Metrics, Scorecard, KPIs

Have you ever thought why balanced scorecard has so many critics?  Some managers claim that this system has become an inseparable part of their everyday routine in the company while others say that balanced scorecard is just waste of time and money.  Everyone has his own reasons to say so since the most successful world companies have gained competitive advantage with balanced scorecard while others failed to implement this popular strategic management tool.

There are various reasons for BSC failures.  One of the most common mistakes is perception of balanced scorecard as of some magic tool that can solve any business problems.  Some managers view balanced scorecard as a project which has its start and end date.  In fact balanced scorecard is a continuous process.  It is either implemented and becomes a part of company’s everyday life or it is use in an inappropriate way.  In such a case balanced scorecard becomes the most expensive managerial tool.

How to prepare for BSC implementation

Some companies have reported to use balanced scorecard as a extensive database or an accounting tool.  The reality is that balanced scorecard should initiate changes in the company.  Implementation of balanced scorecard starts with discussion.  One of the most common mistakes is that this discussion is held on the top level of the company only.  Of course, without any doubts, top managers are experts and strategic management, and they know much about markets the company operates in.  But the power of balanced scorecard is ability to transfer strategy into action and that’s why it is necessary to communicate strategic and operational management, this is where heads of departments and even ordinary employees can help, and that is the reason why they should participate in discussion of balanced scorecard.

Most common BSC mistakes

Sometimes discussion of balanced scorecard is restricted to the first seminar or presentation of balanced scorecard project and strategy maps to the company personnel.  Employees start to think that this is just another unnecessary control tool that will require them to spend their time and efforts.  Such use of balanced scorecard equals to lying to yourself.  BSC will never work unless every employee in the company is properly motivated to use this tool.  Company personnel should be aware of their contribution to implementation of strategic goals.  And do not forget about proper motivation since employees must have their reasons to use balanced scorecard.

Formation of BSC teams that will initiate discussion of balanced scorecard and development of strategy maps prove to be one of the most important stages in BSC implementation.

Why did some companies fail to implement strategic goals?  There are various reasons and explanations.  Very often top managers and business owners criticize balanced scorecard.  They blame this system claiming that balanced scorecard just doesn’t work and this is just a waste of time and money.  Sure, they have their reasons to say so.  But in most cases these companies just use the wrong concepts and approaches to implementation of balanced scorecard.

Just imagine a house with a poorly build foundation.  Sooner or later such a house will inevitably collapse.  The same concerns balanced scorecard.  Once the company top management starts making the wrong steps they are doomed to fail.  So, what is the first step in implementation of balanced scorecard?  First and foremost it is imperative to get personnel involved in discussion of balanced scorecard and then in implementation of this system in the company.

What makes an effective BSC discussion?

It sometimes happens that company top management hires external advisors, forms a working group which consists of external advisors and top managers of business owners of the company, develops strategy maps, and then presents them at the seminar or a meeting.  And that’s it!  They think the work is done.

In such a case ordinary personnel of the company does not understand why they should use balanced scorecard.  There’s few of them actually know something about balanced scorecard.  In the worst cases, employees view balanced scorecard as another system to control them.  As a result of this causes resistance and opposition.  Strategy maps will become useless drawings as they will never come down from the top to the level of ordinary employees.  One should remember that implementation of balanced scorecard is quite expensive, and it requires much time and efforts of personnel.

Create an effective BSC working group

That’s why when starting discussion of balanced scorecard and strategy maps it is vital important to get ordinary personnel involved.  Everyone in the company should have his own opinion on balanced scorecard, and maybe some suggestions as to company goals and strategies.  Of course, external advisors possess very valuable knowledge and experience which may and must be used in implementation of balanced scorecard.  But ordinary employees know everything about company customers, current problems inside the company.  Most of them have their own suggestions on use of IT solutions, optimization of business processes etc.  The company is the people who work there, and implementation of balanced scorecard is much about acceptance of this system by most of the personnel.

The concept of balanced scorecard implies full involvement of personnel in development of strategy and everyday maintenance of this revolutionary strategic management tool.  It’s not an easy task to motivate personnel especially when dealing with long-term goals.  How can top management explain ordinary employees the benefits of BSC?  Even if personnel is aware of BCS advantages why should employees spend their personal working time for balanced scorecard?  These questions are sometimes very difficult to answer.  By the way, lack of motivation and rejection of balanced scorecard by ordinary employees is one of the major reasons why this system fails.

Sometimes, business owners and top managers think of balanced scorecard as of some magic tool.  That’s why they don’t consider it necessary to get personnel involved in strategy development.  Moreover, company management imposes a strategy from top to the bottom.  It often happens that top management of the company or business owners do not know everything they should know about company customers, current problems inside the company etc.  But ordinary employees, front line managers and sales people meet with customers every day.  They spend the entire working day in office and thus they know what can be improved to have higher performance.  That’s why many creative ideas and suggestions come from the lowest level of the company.

If personnel either doesn’t understand strategic goals or rejects them all attempts to implement balanced scorecard in the company will fail.  Moreover, very often employees consider balanced scorecard to be just another tool to control their work.  This causes resistance.

Balanced scorecard should become philosophy for the company.  Once the company manages to make a successful use of balanced scorecard there is no way back.  It is possible to say that balanced scorecard is implemented once and forever.

Many companies think they are using balanced scorecard in a proper way.  On the one hand it would be wrong to say about wrong ways of BSC use.  But it is not very reasonable to use balanced scorecard as Accounting System or a system of managerial control.  It was designed to be something bigger for the company.

When motivating personnel, it is important to introduce a clear motivation system.  If you think that financial motivation is the only available option you are mistaken.  There are many nonmaterial rewards that will encourage high performance of individual employees.

Keep in mind that rewards must be paid both for achieved results and for something that was done to achieve such results and future.  At the same time one should keep balance of rewarding for lagging and leading indicators.  For example, if sales manager receives reward for number of made calls he may forget about the sales themselves.  At the same time making the maximum number of calls to customers is very important as it usually results in sales growth.

The wrong use of balanced scorecard and implementation of in comprehensive reward system will make any companies suffer enormous losses.  Balanced scorecard received a huge portion of criticism and many of the critics are top managers and business owners who made serious mistakes in BSC implementation.

There are many success factors in implementation of balanced scorecard.  First and foremost, company top management should have a true faith in this system.  Moreover, top managers and business owners have to show this faith to ordinary personnel.  If company management is ready to risk their money in order to implement balanced scorecard and start changes in their organization, this means that they truly believe in success and in balance scorecard as a revolutionary strategic management tool.  Companies that have successfully implemented balanced scorecard will never part with this system.  Indeed, balanced scorecard is not just another managerial tool. This is philosophy.  Having improved indicators in the dashboard does not mean success.  Successful implementation of balanced scorecard is understanding that your company or your business will not be able to survive without BSC.  Successful implementation of balanced scorecard means that it is impossible to make any steps back.

Reward system will drive company to success

But is it enough that only top management believes in balance scorecard?  Of course not!  Successful implementation of balanced scorecard implies involvement of ordinary personnel.  Moreover, employees it all company levels must to dissipate in development of strategy and strategy maps.  This is explained by the fact that, for example, front line sales managers have the most complete information on company customers, there requirements, conduct patterns, demands, new trends in the market etc.  These people are so much closer to the real business world than top managers and their high offices.

But how to get ordinary personnel involved in development of strategy maps and maintenance of balanced scorecard?  Employees must be motivated.  That’s why successful use of balanced scorecard implies introduction of a comprehensive and fair reward system

Financial and non financial reward types

Employees must be financially interested in higher performance.  Better BSC results should bring benefits for employees.  For example, a sales manager should know how his job contributes to implementation of company strategic goals, as well as how his performance can affect his salary.

It should be noted that reward and bonus systems can have nonmaterial character.  For example, top performing employees may be offered free learning courses, participation in any interesting business seminar, additional day offs etc.  Experience shows that nonmaterial rewards a greatly valued by employees.

It is also very important to reward employees for their contribution to implementation of strategic goals but not only for improvements and Balanced Scorecard perspectives.  For example, number of calls made to customers does not automatically mean sales growth.  Thus, it would be logical to encourage employees for increased in sales but not for their attempts to improve these results.

Get yourself swot analysis guide

Nowadays there exist a great variety of strategic management tools.  Some of them have rather theoretical nature while others urge companies’ top management for action.  The well-known Balanced Scorecard System has proved to be one of the most effective strategic management tools, but at the same time can be used in combination with other methodologies of strategic management.  SWOT analysis is a popular method of defining strategic goals through evaluation of current condition of the company.  SWOT stands for strengths, weaknesses, opportunities and threats.  These are the most important aspects for the company.

AKS-LABS has released a new product – SWOT analysis guide which will be helpful learning material for top managers, strategic planners and all those who are interested in the issue of strategic management and SWOT analysis in particular.  This package includes templates on SWOT analysis and balanced scorecard.  You will learn that these two strategic management tools can and should be used in combination.  Besides there is a comprehensive SWOT analysis guide which offers much valuable information on this methodology of locating company strong and weak points.  You’ll also find answers to the most acute and burning questions about SWOT analysis.

SWOT analysis guide is available in free and paid versions.  Get the free version from this page or purchase the full version here.

Measurement of business seems rather easy to first glance.  Indeed it seems like all you have to do is to evaluate financial indicators and perform simple mathematical operations.  The company may be earning good money, hire new employees and even develop and introduce new products.  But what about the strategy?  Is the company doing OK in terms of implementation of strategic goals?  As the company strong enough to withstand tough competition?  Is the company ready for challenges?  Of these a very important questions which may be not acute for a company at a present time but they will become extremely important in future.

That’s why, strategic goals and future vision are very important for any company operating in a highly competitive environment.  Strategic vision is about forecasting and predicting possible problems and obstacles.  Future vision is about outwitting of competitors.  It is a real art to solve problems even before they occurred.

Any organization faces two challenges: evaluation of current performance and communication of strategic management with operations.  It is very important to know that the company is doing the right things to reach strategic goals.  Moreover timely introduction of changes to the strategy, goals and measures will make it possible to correct mistakes before the lead to negative consequences.

BSC implementation stages

Balanced scorecard is a must have tool for any organization pursuing strategic goals.  Through evaluation of key performance indicators balance scorecard will tell much about past and future events for the company.  Financial indicators characterize something that has been already done, while nonfinancial ones will tell pretty much about what will happen in future.  Evaluation of intangible assets and nonfinancial indicators is the greatest advantage of balanced scorecard.

Major BSC mistakes

Key performance indicators are grouped in four categories: financial, customer, internal business processes, learning and growth.  Every category characterizes key success factors in the internal and external environment.  Customer category includes goals and measures related markets and relations with customers, while internal business processes category answers the question “how will keep our customer satisfied?”

Balanced scorecard can be used in two ways: as a performance management tool and as a system of strategic planning.  In its first function it will easily measure business and its product in a tea, locate problematic areas and weaknesses etc.  In the function of the strategic management tool balanced scorecard has no competitors.  This tool if you buy the most successful world companies.

Have you ever thought whether not your business can do more and earn more money for you?  Well, maybe you can, but in order to learn that you have to evaluate current performance of your company.  There are many performance evaluation tools used in modern business, but perhaps balanced scorecard is one of the most popular ones.  Balanced scorecard does not only evaluate company performance but also communicates linear and operational management.  Every successful company has certain business goals.  And every company does something to achieve them.  With the help of balanced scorecard it will be possible to see “cause and effect” ties between what is done to reach goals and strategic goals themselves.  In other words, balanced scorecard puts strategy into action, as well as measures business.

The process fo BSC implementation

What are advantages of balanced scorecard?  They go as follows:

1. Balanced scorecard communicates operational and strategic management.  It often happens that company’s decisions, actions and measures have nothing to do with the strategy.  Company management thinks that they are approaching strategic goals, but in fact the company is sinking.  Balanced scorecard provides a clear strategic map with clear cause and effect ties and relations between goals and measures.  Such strategic maps are understood even for ordinary employees with little experience in strategic planning.
2. With the help of balanced scorecard it is possible to educate personnel.  Statistics show that more than 80% of managers do not participate in strategic planning or have wrong concepts and interpretations of company strategy, say apart of ordinary employees.  With the help of strategic maps company strategy will be understood at all company levels.  If every employee in the company understands his own contribution to implementation of strategic goals the company has all chances to succeed.
3. Balanced scorecard makes it possible to introduce amendments in changes to measures and goals which makes this system rather flexible and mobile.  As markets are very changeable these days, external changes should lead to changes inside the company.  Having balanced scorecard implemented in the company, it is possible to correct measures and objectives in order to implement strategic goals.

Advantages of BSC

At the same time, balanced scorecard has certain requirements and rules which need to be observed.  Various mistakes made by top managers lead to failure to successfully implement balanced scorecard.  This explains huge portion of criticism in regard to balanced scorecard.  Remember, that balanced scorecard it just a tool in hands of top managers and business owners.

Business owners and top managers started feeling the necessity to evaluate business performance and develop strategic goals when it became understood that greater production output and high quality products do not guarantee survival in the markets.  Customers became very picky as they almost always have multiple choices.  This resulted in a very tough competition.  That’s why it became necessary to plan everything ahead.  Strategic vision of the company and its strategic goals attempt to foresee possible problems and obstacles the company may face in future.  If the problem is solved even before it has appeared then this problem represents no jeopardy for the company.

The four BSC perspectives

But it is not reasonable to evaluate performance of a company apart from its strategic goals.  In other words the company may do certain things that have nothing to do with its strategic vision.  So, why evaluate such performance?  There is no sense in it.  But with appearance of Balanced Scorecard System this problem has been solved.  BSC is not only an extremely effective tool to evaluate current, past and future performance of the company, but also an excellent way to communicate strategic and operational management.

It has been estimated that about 80% of managers do not directly participate in strategic planning.  Moreover, some of them do not understand the concept of the strategy on may have own interpretation of strategic vision which may not coincide with a genuine strategy of the company.  This is where Balanced Scorecard helps.  It visualizes the strategy and makes it clear even to the lowest level of company management.

What the choice of wrong goals results in

Balanced Scorecard consists of four categories of indicators called perspectives: financial, customer, internal processes, of learning and growth.  These perspectives consist of indicators that represent most important key success factors for the company.  Moreover, every indicator has a direct impact on the company total performance evaluation.  Thus, by looking at the scorecard a top manager can see what prevents the company from implementation of strategic goals.  Balanced Scorecard is a great tool to find weak points.

However, very often companies failed to implement Balanced Scorecard, and one of the most common reasons for that is lack of comprehensive strategy.  It’s impossible to drive to the right destination if the wrong goals were set.  Also, it is unacceptable to confuse Balanced Scorecard and the strategy, since BSC does not substitute the strategy.  That means that strategy development must be still performed by people.

Measuring and controlling of any business is possible with Balanced Scorecard concept, but it is just concept without guides, step-by-step manuals, trainings you will not even understand how to link the concept to your business.

There are two options:

• Take expensive or inexpensive Balanced Scorecard training;
• Invest some time in self-education;

We think that you should choose both! As for self-education there is a great library of Balanced Scorecard articles that is now available online.

So, what can you find there and what is the best way to start your self-education about Balanced Scorecard:

1. Need some inspiration to get started? Check Balanced Scorecard success stories and BSC examples.
2. Need guide? Check guides section.
3. You need to create the best KPIs? Check BSC and KPI section.
4. Need some real-life examples – learn about BSC for Sales and BSC for Finance.
5. If you already have some questions about Balanced Scorecard then start with FAQ section.
6. Setting up company goals? Consider using SWOT analysis, also learn more about strategy maps – you will need them!
7. You have one scorecard and now want implement it company wide? Learn more about cascading and testing scorecard!
8. Have everything on paper and now you are looking for some automation means? Check articles about Balanced Scorecard software or BSC in Excel.
9. Ready to present your Balanced Scorecard ideas? Check these articles for ideas for templates, and BSC presentation.
10. Building your Balanced Scorecard dashboard? Check related articles.

Balanced scorecard has gained tremendous popularity among top managers and business owners seeking to optimize performance of the company and making greater profits.  However, is not easy to make initial steps.  First and foremost, one should set strategic goals for the company otherwise use of balanced scorecard makes no sense at all.  Sure, it seems easy to say: “I want my company to earn $10 million this year.” At the same time, such a goal should be supported by relevant business plan.  Moreover, the company should choose the path and priorities in implementation of strategic goals.

BSC implementation success factors

Some business owners pay very little attention two goals setting.  They focus on innovation, human resource management, internal processes, relations with customers etc.  But all this will be in vain if the company set unachievable or unrealistic goals.  Of course, financial goals are most important.  But in order to achieve financial results much needs to be done with intangible assets.  One should answer one question: “How will I earn  $10 million?” The answer should be quite clear.  If it turns out that annual profit of 10,000,000 will mean increasing of market share up to 30% while a company occupies only 3% now, such a goal cannot be achieved.  This is just a hypothetical example to illustrate importance of correct goal setting.

What are strategic goals?

It is especially important to set the right strategic goals when using balanced scorecard as BSC is a strategic management tool.  If there is no strategy there will be no action.  Of course the company will move forward but that maybe not the right direction for it.

As known, balanced scorecard uses evaluation of key performance indicators which are chosen based on the company strategy.  So, the run strategy will result in the wrong choice of key performance indicators.  In such a way the company will waste much time and money without having any positive results.

Strategic goals should answer the questions about possible problems and obstacles on the company way to implement them.  Strategy is partially the vision of the future.  The wrong vision will result in massive losses.

Measurement of business is important as in such a way the company may measure progress on its way to strategic goals.  If you make the wrong first step the entire way will be wrong.

Goal setting is a real art, of so make sure you choose the right strategic goals for your business to achieve success.

More on goal setting here