentors to support you

Over the last ten years I estimate that less than 10% of all finance people at my seminars and workshops have mentors – it is no wonder corporate accountants are so isolated

Jack Welch, author and ex-CEO of General Electric, talks about having a cluster of mentors.  One will never be enough.  Feeling that you have arrived and do not need a mentor is like a matador who turns away from the bull to the adoring crowd to show his bravery – a gesture of utter stupidity that will one day have painful consequences.

Mentors have many invaluable functions from helping you navigate tricky stages in your career, to advising on managing relationships, to steering you towards great career opportunities.

Contribute to the organisation’s newsletter and intranet

The intranet is the centre of the organisation’s universe so it is logical to treat this as important. Have informative intranet pages for the finance team, including success stories and the photos and short-form CVs of all of the team’s members.

Similarly, contribute to your organisation’ s newsletter. Treat it as a priority and not a chore. Ensure you have content ready for each issue.

Also, you need to ensure someone from the finance team is attending corporate functions.  Corporate accountants lose the plot when they work on a meaningless deadline instead of attending a corporate event where all the big players are.  Watch the events the marketing team attends and replicate: marketing is the past master of networking, after all.

Celebrate more

When  those in finance are seen working into the night, colleagues tend to wonder what they are doing. Surely they aren’t doing anything of value, since if they did valuable activities they would celebrate them?

 A celebration is a great communicator of success.  It tells others you have performed well. Yet corporate accountants often go from one deadline to the next deferring the celebration for a quiet time sometime in the future. If you tend to follow that pattern, you are missing a vital PR event.  Let’s face it the marketing team is celebrating all the time, telling everyone how successful it is.

Be great on your feet

Far too often those in finance short change themselves by under cooking their preparation and practice time before giving a presentation.

Being great on your feet is a skill you need to adopt before you can be effective. So it is best to start now. I will assume that you have attended a presentation skills course –  a prerequisite to delivering bulletproof presentations. The speed of delivery, voice levels, using silence, and getting the audience to participate are all techniques that you need to be familiar with and comfortable using

There are at least 25 rules for a good presentation (which I have discussed in detail elsewhere)[1], but below are a few for you to consider:

1.       At least 10 to 20% of your slides should be high – quality photographs, some of which will not even require a caption. Read Garr Reynolds[2] and Nancy Duarte[3] on this.
2.       Last-minute slide presentations should be seen as a career-limiting activity. You would not hang your dirty washing in front of a hundred people, so why would you want to deliver a poorly thought through and unpractised presentation?  Only agree to a presentation if you have the time, resources and enthusiasm to do the job properly.
3.       Use Guy Kawasaki ’s ‘10/20/30 rule’ for a sales pitch presentation.  Have ten slides, last no more than 20 minutes, and ensure all content is no smaller than 30 pt.
4.       Bring theatrics into your presentation. Be active as a presenter, walking up the aisle so that those in the back see you close up, vary your voice, get down on one knee to emphasise an important point; have a bit of fun and your audience will, too.
5.       Practice your delivery. The shorter the presentation, the more you need to practise. For my father’s eulogy, I must have read it through 20 to 30 times. It is the best speech I have ever delivered and the one I prepared the most for.

Learn to see the wood for the trees

Why is it that many hardworking corporate accountants, dedicated to the organisation, find themselves at best ignored or at worst ostracised by their colleagues? Some of the possible reasons are that they:

• are workaholics who make all other team members feel inferior;
• undertake tasks in such detail that they make work for their team members and colleagues;
• always complain about being overworked, albeit most of their excess workload is self- inflicted;
• treat every activity as if their life depended on it; and
• are too intense, often boring others with unnecessary detail.

 If you are one of these people, there is time to change before it is too late.

Look a million dollars

Look a million dollars and you will feel like a million dollars. Note that most of your organisation’s successful managers actually look successful. Observe them and create a look of ‘success’ that you are comfortable with.  Far too often I see corporate accountants apparently proudly boasting about how little they spend in this area. They are making a mistake. It could be said that quality business attire and a well groomed appearance are ‘tickets to the game’. 

Conclusion

It is no good moaning that the finance team is not appreciated by the organisation.  Working hard into the night, day after day unfortunately does not enhance one’s reputation.  To succeed you need to manage people perception of the finance team’s contribution. You do this through marketing the finance team’s and yourself.

The balanced scorecard (BSC) was one of the major breakthroughs in the nineties.  The groundbreaking work of Kaplan and Norton brought to management’s attention the fact that strategy had to be balanced, needed to be implemented and performance should be measured using a more holistic approach.

Unfortunately many performance-related initiatives have failed and the BSC has been no exception.  I set out below some of the ways I recommend to adapt and apply the BSC model to the contemporary business environment.

efine what KPIs are and what they are not

Many companies are working with the wrong measures, many of which are incorrectly termed key performance indicators (KPIs). Very few organizations really monitor their true KPIs as they have not defined what a KPI actually is.

An Airline KPI

This single KPI totally changed my understanding of KPIs and lead me to develop the seven characteristics of a winning KPI.  KPIs:

1.    Are nonfinancial measures (e.g., not expressed in dollars, yen, pounds, euros, etc.)
2.    Are measured frequently (e.g., 24/7, daily, or weekly)
3.    Are acted on by the CEO and senior management team (e.g., CEO calls relevant staff to enquire what is going on)
4.   Clearly indicate what action is required by staff (e.g., staff can understand the measures and know what to fix)
5.   Are measures that tie responsibility down to a team (e.g., CEO can call a team leader who can take the necessary action)
6.   Have a significant impact in the organization (e.g., affect more than one BSC perspective)
7.  Encourage appropriate action (e.g., have been tested to ensure they have a positive impact on performance and their dark side is minimal).

The first characteristic warrants an explanation. Financial measures are a quantification of the outcomes of an activity. We have placed a value to the activity.  Consequently behind every financial measure is an activity. I call financial measures result indicators; a summary measure.  It is the activity that you will want more or less of.  It is the activity that drives the $, Pd, Yen result. Therefore, as I argue in my book[1], financial measures cannot possibly be KPIs.

Source your KPIs from your the critical success factors of your business

The traditional BSC approach uses performance measures to monitor the implementation of the strategic initiatives and measures are typically cascaded down from a top-level organizational measure such as ‘return on capital employed’. This cascading down of measures from each other will often lead to chaos, with hundreds of measures being monitored by staff in some form of BSC reporting application.

I argue that critical success factors (CSFs) should be the source of all performance measures that really matter, the KPIs. It is the critical success factors, and the performance measures within them, that link daily activities to the organization’s strategies. The critical success factors impact all the time, 24/7 on the business therefore it is important to measure how the staff in the organization are aligning their daily activities to these critical success factors, see Exhibit 1.

I believe many strategic initiatives are monitored through normal project reporting methodologies e.g., acquiring new operations. These new initiatives will become ‘business as usual’ only when the new business or product is part of daily activities.  The strategic initiatives that impact directly on ‘business as usual’ can be managed better through monitoring measures in the CSFs.

Beware of the ‘dark side’ of performance measures

All actions, and measures, have intended consequences and unintended consequences. Hence, every measure can have a dark side, a negative unintended consequence.  In order to minimise the dark side you need to discuss measures with staff, “If we measure this what actions are you likely to take”. Pilot measures and observe behaviour and then tweak how the measure is used so that the behaviours it promotes are the intended ones.

As Dean Spitzer[2] says “People will do what management inspects, not necessarily what management expects”

Limit your measures – by using the 10/80/10 rule

I recommend a 10/80/10 rule for the number of performance measures in an organization. Exhibit 2 explains the four types of indicators and the suggested mix: about 10 KRIs, up to 80 RIs and PIs, and 10 KPIs in an organization. Very seldom are more measures needed, and in many cases fewer measures will suffice.

Exhibit 2: The four types of performance measures

For many organizations, 80 RIs and PIs will at first appear totally inadequate. Yet on investigation, you will find that separate teams are actually working with variations of the same indicator, so it is better to standardize them (e.g., “number of training days planned for next month” performance measure should be consistently applied across all teams).

Based on the seven characteristics of KPIs you will find 10 KPIs will suffice unless your organization is made up of many businesses from very different sectors; in that case, the 10/80/10 rule can apply to each diverse business, providing it is large enough to warrant its own KPI rollout.

Monitor 24/7, daily or weekly if you want to create change.

Show me a monthly performance measure and I will show you a result indicator, a key result indicator or a performance indicator.  It will never be a KPI! How can it be key to your business when you are looking at the measure well after the horse has bolted?

If you want something to happen, something to change then measurement has to be timely. 

To get a change a CEO needs to focus on the critical success factors, and act on the KPIs (activities that are happening now) that will align the appropriate behaviour.

Do not use the lead (performance driver) or lag (outcome) indicator split

I have lost count the number of times I tried to understand the lead / lag indicators argument until I realized my difficulty in understanding was due to flawed logic. 

Many KPIs are simultaneously both a lead and a lag indicator.  ‘Late planes in the sky’, a common KPI for airlines has clearly arisen out of past events and will have a major impact on future events – the late arrival will make the plane late in leaving.

Instead of lead / lag I recommend that you look at measures as either as a past measure (last week last month), current measure (yesterday’s or today’s activities – the here and now) or as a future measure (commitments made in the future e.g. date of next visit to key customers, number of CEO recognitions planned next week, next fortnight).

Next steps

The next steps you need to make to adapt and apply the BSC model are:

•         Start marketing the need to run a workshop to clarify the organization’s critical success factors.
•         Have a common understanding of the definition of a KPI and its characteristics within the organization
•         All measures should be vetted for a damaging ‘dark side’ an unintended consequence. 
•         Limit your measures to the 10/80/10 rule.

The BSC will be around for centuries to come we just need to implement it better.

David Parmenter is a speaker on and author of “Key Performance Indicators – Developing, Implementing and Using Winning KPIs” (Wiley). He would welcome you feedback. parmenter@waymark.co.nz, visit: www.DavidParmenter.Com.