DEC 2, 2005 1:00am ET

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Distinguishing Between Signal and Noise - KPIs or PIs

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As with any emerging organizational improvement methodology, the balanced scorecard will experience speed bumps in its initial years before organizations recognize how to leverage its full power. One glaring problem is a lack of consensus as to what is a balanced scorecard - and what is its purpose? I routinely ask executives from organizations allegedly using a balanced scorecard to describe it, and I get broadly varying answers. Some recognize that they had far too many measures and consequently put their measures on a diet by reducing them to the vital few. Others say they need hundreds of measures to create accountability monitoring of managers and their employees. Neither approach may be correct.

The Vital Few versus the Trivial Many

Michael Hammer, the author who introduced the concept of business process reengineering, described the sad situation of measurement abuse in his 2001 book, The Agenda: What Every Business Must Do to Dominate the Decade.

In the real world ... a company's measurement systems typically deliver a blizzard of nearly meaningless data that quantifies practically everything in sight, no matter how unimportant; that is devoid of any particular rhyme or reason; that is so voluminous as to be unusable; that is delivered so late as to be virtually useless; and that then languishes in printouts and briefing books without being put to any significant purpose. ... In short, measurement is a mess. ...We measure far too much and get far too little for what we measure because we never articulated what we need to get better at, and our measures aren't tied together to support higher-level decision making. 1

Hammer is clearly not hiding his feelings. But has the cure been worse than the ailment? Simply reducing the number of measures can still result in an organization measuring what it can measure as opposed to what it should measure. But to determine what you should measure requires deeper understanding of the underlying purpose of a balanced scorecard.

A Balanced Scorecard Communicates the Strategy and Provides Feedback

A misconception about a balanced scorecard is that its primary purpose is to monitor results. That is secondary. Its primary purposes are to report the carefully selected measures that reflect the strategic intent of the executive team and enable ongoing understanding as to what should be done to align the organization's work and priorities to attain the executive team's strategic objectives. The strategic objectives should ideally be articulated in a strategy map, which serves as the visual vehicle from which to identify the projects and initiatives needed to accomplish each objective or the specific core processes that the organization needs to excel at. After this step is completed, key performance indicators (KPIs) are selected and their performance targets are set. With this understanding, it becomes apparent that the strategy map's companion scorecard, on its surface, serves more as a feedback mechanism to allow everyone in the organization, from front-line workers up to the executive team, to answer this question: "How are we doing on what is important?" More importantly, the scorecard should facilitate analysis to also know why. The idea is not to just monitor the dials but to move the dials.

The strategy map is valuable for executives to communicate to managers and employee teams where they want the organization to go. An important role, arguably the most important role, of the executives is direction setting. Ideally, equipped with a strategy map, the managers and employee teams are involved - essential to getting their buy-in - to determine the next step: to answer the question, "How are we going to get there?" The managers and employee teams should be tasked with the identification of enabling projects and specific core processes that require a punctuated improvement. The appropriate KPIs can then be selected. The presence of both identified enabling projects and selected core processes goes to the heart of what distinguishes a strategic objective from just getting better at what you have already been doing.

Strategy is More than Performing Better - It Involves Doing Different Things

A key to organizational survival involves differentiation from competitors. An important role of the executive team is to exhibit vision and constantly determine innovation to differentiate their organization from others. This explains a misunderstanding about strategic objectives. Some mistakenly believe the purpose of strategic objectives is to keep an organization adhered to a single, unbroken path. This is certainly not the case. Strategy is dynamic, not static; the purpose of strategic objectives is to redirect the organization from the tyranny of maintaining the status quo. Strategy is about constant change. If an organization does not constantly change, then it is exposed to the competitors constantly converging to similar products, services, and processes. Differentiation is key to maintaining a competitive edge. Strategic objectives are about the changes an organization should make to maintain a competitive edge.

A clue that a balanced scorecard is failing to drive change can be found by counting the number of project-based key performance indicators (KPIs) relative to the number of process-based KPIs. A scorecard comprised mainly or exclusively by process-based KPIs is not an efficient engine of change; it merely monitors whether progress from the traditional drivers of improvement, such as quality or cycle-time improvement, is occurring. Process improvement is important, but innovation and change is even more important.

In addition, if there is an excessive number of KPIs, then it becomes apparent that many are performance indicators (PIs) rather than KPIs, where the adjective "key" of the KPI is the operative term. An organization has only so much resources or energy to focus. KPIs are what distinguish the signal from the noise - the measures of progress toward strategy execution.

Finally, some KPIs should be derived from predictive analytics. You want to make changes based on anticipated targets and constantly refocused outcomes so that employees can proactively make changes before events occur that would require a much more expensive reaction.

Getting Past the Speed Bumps

As with any improvement methodology, experience through use refines the methodology's effectiveness and impact. The plan-do-check-act (PDCA) cycle is a great practice for learning organizations. With improvement methodologies, it's difficult to "get it perfectly right" the first time. There will always be a learning curve. Many organizations overplan and underexecute. With regard to KPI selection, my advice is to first learn the principles, and then apply them through selecting, monitoring and refining the KPIs. Strategy maps and balanced scorecards are a craft, not a science.

References:

1. Hammer, Michael. The Agenda: What Every Business Must Do to Dominate the Decade. Crown Business, 2001. P. 101.

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