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Balanced Scorecard, BSC and Performance Improvement
The Balanced Scorecard & Performance Improvement: Using the balanced scorecard to combine viewpoints of company success
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.
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.
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:
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:
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:
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: