Is Your Firm Measuring the Right Things?

You’ll most likely have heard the saying “What gets measured gets done!”

If you set people targets, and reward them when they meet these targets, they’ll often do all they can to achieve them.

This is great in principle, but can backfire in practice: One problem is that it’s much easier to measure financial results than it is to measure progress in other essential areas (such as staff or client satisfaction). This leads to an over-reliance on financial measurement. A second issue is that people will, quite rightly, drop other activities to meet challenging goals.

So, many firms focus too much attention on short term financial results and neglect other important factors.

This is where the idea of the Balanced Scorecard is important ā€“ as a tool for improving the performance of a whole firm, a large department or a small team. The Balanced Scorecard or Weighted Scorecard helps you measure and improve performance in an integrated way.

Understanding the Theory

Developed in the early 1990s by Robert Kaplan from the Harvard Business School and David Norton, the founder of an IT consulting firm, this management system has been applied to many organizations and across many industries with great success.

The original article in the Harvard Business Review (“The Balanced Scorecard ā€“ Measures that Drive Performance”, Harvard Business Review, Jan/Feb 1992) starts with the adage we quoted at the start of this article, “What you measure is what you get”. The whole system is based on this premise.

Elaborating on what we’ve already said, companies have historically used financial measurements to gauge their success (eg improved margins or lower costs). The problem with this narrow approach is that it encourages short-term activities, at the expense of quality of service, staff attrition, loss of clients etc.

Balanced scorecard – definition

What exactly is a Balanced Scorecard? A definition often quoted is: ‘A strategic planning and management system used to align business activities to the vision statement of an organization’. More cynically, and in some cases realistically, a Balanced Scorecard attempts to translate the sometimes vague, pious hopes of a company’s vision/mission statement into the practicalities of managing the business better at every level.

A Balanced Scorecard approach is to take a holistic view of an organization and co-ordinate what are called metric-driven incentives so that efficiencies are experienced by all departments and in a joined-up fashion.

To embark on the Balanced Scorecard path an organization first must know (and understand) the following:

  • The company’s mission statement
  • The company’s strategic plan/vision

Then:

  • The financial status of the organization
  • How the organization is currently structured and operating
  • The level of expertise of their employees
  • Client satisfaction level

The following table indicates what areas may be looked at for improvement (the areas are not exhaustive and are often company-specific):

Balanced scorecard ā€“ examples of factors

 DepartmentAreas
 FinanceGross margin
WIP/Cash Flow 
Utilisation/Recoveries
Internal Business Processes Knowhow generation
Matter management/efficiency
Cross selling
Learning & GrowthEmployee turnover 
Job satisfaction 
Training/Learning opportunities
ClientQuality performance for client 
Client satisfaction rate 
Client retention rate 

Once an organization has analysed the specific and quantifiable results of the above, they should be ready to utilise the Balanced Scorecard approach to improve the areas where they are deficient.

The metrics set up also must be SMART (commonly, Specific, Measurable, Achievable, Realistic and Timely) – you cannot improve on what you can’t measure! Metrics must also be aligned with the company’s strategic plan.

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