Creating the Balanced Scorecard
Updated: Nov 10, 2021
Key Performance Indicators, or KPI’s for short, can be an effective way of tracking the overall performance of a business. We know that no single indicator provides a true reflection of performance. Similarly, a long and overcomplicated list can steer attention away from the areas that matter most. How then do we select the most critical measures?
The Balanced Scorecard separates into four key categories as we can see below:
· Internal Business/ Process
· Learning and Growth
These four categories bring together the heterogeneous aspects of a business and its performance into a concise set of performance indicators which senior management can track to identify areas for improvement. The effectiveness of any improvements can then be monitored to see if it has come at the expense of another.
An important aspect of the scorecard is that it removes control biases from traditional measurements which are focused more on actions that are required of employees and if they have been adhered to. The Balanced Scorecard focuses instead on the overall goals, strategy, and vision of a company.
It is generally accepted that a company should have a maximum of 25 KPI’s with 8 to 10 being optimal.
· 5 Financial
· 5 Customer
· 10 Internal Business/ Process
· 5 Learning & Growth
Financial performance indicators are concerned with the bottom line. How are we improving in factors such as profitability, growth, cash flow and shareholder value?
Too many sales organizations are solely focused on these aspects, but in today’s environment, many are skeptical of the financial perspective, particularly over the short term or from a backwards looking ‘lagging’ perspective, as they are unable to identify areas for value creation or improvement.
Think instead about ‘leading’ indicators that look to the company’s financial success in the future.
Many companies have a customer centric mission statement, take Amazon’s for example:
“To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavours to offer its customers the lowest possible prices.”
Kaplan and Norton suggest that customer concerns fall into four subcategories: time, quality, performance and service and cost. KPI’s within this section of the scorecard should work towards satisfying these.
Internal Business/ Process
Arguably the critical linkage between the intangibles and bottom line of customer and financial performance and often the area where we find the most KPI’s. What must we do internally to meet customer expectations and ensure strong financial performance? And what are the most important internal processes that impact these?
In a sales organization, this requires us to think about the areas in which we need to excel in order to retain or gain customers. Which aspects of our internal processes create the most value for our customers, and how can we standardize and measure those?
Learning and Growth
While thinking about the three factors above, you may have identified some areas which need to be invested in to achieve success. This category can help you to monitor the success of such initiatives. A company’s ability to innovate, improve and learn directly impacts its value. Without continuous learning, our endeavours to improve our operating efficiencies, launch new products or create more value for our customers would be baseless.
Have a think about what training or market and process research might be necessary to keep your competitive advantage intact and then develop some measures which foster a continuous evaluation of these factors.
Now that we know the categories that a KPI should fall within, we should note the characteristics which they should adopt. The most effective KPI’s satisfy the following characteristics:
· Aligned - Relates directly to corporate strategies and objectives
· Accountable - Someone accountable for defining, monitoring and control
· Predictive - Can give insight into how other KPIs may be impacted
· Actionable - Data and options available to enable action to be taken
· Few/select - One of a select few high value
· Understandable - Straightforward, can be explained. Not complex formula.
· Balanced - Forms a complete set, combined they track performance
· Transformative - Stimulates organization to change its thinking
· Standardized - Have a definition that is commonly applied
· Contextual - Can have targets and thresholds set to guide action
· Reinforcing - Reinforces the desired behaviours in the organization
· Relevant - Reviewed and confirmed as still relevant at current time
Try brainstorming some KPI’s within each category with your team, keep them consistent with the points above and the overall goals of your company and note how each interrelates as time passes. This comprehensive insight into the performance of your company is sure to help you make better business decisions towards problem solving and the future success of your team.