The Balanced Scorecard Step 2: Develop Performance Metrics
By Bill Willbrand Jr., CPA, Member, Brown Smith Wallace LLC
The Balanced Scorecard is a proven method that aligns strategies with everyday performance. In last month’s column, we introduced four common barriers to success: the vision barrier, the people barrier, the resource barrier and the management barrier. Now that you have identified some of the reasons your company may not have met recent goals, we’ll familiarize you with the steps in the Balanced Scorecard method to improve performance measurement.
While measuring a company’s performance is nothing new, the Balanced Scorecard method focuses not only on financial outcomes, but also on the human issues that drive those outcomes. Often, non-financial factors are the driving force behind a company’s success. This system takes a comprehensive approach and examines employee needs, which drive internal processes, which enhance customer satisfaction, which yields better financial performance.
The Balanced Scorecard includes the following four metrics to achieve improved performance:
- Employees/Learning and Growth
- Internal Processes
- Customer Satisfaction
- Financial Performance
All of these metrics are interrelated, and ultimately can lead to improved performance. For example, developing a safety incentive program (employees/learning and growth) should result in reduced work-related accidents and improved operations efficiency (internal processes). This, in turn, can allow your company to become the price leader and acquire more customers (customer satisfaction) and ultimately grow revenues (financial performance).
An important aspect of the Balanced Scorecard approach is that it maintains equilibrium between historical measures (lagging) and future predictive measures (leading). In other words, you need to make sure your measurements are not all lagging indicators of performance. Many financial measurements, by default, fall into this category. Paying attention to leading indicators of future performance, such as new contracts and service response time, can help refine your strategy.
When selecting measurements on which to focus, be sure to choose the most important and relevant factors that point to your strategic objective. Each measurement should also meet the following conditions. It must be:
- Linked to the strategic objective
- Repeatable, allowing comparisons over time
- An indicator of future targets and performance
- Accountable, reliable, verifiable and accurate
- Available when needed
Also, keep in mind that successful implementation of the selected metrics requires positive support from all segments of your company’s stakeholders.
The next Balanced Scorecard column will focus on implementing specific steps to achieve your strategic plans.