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Key Performance Indicators - Using Balanced Scorecards
KPIs - a starting point
KPIs are not an end in themselves. They provide a foundation for informed discussion and decision-making. They are the indicators you need to measure to understand how well your internal and external processes are working, and to help you predict what will happen in the future.
Simply measuring an input or output to an activity won't make your business succeed. However, understanding how your business functions, how its processes work, and how it interacts with the outside world, will help clarify your thoughts and give you real insight into your business. KPIs, as measures within the context of such a model, are invaluable - allowing you to understand where you have come from, where you are now and where you might be in the future.
Balanced Scorecards (BSCs) are one way of formalising this model.
There are many management techniques and methodologies aimed at describing how an organisation works. Scorecards have a long pedigree of success and are a straightforward way of formalising your goals in terms of a small number of critical success factors and the KPIs to support them.
Historically, many organisations relied purely on financial indicators. This was for three main reasons: finance systems contain lots of hard facts which are normally relatively accessible, the financial position is often seen as being of primary importance to shareholders, and employees are often given incentives based on past contribution to the finances.
The Balanced Scorecard aims to redress that by encouraging you to look at the business from a number of different but complementary perspectives - not just financial.
BSC - a definition
Balanced Scorecards were originally formalised by Kaplan and Norton. Since then they have been adapted and have evolved. In their simplest, original form, they assume that the Vision and Strategy for a business comprises four perspectives with four concise questions to answer:
- Processes - what must we excel at?
- Customer - how do our customers see us?
- Financial - how do we look to our shareholders (stakeholders)?
- Learning & Growth - how do we improve, add value and innovate?
By looking at these key areas (and others, if you want to adapt the model) and understanding the inter-dependencies and interactions between them, you can build a model which promotes that balanced view of the business.
From that model it is a short and informed step to defining the key metrics to measure. The KPIs may well be combinations of individual activity measure which will give you an overall process measure.
So what should you do?
Producing a Balanced Scorecard and identifying the Key Performance Indicators to support it should not be a length process. It will be iterative; you will need to come back to it on a regular basis to ensure that you still have everything right. To make sure that it isn't a long and drawn out affair, though, you can use techniques such as Time-boxing or Agile to add control.
You need to get the great and the good from your organisation together and:
- thrash out what your goals are - and make sure everyone agrees
- identify what is critical to your success, from each of the four perspectives on the scorecard
- define a few choice KPIs which will let you monitor your critical success factors
- produce action plans
- document everything
- spread the word - don't keep all this modelling to yourselves, let all your colleagues and employees in on the secret
- prototype the KPIs
What should you not do?
Don't let IT hold you back.
If you wait for the perfect KPI reporting system you will probably never get started. The important thing is to get the discussion going.
Use a prototyping system to get the first draft of the KPIs up and running quickly. This will give you confidence in what you are doing and provide a stop-gap while your developers produce the "ideal" solution. There are plenty of low cost, hosted solutions out there. Or you could make use of internal software and skills.
There are two things you could and should do after you have developed you strategic scorecard.
Firstly, your high level, scorecard is a living entity. You need to cherish it and revisit it from time to time to make sure it is still right for you.
Secondly, you can use elements from the scorecard as the basis for scorecards at lower levels in your organisation. That way, everyone is working and thinking in the same way and, hopefully, everyone is aligned behind your strategy.