Balancing the Balanced Scorecard
Too many measurements, too much emphasis on financials, too few leading indicators, disregard for human resource capital, etc., etc., etc. All of these attributes represent fundamental reasons why so many Balanced Scorecards are "out-of-balance." One of the biggest problems to emerge with many balanced scorecards is excessive measurement. As Mark Graham Brown points out in his book Keeping Score, it can be worse to have too many measurements than to have no measurements at all. Brown recommends that the overall organization have no more than 20 measurements. Brown also suggests the following:
-Measurements should be based on the needs of stakeholder groups - shareholders, customers, employees, etc.
- Measurements should provide a mix of past, present and future.
- Measurements should flow from the top down to all levels of the organization to ensure linkage. Kaplan and Norton reiterate this point in their four-layer approach to deployment of scorecards (Organization > Operations > Shared Services > Individual).
One way of reducing the number of measurements is to combine several related measurements into one single index. Weights are assigned to individual measurements based on importance with a weighted average index serving as the metric within the Balanced Scorecard. One problem with the use of an index is the fact that individual measurements can get buried within the index. Therefore, the best approach is to have a few solid key indicators as opposed to an index that combines numerous indicators. However, if your scorecard is overloaded with measurements, indexing can help streamline the Balanced Scorecard.
Financial measurements will often dominate a Balanced Scorecard since many executives are addicted to earnings as a value-driver. One of the problems with financial measurement is that it is tends to be a lagging indicator; i.e. it looks back at past performance. Financial metrics within a balanced scorecard should cover three perspectives:Historical - How did we do last period?
Current - How are we doing right now?
Future - How will we do next period?
For example, the number of customer contracts executed is an indication of future revenues and thus, this would be a leading indicator as opposed to revenues for the quarter (lagging indicator). Measurements should also look at things from a long-term perspective. Long-term strategic thinking should flow into the Balanced Scorecard. Examples of long-term measurements are customer service, human resource development, and product innovation.
Another challenge within the Balanced Scorecard is Detail vs. Summary. How much detail to include depends upon what is required for decision making. Balanced Scorecards should provide sufficient information so that people can act on unacceptable performance. The ability to drill down and see what is going on is important for problem solving.
Balanced Scorecards should reflect a balance between generic types of measurements and measurements that are unique to the organization. Most organizations have similar generic measurements, such as financial and customer service. However, each organization is unique and therefore, balanced scorecards should include measurements that are specific to the organization based on what drives value. Measurements should relate to critical areas for future success, such as maintaining your competitive edge. For example, if your competitive edge resides in innovative products, then you will need to have some measurements focused on product innovation.
No one metric should dominate the scorecard; after-all it needs to be balanced in many areas (operations, customers, financial, etc.). You also need to change your measurements with changes in strategy. Strategies should be changing all the time due to marketplace changes, technological changes, etc. Finally, see if you can answer yes to the following questions about your Balanced Scorecard:
1. Do our measurements reflect the critical strategies of the organization so that we will grow and remain competitive in the future?
2. Everyone within the entire organization, from employee on up to CEO, is not evaluating more than 20 measurements each period within their balanced scorecard?
3. Measurements throughout the organization flow together and no set of measurements is floating alone, separate from the remainder of balanced scorecards in the organization?
4. We have a set of measurements that is balanced - Mix of past, present, and future; mix of unique and generic; balance within categories (operations, customer, human resources, financial, etc.); and balance between detail vs. summary.
Once a strategic map has been developed, balancing the Balanced Scorecard is perhaps the most challenging goal in building the scorecard. Indexing, time dimension, integration from top to bottom, and an emphasis on stakeholder groups can all help ensure that your balanced scorecard is balanced.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756