Adapting and applying the balanced scorecard model in the contemporary business environment

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.

 

Exhibit 1: How strategy and the CSFs work together

 

 

 

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

 

Types of Performance Measures (PMs)	Number of PMs	Frequency of Measurement
Key result indicators (KRIs) give an overview on the organization’s past performance and are ideal for the Board as they communicate how management have done in a critical success factor or BSC perspective.	Up to 10	monthly, quarterly
Result indicators (RIs) give a summary on a specific area and they tell staff what they have done (e.g., Yesterday’s sales).	80 or so.  If it gets over 150 you will begin to have serious problems	24/7, daily, weekly, fortnightly, monthly, quarterly
Performance indicators (PIs) are targeted measures that tell staff and management what to do (e.g., number of sales visits organized with key customers next week/ next two weeks).
Key performance indicators (KPIs) tell staff and management what to do to increase performance dramatically (e.g., which planes need to be brought back on time urgently)	Up to 10(you may have considerably less)	24/7, daily, weekly

 

 

 

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.