What gets measured gets managed, right? It’s easy enough to come up with an alphabet soup of metrics to look at every month. Things like ROI, EBITDA, ROCE, COS, EPS, etc. But is that enough?
We can look at financial measures all day, but one thing will never change…..the past. Financial measures are lagging indicators – ones that only tell us what already happened but don’t facilitate future change. Don’t get me wrong, we need to have information about past results, but that isn’t enough.
We need to focus on managing the things that predict future performance. After all, if you set a weight loss goal, it’s helpful to step on the scale to monitor your success or lack of success (lagging indicator) but that only tells you what has already happened. Measuring how many calories you take in (leading indicator) means that you are focusing on a measure which affects your end goal. The same is true for setting a revenue goal. Looking at the P&L tells you if you succeeded last year, but measuring customer loyalty throughout the year tells you how likely customers will be to come back and spend more money, which in turn affects your revenue goal. If customer loyalty is slipping, initiatives can be launched before it’s too late to change course so that the revenue goal can still be met.
This idea of balancing financial and non-financial measures is the premise for the Balanced Scorecard. The brainchild of Robert Kaplan and David Norton, the Balanced Scorecard is a strategic management tool used by some of the world’s most successful companies. Getting started requires leaders to:
- Create a clear and concise vision and strategy for the company. This should tell everyone where the company is going and how it is going to get there.
- Define the perspectives through which success should be viewed. Most commonly, the perspectives are Employee, Process, Customer, and Financial.
- Develop a few objectives within each perspective. These are areas in which the organization must excel in order to succeed. For example, from the employee’s perspective we must create an environment that focuses on continuous learning in order to succeed. Or, from our customer’s perspective we must respond to issues quickly and accurately.
- Once the objectives are defined, decide how to measure success or failure. Employee retention may tell us if our employees are happy to be a part of our team. Customer loyalty scores may indicate whether customers will promote us to other potential customers. Measures of objectives in the Financial perspective are typically lagging indicators letting us know what’s already happened. As we move down the Scorecard through the Customer and Process perspective, the measures should be progressively forward looking. When we get to the foundation of any organization, the Employee perspective, measures should be almost entirely leading indicators since the organization’s culture almost always drives the success in all of the company’s other objectives.
Now that the objectives and measures are set, you can get busy determining what initiatives will be launched to ensure success. So learn from the past but stop living in it! In the words of Peter Drucker, “The best way to predict the future is to create it.” Subscribe to our blog (by submitting your email address above and selecting email frequency) for more information on the Balanced Scorecard.