Choosing Strategic Measures
In another article on this website, we looked at strategy mapping, which is the most important step in creating the Balanced Scorecard system. Here, we consider how to select strategic measures which, despite a still commonly held belief to the contrary, is not the most important step. In a scorecard hierarchy of importance, metrics follow both selecting objectives and choosing initiatives (where work gets done). The function of metrics is to monitor progress toward strategic objectives, and in doing so test the efficacy of the strategy. It is for this reason that measures play a crucial role in the scorecard system.
The Science of Measurement
The management guru Peter Drucker once famously said that “what gets measured gets done”. In the rush to populate their performance management systems with metrics, many organizations have ignored the fact that measurement is a science (metrology). To apply measures effectively companies must understand at least the basics of this science. Measurement includes concepts such as precision, accuracy and bias.
Where understanding is lacking, the use of metrics can lead to poor decisions. As a simple example, customer satisfaction may be 80% in January, 82% in February and 78% in March. Managers may panic to see such as drop from February and March and order an expensive performance improvement intervention. Yet customer satisfaction may naturally oscillate between 78% and 82%, without there being any change to customer service. The process is ‘in control’. Understanding the control limits is critical for avoiding costly, and potentially damaging, decision-making due to poor understanding of metrics.
The Critical Few Measures
Just as objectives should be kept to the critical few that are strategically focused, measures should also be limited – to perhaps two per objective; so thirty measures should suffice for 15 objectives (two for each).
Where possible, one of the two chosen metrics should be leading, with the other being lagging. As a simple example, profit is a lagging measure of past performance as it tells us what has happened but it does not provide information on what is likely to happen in the future. A leading measure, on the other hand, provides information on what is happening today that will impact performance tomorrow. For instance, for an organization competing through a strategy based on product leadership, the new product pipeline provides a powerful leading indication of future sales potential.
To fully understand the dynamics of leading and lagging metrics within a scorecard model, there are times when a metric is both. Customer satisfaction is a lagging measure as it tells an organization how satisfied a customer was with the product/service already received (so a measure of past performance). However, it is also a leading measure as it provides an early warning signal regarding likely future levels of customer loyalty and profitability (future performance).
To be useful for aggregation, comparison and best-practice sharing, measures should be commonly defined organization-wide. Typically this is an early challenge for a Balanced Scorecard Manager and their team as it is not unusual to find that performance is measured in many different ways across the enterprise. For example, a large trucking company might have myriad definitions of what it means by ‘on-time’ delivery. Consequently, performance in one part of the organization cannot be accurately compared with another. One unit might claim 95% on-time delivery according to their definition and another unit 85% based on their own definition. But from the customer’s perspective the latter may be more ‘on-time’ than the former. Metrics must be commonly agreed, with standard templates documented and circulated.
The danger of repackaging
It is also important that organizations choose strategic metrics that truly do support strategic objectives and are not a simple repackaging of measures that are already in existence. Indeed it is not surprising for up to 50% of preferred measures to be unavailable on launching the scorecard. Organizations then have to either create the measure from scratch or if data sourcing would prove too time-consuming or expensive, opt for proxy measures (a close assimilation). But care should be taken with proxies. For example, a measure such as ‘training hours per employee’ may be chosen as a proxy in the absence of a more tangible metric to support an objective of becoming a ‘knowledge-based organization’. But the tenuousness of the link all but nullifies the value of the objective and the measure.
More, as with strategic objectives, ownership and accountability should be assigned to metrics. Objective and Measure ownership is crucial to taking the scorecard from the boardroom to the shop floor or frontline.
Importantly, metrics should be actionable. Measures that are nice to know but do not trigger step-change performance improvement typically have no place on a Balanced Scorecard. For instance, if an organization has an objective to retain talent and has clearly defined what constitutes talent and has agreed upon a common enterprise-wide metric, and the measures show that strategically critical employees are walking out the door, then this should trigger an intervention. Simply put, we have a strategic objective, the measure indicates we are failing to meet that goal and so we do something about it. This represents the most basic, and oldest, premise of the Balanced Scorecard – turning strategy into action.
-Take time to understand the science of measurement
-Ensure measures are commonly defined enterprise-wide
-Ensure strategic measures support strategic objectives
-Keep the number of metrics to a critical few, about two per objective
-Where possible use leading and lagging measures
-Do not choose measures just because they are readily available
-When using proxy measures make sure they are meaningful
-Assign ownership to each measure
-Make sure metrics are actionable