Balanced Scorecards 101
Ever wonder what all the excitement is about balanced scorecards? After all, isn’t the primary goal of a business to be profitable, and therefore isn’t the only measure that counts the financial one? Well, think of it this way: if you are trying to lose weight, do you just step on the scale each day to see where you are, or do you do other things like exercise, watch your caloric intake, monitor your carbohydrate ingestion, etc. These are all processes that you monitor with leading indicators that have an impact on your lagging indicator -- the weight. That is the essence and the power behind the balanced scorecard concept.
The organization and its processes represent a system, where the parts of the system are interdependent. They have an impact on each other and the system performance. In the case of an organization, there are many variables in the system, including people, the operational processes, the customer interactions and satisfiers, and the financials.
Studies have demonstrated that a motivated workforce will perform better in their roles and provide better service in client interactions. This positively affects the operational process performances. In addition, the operations process and systems have an effect on the ability for the individual to perform to meet the needs of the customer. These products, services, and customer interactions have an effect on customer satisfaction and loyalty, which in turn has an impact on the repeat buying and referral behavior of your customers. This has a direct impact on the financial health of the organization.
So, the dynamic at play here is that the employee performance metrics, such as employee satisfaction, productivity, capacity, and capability, are leading indicators to the performance of the lagging indicators in the operational processes and customer satisfaction. The operational process metrics are, in turn, the leading indicators for the outcome customer metrics and the financial performance measures.
These operational measures may be cost of quality, productivity, quality, process capability, rework, non value added steps in the process, cycle times, etc. The resultant customer measures become leading indicators for the financial outcomes. These may include customer satisfaction levels, complaint rates, customer loyalty, customer willingness to refer your organization, etc. The impact is directly on the lagging indicators of revenues, costs, profits, and growth.
Leading vs. Lagging Indicators
This connection through the system, with its inherent cause and effect relationships, is why the balanced scorecard is so important. It allows an organization the opportunity to analyze the strong process performance variable correlations to the outcomes of the process. By measuring and monitoring these leading indicators, the organization is in a position to predict the future outcomes of the lagging indicators by the predictor metric performance. It allows an organization to take proactive action on process improvements before the lagging indicator is affected to a large degree.
Waiting until the end of the month or quarter to see how well the organization has performed financially is a lot like just stepping on the scale to see whether we have lost weight. It is too late! The "horse is already out of the barn." What is more effective and efficient for an organization is to have a balanced scorecard that is a mix of the leading and lagging indicators to monitor performance, predict performance, take early action on performance.
Linking these measures to the strategic plan is a great way to keep the organization aligned, and to create an environment where people can be empowered. Much like the dashboard in the cockpit of an airplane, the balanced scorecard metrics are the critical gauges to monitor in order to keep the organization airborne.
More than just a measurement system, the balanced scorecard can channel the energies, abilities and specific knowledge held by people throughout the organization toward achieving long-term goals. The balanced scorecard translates mission and strategy into objectives and measures. Now, isn’t that exciting?