Using Balanced Scorecard KPIs To Achieve Your Business Vision

Many businesses use Key Performance Indicators (KPIs), and many managers agree that KPIs are an important element of sound management practice. But how do you choose and implement KPIs in a way that will take your business where you want it to go?

In 1996, Robert Kaplan and David Norton of Harvard Business School published their seminal book, The Balanced Scorecard (HBS Press). Perhaps less well known is the subtitle of that book Translating Strategy into Action.

And that is what the Balanced Scorecard really is all about - translating your business strategy into action. When your KPIs are a strong force driving every part of your business to achieve its goals, then you will have created a Balanced Scorecard.

Since its introduction in 1996, the Balanced Scorecard (BSC) has been widely adopted by business. About 50 per cent of Fortune 1000 companies in North America, and a similar percentage in Europe use BSC, but only 35 per cent of comparable companies in Australia use it.

Nevertheless, a survey of CPA members in Australia found that those organisations that do implement the BSC report substantial improvements in their profitability, competitive position and staff motivation. In particular it was reported that the benefits of the Balanced Scorecard are realised when it is transformed from a measurement system to a management one.

BSC is now widely recognised and used by larger businesses, government departments and defence organisations around the world and in Australia.

Experience indicates that small to medium enterprises (SMEs) can derive great benefit from the Balanced Scorecard for modest effort. The gathering of key performance information in smaller organisations generally is not complex, and the primary emphasis should be on the BSC management system leading directly to the realisation of business benefits.

Introducing BSC into an SME is therefore more about changing management culture and process and much less about IT. Often a very good start can be made using simple tools such as Word, Excel or Access to collate and report the required information. BSC implementation is therefore low cost and effective in an SME.

But before looking further at the implementation of BSC, answering the ‘how’ questions, let’s look first at the business benefits, answering the ‘why’ questions.

What does a Balanced Scorecard Organisation look like?

The Balanced Scorecard Organisation has a clear strategy: setting and achieving the organisation’s strategy begins with the senior management team.

But often it can be difficult for managers to judge what progress is being made towards achieving their strategic goals within the set timeframe if the strategy of the organisation is not clear.

The meaning of having a ‘clear strategy’ has several aspects. First, the strategy is clear if progress of every part of the strategy is measured in the organisation through one, or even several, Key Performance Indicators. The underlying philosophy is that “if you don’t measure it, you can’t manage it”. It might be worth noting here that not all performance measures are numbers, some are descriptive.

The second aspect of having a ‘clear strategy’ is that there is a clear personal accountability for the achievement of every aspect of strategy.

It is most desirable that there is an individual manager responsible for each strategic outcome, even though many people in the organisation may need to contribute, and the contributions may cross organisational boundaries.

The third aspect of having a ‘clear strategy’ is that everyone in the organisation understands it and contributes to it.

This means that senior managers shoulder their responsibility to communicate the organisation’s strategy through their departments, and devolve their accountabilities to their staff.

The process of communicating strategy and devolving accountability is a key aspect of what is meant by the transformation of the Balanced Scorecard from a Measurement System to a Management System.

The Balanced Scorecard Organisation is a Learning Organisation

Organisational learning has many aspects. The one I will discuss first is the means by which the organisation’s management processes encourage continuous improvement and progress towards its goals. The focus here is on the senior management level, although similar comments apply throughout the organisation.

For organisational learning to be effective, the senior management team needs to meet frequently, and the agenda for these meetings has to be consistent from meeting to meeting. In a Balanced Scorecard Organisation the agenda for these meetings is dominated by consideration of the Balanced Scorecard Report.

The Balanced Scorecard Report consists of the actual performance achieved for each KPI in the period, the target performance value for that KPI in the period, and a brief summary of the accountable manager’s action plan to remedy any variance.

Often, the Balanced Scorecard Report will include a metaphor such as a traffic light symbol to indicate the status of each measure, as well as a rolling twelve month summary, in graphical form where appropriate.

The senior management team meetings are short and effective since the agenda, the Balanced Scorecard Report, can be dealt with by exception. The traffic light metaphor can be rapidly scanned and there is little point in routine discussion of green lights.

Rapid learning occurs because trends in the organisation’s strengths and weaknesses soon become apparent. It becomes very clear which targets will be achieved within the time-frame and which will not, which management initiatives are leading to progress, and which are not. It also becomes clear where, and how much, of the organisation’s resources need to be deployed to be most effective.

Over time, the collection of Balanced Scorecard Reports becomes a history of the organisation, that can be learned from, rather than repeated.

But there is another related form of learning that the Balanced Scorecard Management Process promotes. From time to time the senior management team needs to pause and reflect more deeply.

If nearly all the measures in the scorecard are on target then perhaps the strategy is not ambitious enough. The bar should be raised! If, on the other hand some measures are consistently under performing then maybe some lateral thinking is needed, or a fresh approach, or even a more modest target.

And periodically, the entire strategy, and with it, the Balanced Scorecard, needs to be revisited as the business environment changes over time.

There are many other aspects to a Learning Organisation. The Learning Organisation trains its staff in the skills they need. It learns from its customers how to meet their requirements better, and learns from its employees how to improve its internal processes. All of these aspects of learning can be driven and managed through the Balanced Scorecard.

The Balanced Scorecard Organisation Manages the Future

Accounting KPIs are widely used in business but they are mainly of historical significance. While financial measures are an essential component of business management they tend to tell you what has happened already, last month, last quarter and last year. They are of some, but limited, value for predicting what next year’s balance sheet is going to look like.

The Balanced Scorecard Organisation uses accounting KPIs, but it also looks much deeper. It measures and manages staff motivation and performance, leading to better business process performance.

It measures and manages its business process performance, leading to lower costs and improved delivery to customers. It measures and manages the effectiveness of its marketing and the satisfaction of its customers, leading to greater volumes of business or larger margins. It measures and manages its financial and other resources to develop its capabilities better and to satisfy the growth and profitability expectations of its shareholders.

Staff, process and customer measures are the leading indicators of the health of the organisation and the direction it is taking. To manage the future, next year’s financial outcomes, the Balanced Scorecard Organisation measures the performance of its staff, the effectiveness of its processes and the satisfaction of its customers. It then puts into place the initiatives it believes it needs to bring all of those measures on to target, and then measures again.

Those with an engineering background may recognise this way of doing things as a ‘feedback loop’, or a ‘closed loop control system’. Whatever you call it, it’s the thing you need to do to keep your business under effective management control.

Establishing the control loop in your organisation transforms the Balanced Scorecard from being a measurement system to being a management system. The control loop is what ‘translates strategy in to action’, allowing the Balanced Scorecard Organisation to manage the future.

Implementing the Balanced Scorecard in your Organisation

Implementing the Balanced Scorecard is first and foremost about changing the culture of the organisation. IT support is introduced as needed to support the new culture, not to drive it.

In many smaller organisations the information required already exists, including accounting systems, sales tracking systems, customer relationship management systems, manufacturing systems, HR systems, as well as what is in people’s heads. Creating the first Balanced Scorecard Report is a matter of identifying and collating the information required.

Typically, a Balanced Scorecard Report for the Senior Management team will consist of 10 to 20 key measures that are critical to the success of the organisation. It will fit in to two or three printed pages.

Dr Peter Kemeny, Kemeny Consulting. Dr Peter Kemeny is the founder and CEO of Kemeny Consulting, Management Consultants. For further information please contact Peter on Phone: 0409 028 165 or Email: peter.kemeny@kemenyconsulting.com.au
First published: 12 October 2005.
Last updated: 9 November 2005.