One of today’s business mysteries continues to be how to support a manager’s claim that, "We did well last quarter." The normal follow-up question is, "How do you know?" Despite a sea of collected data, organizations struggle with making sense of it all. Organizations are generally data rich and information poor. Attempts are being made to fix this with data warehouses and number- crunching software. But are those technologies simply Band-Aids and medications or a real cure
When the manager just referred to states that "we did well," how does the organization detect if the entire organization benefited from whatever that department did when they supposedly did well? One way to know is to improve the organization’s measurement system itself. The weighted and balanced scorecard is an increasingly popular term for improving the measurement system.
A scorecard provides a framework for literally keeping score of the functions and processes that are most important to an organization. Just like at a sports event, a scorecard quickly answers how teams are doing at what matters. Unlike with a sports event, a performance measurement scorecard allows managers and employees to keep digging deeper for explanations and answers. Measures have measures within measures.
The outputs of activity-based cost management systems (ABC/M) are excellent inputs to a weighted scorecard system. However, let’s not confuse ABC/M and performance measures. ABC/M is not the measurement system. The output of ABC/M can be an important input to performance measures. And the presence of ABC/M data can lead to actions and decisions, not just sighs or an "oh my."
Scorecards are about communicating strategies to employees and increasing alignment of execution of the work to stay focused on the strategies. ABC/M data can populate the scorecard framework with robust and high-octane data.
Executive Headaches with Employees
High on the list of the major frustrations of executives is their inability to get their employees to execute their strategies. More specifically, when executives adjust and shift their strategy, they discover that their employees continue to perform without much change. Failing to execute a good strategy is a major disappointment in the boardroom and to the governing body. CEOs and managing directors usually get blamed.
The massive inertia of the existing balkanized measures keeps employees doing what they have been doing. A change in course may not happen despite the executives’ appeal for a shift in strategy. The executives are less interested in employees just getting better at what they have always been doing. They want employees to change their priorities. What people focus on is more important than improving on things that don’t matter. But you get what you measure.
Another explanation for why employees do not automatically execute changes in strategies is because today’s employees are "empowered workers." Unlike many years ago where employees dutifully obeyed a snap-to-attention command-and- control senior management style, things are different now. Empowerment is a double-edged sword. Empowerment means employees can now choose what they believe they should do but also reject what they think they should not do – regardless of their managers’ orders. So when today’s executives announce new changes in direction for their organizations, today’s knowledge-worker employees ask themselves, "Am I persuaded? If not, I continue with my current ways."
To the executives, this is like driving a car with excessive play in the steering wheel. When they turn the steering wheel left or right, the car barely turns. Weighted scorecards are intended to provide precision steering. Like a good golf swing or tennis stroke, scorecards give the follow-through that separates the novices from the professionals.
Poor Alignment of Strategies and Measures
One of today’s organizational problems is a disconnect and absence of alignment between local measurements of things a manager, team or employee can control or influence and the subsequent organizational results. In many cases, the measures in place today tend to be internally "competing" measures that result in employee behavior where, "As I do well, I adversely affect your measures so you do poorly" – classic suboptimization. Worse yet, employee teams are usually tracked by too many measures. The vital few that they control should be carefully selected for linkage. Figure 1 reveals how dysfunctional measures create undesirable behavior and results.
Figure 1: Goal Non- Congruency and Conflict
New thinking in the areas of performance management and balanced performance measurement systems are making great strides to directly connect local employee behavior to the organization’s strategies and goals. Two attractive aspects of this new thinking are:
- An increasing emphasis on nonfinancial measures, such as customer satisfaction and employee innovation; and
- A greater focus on predictive measures (leading process indicators) in contrast to after- the-fact historical results that are reported too late to change the outcomes (lagging results indicators).
In sum, the need for reforms with organizational measures is due to executive needs to communicate strategy changes and get their organization to execute in alignment with the revised strategy. To senior managers, managing the lagging financial results is like pushing a rope – it is hard to do. Leading indicator measures are more important because they are predictive of financial outcomes.
In the original idea for The Balanced Scorecard, as introduced in 1992 by Professor Robert. S. Kaplan and Dr. David Norton, there are four perspectives:
- Financial perspective: profit and investment return results (or mission within budget for public sector organizations)
- Customer perspective: customer satisfaction and their needs attainment
- Internal core business process perspective: efficient and effective execution
- Innovation, learning and growth perspective: The "soft" side measures describing new product and service development as well as people development and learning.
A weighted scorecard is a multidimensional framework that links objectives, initiatives and measures to an organization’s strategy. Scorecards provide an enterprise view of an organization’s overall performance by integrating financial measures with other key performance indicators. After the relevant measures are selected, often called key performance indicators (KPIs), then targets for each KPI are assigned. The actual results for each KPI are measured.
The mantra for weighted and balanced scorecards is the answer to a simple question: "How am I doing on what is important?" This question should ideally be answerable at every level of the organization – from the operational teams to executives to the governing board. With KPIs and actual data, this question is answered.
A Focus on Outputs
One of the primary ways that activity-based cost management systems (ABC/M) accelerates information-enabled productivity is by providing fact-based data. ABC/M’s reliable data can be used to both assess past progress plus serve to support future decisions. In its most basic form, ABC/M is simply data that is a means to an end. ABC/M should not be considered as an improvement program, because then it may be perceived as a temporary fad or project of the month. In reality, ABC/M simply reflects the economics of how an organization behaves and consumes its resources’ expenses.
Most organizations have very little insights about their outputs – not the obvious products and standard service lines that they deliver to end customers and service recipients. I mean employees have minimal understanding of the internal "outputs" of their work, such as knowing what is the work effort and cost to generate a:
- New enrolled account
- Processed invoice
- Returned and put away goods
- Completed engineering change
- Completed new customer sign up
- Completed executive report
- Registered student
- Sales call
These are not simply the "work activities" that people perform but are the descriptions of the results after the activities have been performed – they are the outputs of work. ABC/M does a great job tracing resource expenses into all sorts of various outputs. Many people react more to the visibility of output costs relative to the process costs – even though they are equivalent amounts of the same costs just reported differently. When the unit costs of varying outputs are trend reported, then employees and managers gain even more insights. They can benchmark to deduce if they might have a best or worst practice.
Cascading Measures
"Local" measures can be selected and cascaded downward for teams, and results can then be rolled up that are aligned with the organization’s strategy. Figure 2 illustrates the overall idea to have the more operational leading indicators at the employee team level measured more frequently. The higher level lagging indicator results, measured less frequently, should respond in synchronization if there is a reasonable level of correlation.
Figure 2: Shift of Cascading Measures
Figure 2 also illustrates that when the senior executives shift strategy, they can: 1) replace a measure or two of the vital few measures with different and more applicable measures, and 2) rebalance the weightings of the measures. Rebalancing the weightings by modifying the coefficient percentages is like an airline pilot slightly adjusting the ailerons on the wings to slightly alter the plane’s course. But replacing an old measure with a new is more intense – like banking the plane left or right.
Figure 3 provides an example for how an employee can have the line of sight on how what they do can impact other performances that eventually impacts achieving the strategic goals. They can see how they contribute toward the organization’s success. If management is bold, they will allow the employee teams to all see how each other is contributing toward success.
Figure 3: ABC/M Links Scorecards to What People Do
ABC/M as an Enabler for Performance Measures
With fact-based and relevant cost data, managers and teams can see things they have never seen before – and some of it might not be pretty. They might really know, for example, what the true cost is to process an individual customer return. They can differentiate profitable from unprofitable products, service lines and customers. They can isolate the location, amount and cost of unused and available processing capacity. It is important to treat ABC/M data responsibly. Often organizations are surprised when they see the truth about the consumption patterns from their cost structure. Finding someone to blame is not the point with ABC/M data. The key is to use the ABC/M data as a guide for better decisions, and its use as performance measures is a valuable benefit. Similarly, the scorecard should not be applied as a report card. Employee teams should be involved in the all- important selection of their measures – not mandated ones that may have inadequate cause-and-effect relationships with their higher measures.
In today’s environment, a business’ road is no longer long and straight, but it is windy with bends and hills which don’t give much visibility or certainty to the future. Organizations need to be agile and continuously transform their cost structure and work activities. This is difficult to do when employees and managers do not understand their own strategies, cost structure and economics. It is much easier for organizations to transform themselves when their weighted and balanced performance measurement system links and communicates their strategies to the behavior of their employees.
The scorecard’s purpose is to translate strategy into measures that uniquely communicate senior management’s vision to the organization. In short, failing to link measures to strategies will cause misalignment of the cost structure to the strategy.
The Value of ABC/M with Scorecarding
Some organizations perceive ABC/M as just another way to spin financial data rather than as useful mission-critical managerial information. Also, in the past, an ABC/M project was just that, a project and not viewed as repeatable and reliable reporting system. As a project, ABC/M helps fix the problem and then the project is done. In contrast, scorecarding quickly becomes essential to be maintained and regularly reported. By combining today’s low-maintenance ABC/M systems with scorecarding, ABC/M becomes a valuable feeder system of data into the scorecarding system. Effective performance measures align employee behavior to the organization’s strategies, and ABC/M provides some of that information.
