MEASURING IS A SCIENCE, SELECTING MEASURES IS AN ART.
THE BALANCED SCORECARD—A LEADING GLOBAL ENTERPRISE PERFORMANCE MANAGEMENT TOOL—BRINGS TOGETHER A COMPANY’S OBJECTIVES AND RELATED MEASURES ACROSS FINANCE, CUSTOMERS/ STAKEHOLDER MANAGEMENT, PROCESSES, AND ORGANIZATION AND TECHNOLOGY DOMAINS.
In today’s dynamic environment, a well-defined road map is critical for an organization’s success. The elements of this road map, including a company’s overall objectives/goals, should be based on external market conditions as well as internal capabilities and or past performance. Too many objectives cause confusion and serve as an impediment to success. So, as a thumb rule, a company should have 20-25 well-defined and clear strategic objectives. More importantly, these objectives should cover the entire spectrum of a firm’s operations across financial performance, customer/products, key internal processes, human capital, and technology. It is also critical to ensure that these objectives are SMART—strategic, measurable, achievable (or else they can demotivate), realistic, and time bound.
While such objectives are important, they -by themselves are insufficient.it is necessary to measure and track progress (good or bad) made toward achieving these objectives. To do so, for each objective, specific and relevant measures need to be put in place. These measures will help focus management and employee attention on factors that are essential for success. Similarly, simply laying out a long list of measures without associating them with objectives will not provide a holistic view of the company’s strategic goals and plans to achieve them. Periodic reporting of these measures will enable an organization to review its performance,reflect on what went right and what went wrong, and outline a clear action plan for the next performance period/cycle.
The Balanced Scorecard—a leading global enterprise performance management tool—brings together a company’s objectives and related measures across finance, customers/stakeholder management, processes, and organization and technology domains. It also facilitates periodical reporting for timely review, corrective actions, and most importantly, strategic decision making, thereby serving more as a strategy deployment tool and not just a simple management information system or a plain vanilla dash – board.
Now, as we all know, a company’s performance is ultimately driven by its employees. Therefore, measuring a company’s performance is only possible if the performance of its key employees is also measured. Individual performance measures are relevant measures defined for each position. As is often seen, being measured serves as a motivating factor. Am I being measured? Is my progress being tracked? Will my achievements be re -warded Aren’t these first few things that cross our minds when asked to execute a task at work? Yes they are. Assessment of our performance or measuring our performance drives us to do our best. It is therefore often said that “what gets measured, gets done.”
Having established the importance of measures and measurement, there are certain key attributes that must be remembered while defining and selecting these, both at the company and employee levels. The trick is not in identifying a long list but in identifying and selecting a handful, carefully aligned to, and having a direct impact on the objectives (no more than 2–3 per objective). The more the merrier rule does not apply here.
Often only financial objectives dominate a company’s decision making. The draw -back to this is that financial measures typically only reflect past performance.
These are frequently good lag indicators of performance. To drive future perfor – mance, preemptive indicators need to be considered. For example, the number of sale in a situvation where a firm’s goal is to grow sales, these lead indicators are more useful than only measuring total sales. For overall improved performance, a combination of lead and lag measures are essential. Typically, approximately 40% of the measures should be lead indicators and the balance lag indicators. This obviously could change depending on the growth stage of the company. A company in a high growth stage should ideally have more lead than lag indicators.
In addition, measurement of performance in only the financial domain does not give a complete view of firm’s progress in achieving its objectives. Non- financial aspects drive the financial performance of the firm, and there it is important to these. In my experience of approximately 100 scorecards, financial measures typically account for only approxmately 40% and non financial measures account for the balance.
While quantitative measures form the backbone of all measures, certain quali – tative measures should be considered. Many firms often use indicators,such as a customer satisfaction score, to refine their products/offerings and improve overall customer service processes. An – other example is employee satisfaction, which is a good lead indicator for cus – tomer satisfaction. “The more motivated and satisfied employees the more likely they are to service customers well.”
Need less to say. while some measu res may apply to all Industries. each industry ha.s a specific set of unique measures.For examp…revenue p&r arrival is a critical mttasure for hotels. average revenue per user is unique to the telecom industry, footfalls ror retail, tight firsttime(RFT) for manufacturing comnies. and non per· forming assets for financial services.
As an example, let me describe an in – stance where the art of selecting the right measures was imperative to help a client improve its performance. Our client, a leading home textile manufacturer, with approximately $1 Billion in revenue and 12,000 employees, had recently ex – panded its towel production capacity by 100% and also added a new sheeting plant. It had also recently reorganized to a functional organization structure, creating teamwork challenges. Amidst this reorganization and drastic expan – sion, management seemed to have lost focus on the overall objectives. The per – formance of the company was off on multiple critical parameters, including financial parameters.order book.prod uct quality, and productivity, creating significant enterprise risk.Cedar adressed these challenges by developing a corporate strategy map and scorecard to help focus the leadership team on the key challenges. Approximately 60 cas – caded scorecards were also developed to drive performance at the departmental level.
THE SELECTION OF MEASURES IS A DOUBLEEDGED SWORD, IF DONE INCORRECTLY IT CAN CREATE HAVOC AND DEMORALIZE EMPLOYEES. THERE IS ALSO NO ONE CORRECT OR RIGHT WAY TO CHOOSING MEASURES, IT IS SITUATION AND COMPANY SPECIFIC
For each of these scorecards. while the objectives were collectively decided given the market environment and company competences. the choice of measures was what made au the difference.Measures for each objective were carefully selected to ensure a balance between lead and lag.. For example.for the objective to improve cash flow, a measure on free cash flow wasintroduced, for the objective to profitably grow revenues. a leadindicator for sales and marketing in· novations was added.Any cost-effect ve innovationin the way products cou d be sold would ultimately contribute to overall profitable revenue growth.Simi· larly.an effort was made to include both qualitative and quantitat ve measures.To increase the average ticket size per customer.it was vitalto ensure and measure customer satisfaction. naddition.overall equipment efficiency. RFT, on time in-full,and conversion cost wereintroduced from a manufacturing standpoint.These measures enabled the leadership to focus its attent on on the key challenges and collectively deliberate solutons.The selection of measures is a doubleedged sword, if done incorrectly it can create havoc and demoralize employees. There is also no one correct or right way to choosing measures, it is situation and company specific. While measuring itself may be a science (it is usually based on formulas and data}. the process of carefully identifying,deliberating,and selecting measures is definitely an art. It is an art because it has elements of goodjudgment. bus ness experience.and technical knowledge.coupled with the right balance among lead. lag.non-financial and financial, and qualitative and quantitative.while obviously aligning to overall organizational strategic goals.
For a further conversation on this subject of Cedar View or how we may be able to help please email Amit Jain, Director, Cedar at amit.jain@Cedar-consulting.com.