The practice of performance measurement is essential when managing enterprise performance. Yet far too often, performance measurement is confused with the iterative process of performance management. This article will explain that although performance measurement is an integral part of the management process, the two are not equals. In addition, this article will illustrate how the Balanced Scorecard can be used to automate the performance management process.
Distinguishing the Difference
Performance measurement monitors isolated metrics, which explain what happened. It is quite helpful when used to determine how one is performing against goals. The measurement of key performance indicators (KPIs) assists managers in identifying an organization's strengths and weaknesses. It provides a starting point for the performance management process because it demonstrates whether an organization is in line with strategic objectives.
Currently, most organizations are measuring performance with a system in place to gather and monitor KPIs. However, performance measurement explains the past. It does not explain why an organization is performing in such a way, nor what to do to get the organization back on track. The latter results are derived from a performance management system because it encompasses enterprise strategy.
Unfortunately, many managers use isolated KPIs when making strategic decisions. This is a critical misuse of performance measurement. They should only use KPIs to determine whether the organization is meeting goals or to detect strengths and weaknesses. A performance measurement system of isolated metrics drives isolated performance and, therefore, isolated decision making. Many have neglected to add the strategic element of performance management. Managers must realize performance measurement is the integral first step in the process of performance management.
Performance management is the iterative process of monitoring enterprise performance to manage internal processes and effect strategic change. The Balanced Scorecard provides an effective methodology for strategic evolution. This management methodology is a comprehensive, top-down view of enterprise performance with a strong focus on vision and strategy. To develop an effective scorecard, one must begin with enterprise vision (i.e., mission). Next, while keeping organizational structure in mind, managers must decide which strategic objectives will lead to successful goal attainment. Managers then decide which strategic initiatives will assist the enterprise in meeting strategic objectives. Strategic initiatives are translated into specific tactical performance-driving activities. Finally, metrics are established for each activity. These become the enterprise performance measures. Now management has a framework of interrelated performance measurements.
Strategic enterprise management then yields process improvements that optimize performance at functional levels in order to maximize overall strategic performance and vision attainment. The process of performance management includes measurement of key metrics, analysis of metric results, and the planning and managing of enterprise strategy. To survive in the dynamic global economic system, strategic assessment and amendment must be possible. Only a performance management system engenders strategic evolution.
Optimize Organizational Performance
Performance measurement will not optimize organizational performance. By monitoring isolated performance measures, managers will probably attempt to maximize the performance of all metrics. Therefore, they are maximizing tactical performance, yet they are not determining which tactical activities optimize overall enterprise performance. Only a performance management system will identify which metrics must be maximized to optimize strategic results.
To illustrate, managers may subscribe to the following performance objectives:
Maximize Margin vs. Maximize Profit. Depending upon the product, it may be wise to decrease the profit margin to increase overall profit. Thus to a reasonable degree, these measures are inversely related. If managers track pricing metrics in an isolated manner, they may not detect this relationship. Hence, they may attempt to increase the profit margin, rather than identifying the exact margin for profit maximization.
Improve Customer Service vs. Decrease Inventory Carrying Costs. Inventory managers commonly wrestle with the dilemma of improving customer service while maintaining a low inventory carrying cost. If inventory carrying costs are high, managers may decide to keep inventory low. This may sacrifice customer service quality. If customer service impacts customer satisfaction and customer loyalty, it may be wise to increase inventory levels. If there is no methodology in place to detect causal relationships between performance and results, then there is no way to accurately manage overall performance. Basing decisions on performance measurement only can be a rather risky adventure. Since the enterprise exists in a dynamic environment, the performance management system must quantify the relationships between activities and track progression toward strategic goals.
Automating the Performance Management Cycle
In attempt to ride the recent wave of interest in the Balanced Scorecard, some query and reporting vendors would lead one to believe that there is no difference between monitoring metrics and the actual process of performance management. However, the META Group disagrees, having stated that the Balanced Scorecard is not reporting on steroids. Revolving around strategy and facilitated by the Balanced Scorecard framework, performance management applications must enable the following:
This is the process whereby users learn what has happened. By establishing metrics that are linked to strategic goals, users are able to measure actual historical performance as it relates to the overall strategy. The measurement model contains performance targets, including industry benchmarks, for each metric. Actual performance may then be compared against these targets and "scored" using a normalized scale such as zero to 10. A Balanced Scorecard application should enable:
The Integration of Quantitative and Qualitative Measures: Quantitative measures are those represented in numerical terms, i.e., return on investment and on- time delivery. Qualitative measures have no numeric value and are usually opinion based, i.e., customer satisfaction. Balanced Scorecard applications should enable the input of both measure types, thus enabling the analysis of hard data while allowing managers to inject experienced opinions into results.
Target Setting and Benchmarking: To avoid evaluating your performance results in a vacuum, Balanced Scorecard applications should provide the ability to set comparative performance targets such as worst/best scenarios, industry benchmarks and historical performance.
Graphical Performance Repre-sentation: To visually grasp results, a Balanced Scorecard should enable graphical performance representations. This provides the means for managers to compare actual performance with targets and benchmarks.
This is the critical exercise that enables users to answer why. Using business intelligence technology and techniques, users are able to drill into performance data to better understand why performance is either good or bad. Arriving at an accurate understanding, users may then effectively manage change to correct poor performance or perpetuate good performance. The following features are imperative for analysis:
Direct Access to Performance Data: To understand why performance results are good or bad, it is essential to have direct access to data. Robust Balanced Scorecard solutions should provide access to most of the popular databases. With direct data access, users can automate the data- gathering process and perform in-depth analysis of performance results.
Interactive Data Analysis: With underlying business intelligence functionality, users can analyze performance data in a number of ways, including: reporting, multidimensional analysis, executive dashboards, forecasting and what-if analysis. Thus, top-level executives can monitor the pulse of the organization with high-level views provided by executive dashboards; and operations managers can see detailed views of performance by utilizing drill-downs, graphs and reports.
This is the process by which users are able to ask what if. The ability to link performance to specific business activities, detect statistical relationships that exist between various business activities and enable users to play "what-if" games with strategic initiatives is the most powerful deliverable of a true performance management solution. Users clearly see which activities have the most impact on organizational vision. This knowledge enables them to identify which activities are worthy of time and money and which activities are expendable.
Statistical analysis of the performance management model enables managers to quantify the link between tactical measures and strategic goals. By testing various scenarios within the performance management model, managers can identify which strategy optimizes overall corporate performance. Strategic planning results suggest remedies for management dilemmas and insight into outcomes of hypothetical initiatives. Consequently, managers will have established a methodology to effect strategic change. Planning features include:
Strategy Validation: Statistically validate your strategic hypotheses by applying regression analysis to performance results. Correlation coefficients will determine whether actual statistical relationships exist between initiatives. Thus, you can determine the extent of strategic initiative interrelation.
Performance Prediction: Once initiative interrelationships are quantified, utilize "what-if" analysis to predict outcomes of strategic hypotheses. This provides managers the ability to test business hypotheses prior to implementation.
Once appropriate strategic initiatives have been discovered through strategic planning, results and initiatives should be communicated throughout the entire organization. This area entails the process of implementing change, which requires extensive communication. Users must be able to communicate strategic intents and share insights into performance results. Strategic evolution occurs when all employees implement change to realign the tactical activities with strategy. Strategic management is capable via the following:
Cause-and-Effect Diagrams: These are graphical representations of an organization's strategic game plan. Cause-and-effect diagrams enable strategic planners to visualize the interdependencies between initiatives and functional areas. For instance, to reinvigorate the product line, development managers may increase resources dedicated to research and development with the expectation of product innovation and improvement.
Linking Performance Results to Strategy: Each strategic initiative within the cause-and-effect diagram should be linked to a subordinate scorecard. Initiatives thus receive their results or scores from the underlying scorecard. This allows users to link strategy directly to individual performance measures.
Linking Action Plans to Strategic Performance: By linking action plans to performance measures and/or strategic initiatives, individuals can track project progress directly from the scorecard. In addition, users will be able to demonstrate how various action plans support strategy.
Innovation and economic change demand strategic modification. A performance management system can recognize such changes in the organization's environment and enhance strategic decision making. Therefore, managers will be taking a proactive rather than reactive approach to strategic development. By effectively analyzing performance information, discovering quantifiable outcomes from strategic planning and basing strategic decisions upon the latter, managers will effectively manage organizational performance.
Performance measurement is the facilitating first step in the process of performance management. Historically, many have mistakenly based strategic decisions upon performance assessments. To effect strategic performance, metrics must be analyzed and strategic initiatives must be tested to track successful goal attainment using a valid performance management methodology such as the Balanced Scorecard. Strategic planning enables managers to statistically test strategic theories and view results of hypothetical initiatives. Finally, such strategic planning guides managers to the appropriate decision by providing insight into the outcomes of possible tactics. As a result, managers are armed to effectively manage enterprise performance.
Balanced Scorecard Collaborative
By Robert L. Howie, Jr.
Balanced Scorecard Collaborative an organization that facilitates the worldwide awareness, use, enhancement and integrity of the Balanced Scorecard (BSC) as a value-added management process has defined guidelines for performance for software applications that embrace the BSC approach. These Balanced Scorecard Functional Standards help users better understand what they should look for in BSC products, guide suppliers in designing Balanced Scorecard products to meet market demand and form the basis for certifying software from suppliers seeking to comply with the methodology of Drs. Robert Kaplan and David Norton, creators of the BSC concept.
The BSC is an organizational framework for implementing and managing strategy at all levels of an enterprise by linking objectives, initiatives and measures to an organization's strategy. The scorecard provides an enterprise view of an organization's overall performance by integrating financial measures with other key performance indicators around customer perspectives, internal business processes and organizational growth, learning and innovation. Since the concept was introduced in 1992, Balanced Scorecards have been implemented at corporate, strategic business unit, shared service functions and even individual levels at hundreds of organizations in both the private and public sectors worldwide.
A shift in the software industry toward strategic applications in ERP, database, business intelligence and other analytical application areas highlights the need for BSC standards. These strategic applications lend themselves to the BSC methodology and are prime candidates for software-enabled scorecards. Suppliers need a functional baseline for managing strategic performance, and users need to understand what constitutes baseline functionality in automated support of their scorecards.
With software suppliers accelerating their efforts to develop applications that support the BSC, the standards help users determine if the applications in question have the integrity of a good BSC management system. Software that is certified as compliant with the standards will also assure users that these applications will support the management approach for which they are named.
The standards released on September 30, 1999 represent the minimum functionality for a BSC system including design, strategic education and communication, business execution, and feedback and learning. Vendors are encouraged to differentiate their products beyond these minimum standards. A complete set of the standards, along with information about certification, can be found at Balanced Scorecard Collaborative's Web site, www.bscol.com.
Robert L. Howie, Jr. is the vice president of Balanced Scorecard Collaborative, Inc. He can be reached at firstname.lastname@example.org.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access