Keeping the score
Would a football coach impress you, if he blamed his team's defeat on the fact that the opposing team scored more goals? Even armchair television viewers expect a commentary on the game plan including where it broke down in terms of positioning, marking, lost possession, corners conceded and missed tackles. And with the development of modern electronic technology, these arguments can readily be supported by friendly graphics.
But it is surprising how frequently business performance is measured only in traditional financial terms. Financial numbers provide the score, but tell us little about the play. Analysis of non-financial data can provide the key to performance. Measuring and analysing these variables highlights areas for action.
The popularity of this approach has grown enormously since 1992, when Mr Robert Kaplan and Mr David Norton first published the concept of a balanced scorecard in the Harvard Business Review. They compared the scorecard to the dials in an aeroplane cockpit, which provide the pilot with complex information at a glance.
When the pilot observes discrepancies, corrective action can be taken. In the same way a business can be guided to reach its strategic targets by monitoring the key measures which ultimately drive its financial performance.
Based on their research into leading US companies, Mr Kaplan and Mr Norton devised a balanced scorecard template from four perspectives: financial, customer, internal business, innovation and learning. The four perspectives are common to all organisations, but the actual measures and the weighting attached to any measure will vary from organisation to organisation.
The financial perspective is the viewpoint of the shareholder. Usually goals are set around cash flow (for survival), profitability (for success) and sales/market share (for growth). The balanced scorecard does not supplant such measures, but rather complements them with others, which tend to be longer term in their focus.
The customer perspective views the business from the marketplace. Issues such as time, quality, performance and service, or cost are often addressed in many organisations, but bringing these measures into an overall scorecard is relatively novel.
The internal business perspective addresses the issue of efficiency. Organisations will lose business, if they fail to meet the customers' expectations in the many processes it undertakes. Over the last decade, in an era of TQM (time and quality management), re-engineering and world class manufacturing, benchmarking processes have become commonplace. Measures such as cycle time, productivity, employee skills may merit a place in the scorecard.
The innovation and learning perspective can often provide the greatest challenge in finding goals to measure. In a learning organisation, not only products, but systems and individual skills need constant updating. The difficulty is that in an era of rapid change, old targets may be moving very quickly and new targets may not be spotted.
What is so new about the balanced scorecard? Many companies have produced non-financial measures for years, but the balanced scorecard changes the way a company does its business. The old adage "what gets measured gets done" applies. Balance is one novel aspect. Organisations are forced to choose from a myriad of possible measures to produce a scorecard with 20 measures at most.
By attaching weights to these measures, management can focus on the key areas to improve performance. Without inclusion in a continuing scorecard it is too easy for the benefits of important initiatives to dissipate over time.
The other critical feature of the balanced scorecard is that its content is driven by the company's own strategy. How often are business plans, which have necessitated many years of work, allowed to gather dust on the shelves? Unless the strategy can be monitored in the short term, it is unlikely to be implemented in the longer term because short term budgetary considerations are likely to receive priority. The introduction of a Balanced Scorecard measurement system is not a very daunting task. Many appropriate measures are already in existence somewhere in the organisation. Others can be created with minor adjustments to the information system. Probably the biggest task is obtaining the views of the top management on what should be the most important measures, selecting those that are the most significant and obtaining consensus on the relative weightings.
Educating middle-managers as to their significance can also take time. The initial measures chosen may require changes or modification. However, with the support from the chief executive, the project is readily manageable.
To judge by the number of CEOs in Ireland currently introducing a balanced scorecard, the effort is worthwhile. Management meetings become more productive, when excuses to explain past failures are replaced by decisions to mould future success. If the coach can really transform the performance of the team, there should be fewer defeats and a happier fan-club.
Tim McCormick is a senior specialist with the Irish Management Institute.