Strategy & Business Development

Balanced Scorecard: Five principles to focus on the bottom line

According to 2GC  The Balanced Scorecard is the world’s most popular performance management method. But it's a complex tool, and this means that a lot of companies struggle to gain the maximum effect from it.

In this article we look into the five things most companies struggle with when they need to develop and design their performance management structures, and five principles you can use to avoid becoming the next victim.

Why do Balanced Scorecard fail?

Nicolai Broby Eckert and Jan Lythcje-Jørgensen from the consultant-company Implement identify in their article “Performance Management: Breaking the Code” these five challenges:

  1. Ensuring balance
    It can be difficult to maintain balance in any performance management framework. And often you end up, using parameters that everybody understands and which are also easy to measure. Unfortunately, this often leads to an overrepresentation of financial parameters.

  2. Understanding the creation of value
    It can be difficult to keep focus, when you have to measure many different areas; such as learning and growth, customer satisfaction and strategical direction. This means that you can lose sight of where actual value is created. Only if you are able to create a full understanding of, and focus on, what drives the competitiveness and the differentiation, can you avoid this.

  3. Choosing process parameters
    To measure the wrong parameters can ruin an already well-functioning structure, because you end up with the wrong numbers.

  4. Listening to each other
    To measure the customers’ satisfaction based on internal definitions of what the customers want can lead to incorrect conclusions. Make sure that you find out what your customers really want.

  5. Implementing
    The implementation itself can fail, if you focus too much on KPI’s. Instead, choose a more holistic approach on the implementation by also reviewing rules, processes and managing tools.

How to fight the five challenges

But how can you avoid these challenges and ensure that focus is kept on strategy, turnover and profit? Here are Implement’s five pieces of advice:

The five principles:

  1. Design for balance

  2. Design for value

  3. Design for flow

  4. Design for customer

  5. Design for implementation

Design for balance
Achieving balance between the four different perspectives is the main purpose of The Balanced Scorecard. To help this along ask yourself these five questions regularly:

  1. Is there enough focus on our strategic direction, or do we use all of our time discussing operational measuring points?

  2. Are we primarily measuring layer indicators and are we thereby losing the possibility of adjusting early in the process?

  3. Are we only measuring the “hard” financial measuring points or are we also measuring the “soft” customer and coworker related numbers?

  4. Are we evaluating our achievements based on the most important value-creating processes or have we lost our overview of what really creates value in our company?

Design for value
Find out where your profit comes from and make sure that you measure the right measuring points. You can do this by using these three steps:

  1. Analyze the successes and failures of previous projects and prepare 10-25 hypotheses for what's creating growth and profit in the organization.

  2. Test your hypotheses by analyzing the quantitative data for specified data and actual value-creators. Also examine if your hypotheses are actually the main value creators or perhaps merely secondary or tertiary.

  3. The results are converted to an economic formula. Include secondary drivers. This method describe straightforwardly what drives a company’s success.

This is a simple tool that can be an eye-opener to the entire organization and which makes it easy to communicate the company’s success factors.

Design for flow
When you design for flow, you rearrange the central factors that create value and turn them into measuring points, which are measured regularly.

Value Stream Mapping (mapping the company’s chain of value), known from Lean, is an efficient tool for achieving flow and efficiency in the company’s processes.

Design for customer
Customer satisfaction creates profit and growth in most companies. Your customers’ satisfaction is created primarily from the experience they have of their interaction with your company. Find out where this happens and chart the customer’s journey through your company from first contact to purchase.

Now, try to find out which of the company’s processes influence the customers’ experience. In order to do this in a persuading manner, it is a good idea to ask your customers what they really want. You can for instance do this by using value mapping.

Value mapping: How to measure real customer satisfaction
Value mapping is a method for identifying the value that the customer attaches to the attributes that he/she wants to have. This is done by making a list of all the service attributes on offer. Not just your own, also the competition's. Then you ask your customers to evaluate these from a comparable scale. Now, you're able to see where you over or under perform the expectations of your customers and where to aim your future effort. Perhaps this exercise will provide you with new knowledge about what it is your customers really appreciate.

Focus on areas where potential to improve. You shouldn't spend time on areas where you are ahead of your competition. You are, after all, trying to generate profit. Also remember that your customers can fall under different segments.

Design for implementation
How do you ensure that the new management performance metrics become a natural part of everyday life?

Four factors of success for implementation of change:

  1. Make it actionable. Make sure that everyone in the organization knows how a KPI relates to the organization’s achievements.

  2. Make it visual. Visualize KPI-goal numbers every day and show how your employees can do better.

  3. Create the conversation. Performance management is about changing conversations – not that much about numbers, graphs and rewards.

  4. Make it formalized. Reporting, incentive systems and meeting structures needs to be formalized. For instance, split the management meetings into two: Strategical initiatives (company change) and discussions of administration (administrating the company).

Source: Nicolai Broby Eckert and Jan Lythcke-Jørgensen, Implement: “Performance Management: Breaking the Code”.