Is your business balanced?
Is your business balanced?
Connecting vision, strategy and performance indicators
The balanced scorecard is a great little tool that seeks to link the company vison and strategy to a means of controlling its implementation and execution.
Think of things like this, the vision is the destination, the strategy is the compass for getting you there and the key performance indicators are the points on the map along the way.
Vision and strategy and are the means of setting the direction, and in military terms, the means of setting direction is the command, but following the command we need some means of control. We need to know how we’re doing. What the balanced scorecard helps us do is control the execution of the strategy and the delivery of the vision… in a balanced and co-ordinated manner.
- To exercise command is to articulate an intention to achieve a desired objective.
- To exercise control is to monitor events to determine if we are on course.
Thereafter, it is in a function of command to decide what action to take if we are over or under delivering.
The accolade for developing the balanced scorecard approach goes to a couple of guys called Kaplan and Norton who following a paper in the Harvard Business Review published their book “The Balanced Scorecard” in 1996. However, many companies had been using dashboards and scorecards to track both financial and non-financial measures for a while. Indeed, there is a guy called Art Schneiderman, who actually worked with Kaplan, who published articles on similar subjects almost a decade earlier. Other management historians can trace back this type of “balanced” thinking even further back in time. However, as a result of the HBR papers and the book, Kaplan and Norton win the prize; they are seen as the creators of the concept.
Let's explore it in a little more detail.
The term “balanced scorecard” primarily refers to the fact that the focus is not entirely financial, the score card looks at four components, or perspectives, so, it provides a more rounded view of an organisation’s overall performance. The glue that holds the scorecard together is the company strategy and vision and the four components are:
- The financial perspective
- The customer perspective
- The internal processes perspective
- The learning & growth (organisational capability) perspective
The objective of which is to ensure that in executing a strategy there is a balance between these four major activities within a company, essentially, the methodology differs from others in that it seeks to provide an integrated strategic management system that is entirely inclusive of all the operating activities.
The key is, it is not “just” a scorecard, it is actually a methodology that uses a small number of financial and non-financial objectives to drive strategic initiatives. Each objective then has associated measures and targets corresponding initiatives or projects.
It is at this stage where the approach departs from other methodologies as it forces the company to think about how objectives can be measured first and only then, what initiatives can be put in place to satisfy those objectives. The advantage being it eliminates costly initiatives or projects that have little or no impact on the strategy.
Let’s now take a quick peek at the four perspectives, each of which, seeks to answer a specific question:
Most executives are judged by their level of financial success, so it's no surprise that finance is usually the first perspective. The company’s financial objectives and measures seek to answer the question – How do we look to our shareholders?
A key objective with any commercial organisation is to build an engine that pulls in and satisfies customers. The customer perspective is about customer satisfaction, and the customer perspective seeks to answer the question: How do our customers see us?
Internal processes perspective
The company needs to run the business developing activities and processes that deliver value to the customer, as a result, the internal processes perspective seeks to answer the question: What business processes should we excel at?
Learning and growth (organisational capability)
Given the world is subject to change, as are markets, products, services, customers and competitors; companies, and the people within them, need to be able to respond to those changes. The learning and growth / organisational capability perspective covers issues like; how well people perform, their skills, training, company culture, leadership, knowledge base, infrastructure and technology. The learning and growth perspective seeks to answer the question: How can we improve and create more value?
As a result, each perspective is likely to have a number of different components each with their own performance measure often referred to as key performance indicators (KPIs) which are used to determine how well the organisation is performing which inform decisions and actions that need to be taken to bring the measure back on course in order to meet the overall strategy and vision.
At this point we probably ought to say a bit more about key performance indicators …
Warning! Key performance indicators
It has been said that “organisations like processes but they adore metrics”… “their precision creates a satisfying illusion that they lack ambiguity and our ability to collect and collate them creates an equally seductive feeling of control” .
The point is, metrics should never be allowed to become (but often do) an end in themselves. As can be seen from the diagram above, vision and strategy sit at the centre of the balanced scorecard model. It is this you are aiming at. Metrics should never usurp the focus on the vision and strategy. Vision and strategy are the ends, metrics are merely the means to assess how far you've got and the need for corrective action or otherwise.
How many strategies and measures?
I remember reading a long time ago a report, I think it was by the American Society of Quality Management, that had concluded:
- The single best generic business practice that differentiated above average performers from the rest was business planning.
- The number of key strategic initiatives in a business plan should be kept to a minimum.
In essence, it is significantly better to focus effort on a small number of initiatives to get things done, where time and resources can be focused on influencing behaviours and outcomes to achieve the desired result, rather than to spread the resources so thinly that nothing of significance gets done.
As a general rule, we would suggest if your strategy had 3 objectives you have half a chance of succeeding in all 3, if you have 4-10 objectives you might succeed in 1 or 2. If you all aiming at more than 10 objectives you are unlikely to succeed at any.
Additionally, key performance indicators should be exactly that key. Certainly, there will be other measures, but these might be considered process or housekeeping measures and should not be confused with the strategic key performance indicators.
Focus on the vision - people make the decisions
So, we've now got the vision strategy key performance indicators and projects and the measures are telling us how well we're doing … what next?
If we take something like the humble thermostat in our living room our aim, our vision is to be comfortable. If we set the temperature at 21 degrees, we have set the command, we then need to monitor the results to see if we are achieving our aim. However, the critical issue is whether or not we feel comfortable, so, if we get the system to reach temperature and we are not comfortable what do you do? Well, you adjust the thermostat. While the temperature readouts are useful, we need to focus our aim on our vision rather than a slavish adherence to what the metrics are telling us.
Suppose that the scorecard reveals that revenues, margins or some other key metric have fallen it won't tell us why. It has been said that data is not information, information is not knowledge, knowledge is not understanding, and understanding is not wisdom. The numbers give us information and knowledge, but people need to have the wisdom to make the right decision.
If we hit the numbers but don't deliver on the strategy or vison, we have spectacularly missed the point. We should change the targets … we can't have the metrics tail wagging the strategic dog so the last thing we should be doing is patting ourselves on the back.
Additionally, organisations often take the view that all measures are useful. However, there are linkages between measures and some measures are more useful than others; some measures lead, others lag.
Leading and lagging measures
In addition to balancing the measures around the scorecard it is also important to balance leading and lagging measures. Most organisations focus on lagging measures simply because they are usually easy to measure and easily available, leading measures are often more difficult to measure, less absolute, and perhaps not as sexy.
As an example, if you wanted to lose weight a leading measure might be the number of times you go to the gym or your calorie intake, both pretty boring, but necessary if you want to lose weight. The lagging measure and perhaps a little more exciting is taken every time you step on the scale, but that’s the result of your efforts … it lags behind the effort you made … it in no way helps you know what to do to succeed. One of my favourite little one liner’s that encapsulates the difference between leading and lagging indicators is “you don't fatten a pig by weighing it”.
The balance scorecard approach gives the company an opportunity to create a ‘balanced’ view across the whole organisation and to define strategic objectives in the four perspectives together with the associated KPIs. The balanced approach provides a holistic view over the whole organisation giving top team a view of the domain of others with none taking Dominion.
However, as I am sure you’ll have noticed, there are only four perspectives. There are no perspectives for competitors, governments, regulators, no social or environmental perspectives. The dashboard of your car cannot tell you about weather conditions, traffic conditions, roadworks, road surfaces, traffic light sequences or accidents … the dashboard of your car, like the balance scorecard simply provides some information on how you're doing.
In an ideal world, prior to developing a balanced scorecard, you will have taken a peek at the outside world using tools like PESTLE, Porter and SWOT analysis to understand the external world and how it impacts you before you create your scorecard.
As discussed above, metrics, balanced scorecard or otherwise, provide us with information, interpreting the information gives us knowledge and understanding and taking the right action is wisdom. It is only with a clear focus on the vision and strategy that the top team can develop the necessary wisdom.
The real value of the perspective approach is that it provides a framework to describe a business strategy. It focuses on objectives and measures that both inform us about progress and allow us to influence activities to achieve the strategy.
. The Art of Action by Stephen Bungay
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