Resources - Article
Balanced Scorecarding Works!
David Johnston, DoubleCheck Technician & Randy Johnston, Executive Vice President, K2 Enterprises
August 1, 2007
Balanced scorecards initially got a bad rap, but the thinking behind them works and can guide a business to make the right decisions. Scorecarding done correctly can translate the strategic and tactical goals of the business to action items that translate into success. Since we have a natural bias towards financial reporting and measurements, balanced scorecards create other key measures that meet business goals.
Balanced scorecards are designed to overcome three major problems with budgeting and performance metrics: 1) unsuitability of financial measures for assessing managerial performance, 2) inconsistency of operational plans and individual performance measures with strategic plans and 3) dysfunctional managerial behavioral induced by single measures of performance. Balanced scorecards can help organizations avoid gamesmanship and vetting of numbers that have been artificially manipulated to meet a particular goal, usually because compensation is tied to the performance number.
Balanced scorecards should be developed from four or five perspectives, and each perspective should have no more than four or five measurements for a maximum of twenty measurements. Four perspectives were named in the initial development of the balanced scorecard in the Harvard Business Review. The perspectives to include were: Financial, Customer, Internal Business, and Innovation and Learning. You should choose categories that make sense for your business that are measureable, and better yet, can come out of your systems almost automatically and without manipulation. Some of these measures will be changed from year to year, and many will remain the same.
Key Performance Indicators (KPIs) can be used as the components in a balanced scorecard. KPIs are developed by a business to measure the performance of key elements of its business processes. They are unique to each business, but can be generalized across industries. KPIs can be used by Business Intelligence systems to assess the present state of business and to help identify a course of action.
What are reasonable measures to have in your balanced scorecard and what are reasonable KPIs? We suggest the following: customer satisfaction measures, number of courses completed by employees, profitability, cycle time, manufacturing yield, 80/20 measures, quarterly sales growth, market share %, percentage of sales from new products, on-time delivery, and so on. You can measure your performance against yourself, a peer group, and nationally if you can get the data.
Standardized or reference KPIs can be obtained from vendors like SageWorks with their ProfitCents tool. There is reference data for small companies, public companies, banking as well as other specialized treatments of the reference data. For more information, visit http://www.profitcents.com/USEN/samplereports.aspx.
Scorecard tools are available at many levels of cost and complexity. We prefer technologies that use graphical presentation, but allow drill through capability to the numbers that make up the graphic. The entry point begins with Business Objects Xcelsius, some needed capabilities can be found in the mid-market with a product like FRx or Crystal Reports, and is represented on the high end by companies and products including Business Objects Business Intelligence Products, Cognos Enterprise Business Intelligence, Hyperion® System™ 9 BI+™ and SAS. CPA firms have products like ProSystem fx Practice Driver or Thomson Practice CS+.
We prefer balanced scorecards that present data in real time, but can live with data that is extracted on a regular basis, such as nightly or weekly. Clearly in larger environments there can be significant costs to process the data in real time, so running the balanced scorecards from extracted data warehouses or data marts is clearly better than what most companies have today. In smaller businesses, however, digital dashboards exist in most of the entry level products such as Peachtree by Sage, Intuit QuickBooks or Microsoft Office Accounting. Most of the small and medium business (SMB) products also have digital dashboards, sometimes at an extra cost.
You don’t have to have a fully ready balanced scorecard to start using the information effectively. In fact, preparing a few key indicators, and building the habits of using the scorecard is a wonderful start. Consider what measures the business results effectively, and start building your balanced scorecard today.
This page was last updated on August 12, 2007
August 1, 2007
Balanced scorecards initially got a bad rap, but the thinking behind them works and can guide a business to make the right decisions. Scorecarding done correctly can translate the strategic and tactical goals of the business to action items that translate into success. Since we have a natural bias towards financial reporting and measurements, balanced scorecards create other key measures that meet business goals.
Balanced scorecards are designed to overcome three major problems with budgeting and performance metrics: 1) unsuitability of financial measures for assessing managerial performance, 2) inconsistency of operational plans and individual performance measures with strategic plans and 3) dysfunctional managerial behavioral induced by single measures of performance. Balanced scorecards can help organizations avoid gamesmanship and vetting of numbers that have been artificially manipulated to meet a particular goal, usually because compensation is tied to the performance number.
Balanced scorecards should be developed from four or five perspectives, and each perspective should have no more than four or five measurements for a maximum of twenty measurements. Four perspectives were named in the initial development of the balanced scorecard in the Harvard Business Review. The perspectives to include were: Financial, Customer, Internal Business, and Innovation and Learning. You should choose categories that make sense for your business that are measureable, and better yet, can come out of your systems almost automatically and without manipulation. Some of these measures will be changed from year to year, and many will remain the same.
Key Performance Indicators (KPIs) can be used as the components in a balanced scorecard. KPIs are developed by a business to measure the performance of key elements of its business processes. They are unique to each business, but can be generalized across industries. KPIs can be used by Business Intelligence systems to assess the present state of business and to help identify a course of action.
What are reasonable measures to have in your balanced scorecard and what are reasonable KPIs? We suggest the following: customer satisfaction measures, number of courses completed by employees, profitability, cycle time, manufacturing yield, 80/20 measures, quarterly sales growth, market share %, percentage of sales from new products, on-time delivery, and so on. You can measure your performance against yourself, a peer group, and nationally if you can get the data.
Standardized or reference KPIs can be obtained from vendors like SageWorks with their ProfitCents tool. There is reference data for small companies, public companies, banking as well as other specialized treatments of the reference data. For more information, visit http://www.profitcents.com/USEN/samplereports.aspx.
Scorecard tools are available at many levels of cost and complexity. We prefer technologies that use graphical presentation, but allow drill through capability to the numbers that make up the graphic. The entry point begins with Business Objects Xcelsius, some needed capabilities can be found in the mid-market with a product like FRx or Crystal Reports, and is represented on the high end by companies and products including Business Objects Business Intelligence Products, Cognos Enterprise Business Intelligence, Hyperion® System™ 9 BI+™ and SAS. CPA firms have products like ProSystem fx Practice Driver or Thomson Practice CS+.
We prefer balanced scorecards that present data in real time, but can live with data that is extracted on a regular basis, such as nightly or weekly. Clearly in larger environments there can be significant costs to process the data in real time, so running the balanced scorecards from extracted data warehouses or data marts is clearly better than what most companies have today. In smaller businesses, however, digital dashboards exist in most of the entry level products such as Peachtree by Sage, Intuit QuickBooks or Microsoft Office Accounting. Most of the small and medium business (SMB) products also have digital dashboards, sometimes at an extra cost.
You don’t have to have a fully ready balanced scorecard to start using the information effectively. In fact, preparing a few key indicators, and building the habits of using the scorecard is a wonderful start. Consider what measures the business results effectively, and start building your balanced scorecard today.
This page was last updated on August 12, 2007
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