Paul Niven's latest book Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results was written to fill the considerable void that exists between Balanced Scorecard theory and application. Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results was written to fill the considerable void that exists between Balanced Scorecard theory and application.

He says, "Much has been written on the methodology of the Scorecard, but unfortunately little has been offered in the way of actual implementation advice aimed at those involved in the development of the system. BetterManagement.com has graciously asked me to share selected excerpts in a series corresponding to the five parts of the book. Each excerpt will cover a topic designed to help you better understand the Balanced Scorecard and, more important, offer some practical advice you can put to work immediately as you develop your own performance measurement system."

The Balanced Scorecard is often described as simple but not simplistic. The basic premise of developing a series of financial and non-financial performance measures that act as a translation of strategy isn’t exactly quantum physics and for most of us makes good sense. However, those who travel this road soon learn that developing the critical few drivers of performance for your organization can prove to be a very difficult task indeed – hence the “not simplistic.” Most organizations will encounter little difficulty generating a substantial number of measure candidates for their Scorecard. The problem lies in distilling that raw collection of measures down to those that truly tell your strategic story. Here are the criteria you can use to carefully sculpt your strategic performance measures from the mountain of possibilities you face.

Criteria for Selecting Performance Measures

One of the many benefits of the Balanced Scorecard is that it forces organizations to make difficult choices among a variety of alternatives. Choices regarding objectives, targets, and initiatives to achieve our targets must all be deliberated upon in developing a Scorecard that serves as the cornerstone of our management system. Nowhere is the process of making hard choices more evident than in the selection of performance measures. These measures are really the centerpiece of the Scorecard system and will provide the point of reference and focus for the entire organization. Here are several criteria that experience and research have proven to be effective in helping you evaluate, and pick your measures.

• Linked to strategy: This one gets the vote for most obvious, but its importance cannot be overstated. The Scorecard is a tool for translating strategy into action through the performance measures that tell the story of your strategy. Choosing performance measures that don’t have an impact on your strategy can lead to confusion and lack of clarity as employees devote precious resources to the pursuit of measures which don’t influence the firm’s overall goals. Having said that, you might have difficulty finding a direct link from every measure to your strategy. Most businesses will have a number of what we may term “diagnostic” performance measures that are important to the day to day efficient functioning of the business but don’t seem to correspond directly to a strategy. We need to monitor these factors to ensure the organization remains “in control” and is able to respond quickly to items that require immediate attention. While these indicators are important, they are not necessarily strategic. Recall our discussion of value propositions in Chapter Five. An organization pursuing a customer intimacy strategy will devote the majority of its efforts to providing total solutions to customer needs through deep knowledge. This is their focus, but they can’t ignore logistics issues (operational excellence), or product functionality (product leadership). Maintaining threshold standards of performance in these areas may require the inclusion of performance measures on the Scorecard.

• Quantitative: There is often a temptation among Scorecard practitioners to include measures which rely on subjective evaluations of performance. Rating suppliers’ performances as “good,” “fair,” or “average” for example. Of course the principal issue with this approach is that ten people rating the same supplier may come up with completely different approaches and responses. However, if the same suppliers were evaluated on a percentage of on-time deliveries the results are objective and convey the same meaning to all involved. Everyone knows what 10% connotes, but your definition of “average” and mine could vary significantly. If you’re creative, virtually all performance measures can be calculated mathematically. I can recall a medical services unit I worked with at a government agency. A key performance metric was the distribution of their trauma reports in a timely fashion. Their original measure was “Reports issued.” In other words a simple yes or no would suffice as the indication of performance. With a little tweaking we improved the measure by re-stating it as “The percentage of trauma report recipients receiving the document on time.”

• Accessibility: Kaplan and Norton often discuss the merits of “missing measures.” Those are the performance measures you didn’t capture in the past which came to light only as a result of the Balanced Scorecard development process. Undoubtedly, new and innovative measures are a wonderful benefit of the Scorecard, in fact missing measures may signal that entire value creating processes are not currently being managed. However, I caution you to avoid selecting “wish list” performance measures, the type that require significant investments in information technology infrastructure to collect. You’ll learn fairly quickly that you must be pragmatic when selecting performance measures. I worked with one group recently that developed a Scorecard for their business unit which was considered by the group executive as the pride of the entire organization. But when it came time to actually report the information, it turned out the data was completely un-collectable without significant investments in technology. I’m not suggesting you avoid new and innovative measures, just be sure to calculate the costs and benefits of their collection. Data requirements are discussed further in a following section covering measure dictionaries.

• Easily understood: Your ultimate goal should be to create a Scorecard that motivates action. It’s difficult to do so when your audience doesn’t grasp the significance of the measures you’ve selected. At a glance, Scorecard readers should be able to explain both the operational and strategic significance of every measure. The desired direction of movement of the measure should also be obvious. If your employees don’t know whether a high value for the measure is good or bad then you probably need to re-think it.

• Counter-Balanced: Let’s say you owned a fast food restaurant and were interested in improving your customer satisfaction scores. As we all know, these restaurants can become pretty crowded during peak hours, so you decide to increase staff and lower prices. The increased staff should be able to handle current and future demand created by your lower prices and will drive increased satisfaction. However, what effect will lowering prices and increasing staff have on your profitability? Chances are it will plummet in a hurry since you’ve increased your cost base and lowered your revenue. Some call this effect “sub-optimization” i.e. the improvement of one or more measures at the expense of others. While your Scorecard will require that you make trade-offs and decisions regarding where to allocate resources, you don’t want to create a situation in which focusing on certain measures actually hinders your ability to compete. In the case of our fast food establishment we would want to counter-balance our satisfaction rating with a measure of “revenue per employee.” We need to ensure that despite our lower price structure, the resulting volume and efficiencies from increased staff are allowing us to maintain revenue targets.

• Relevant: The measures appearing on your Scorecard should accurately depict the process or objective you’re attempting to evaluate. A good test is whether or not measure results are actionable. If some aspect of performance failed, you should be able to recognize the significance of the problem and be able to fix it. This issue is demonstrated through the use of performance indices, which many organizations will use on their Scorecards. An index is a combination of several individual measures combined in some way to result in a single overall indicator of performance. Employee satisfaction may appear on your Scorecard as an index of the weighted- average performance of: turnover, absenteeism, complaints, and survey results. Indices are a great way to quickly depict a number of performance variables in a single indicator, but they have some inherent weaknesses. First of all, they may obscure results and limit action. If turnover at your organization was at an all-time high but was given a low weight in your employee satisfaction index you may never know there are issues since the overall index could appear to be on target. If key staff members are among those leaving the firm and you haven’t mounted a response you may soon pay a heavy price in other areas of performance as reflected on the Scorecard. Indices also frequently fail to pass the “easily understood” criterion we discussed above. A “logistics” index appearing in the internal process perspective may contain valuable information but be baffling to those outside of the supply chain side of the organization. Again, indices can provide very useful information, especially when you have a number of measures you’d like to include but wish to keep your total Scorecard count limited. Based on the arguments above, however, you should limit their use to only a handful of your total at most.

• Common definition: Your Scorecard will likely contain a number of esoteric performance measures, and that’s perfectly appropriate since it’s your strategic story you’re telling. However, problems occur when you place measures on the Scorecard that are loosely defined or not defined at all. On-time delivery may be a crucial metric, but what does on-time mean? You must specify the precise meaning of your performance measures and ensure you have agreement from your entire team. Customer satisfaction could have a very different meaning for a team member from Marketing than it does for someone from Finance. The process of agreeing on measure definitions is yet another example of how the Scorecard building process brings seemingly disparate functions together as they work to ensure the measures capture a meaning that allows all to contribute meaningfully to success.

I have created a worksheet you can use to choose among the performance measures you’ve gathered. List the measures under the appropriate perspective and rate each according to the criteria supplied. I would suggest you rate each measure out of a possible 10 points on each of the individual criteria. For example, if you were to measure economic value added on your financial perspective it may score a 10 for “accessibility” given the pure financial nature of the information. However, it could warrant a 5 or under on “ease of understanding” since most employees will probably not be familiar with the metric.