How do executives expect to realize their strategic objectives if all they look at is financial results like product profit margins, return on equity, earnings and interest before interest, taxes, depreciation, and amortization (EBITDA), cash flow, and other financial results? These are really not goals – they are results. They are consequences. Measurements are not about monitoring the summary dials of a balanced scorecard. They are about moving the dials of the dashboard that actually move the scorecard dials.
Worse yet, when measures are displayed in isolation of each other rather than with a chain of cause-and-effect linkages, then one cannot analyze how much influencing measures affect influenced measures. This is more than just leading indicators and lagging indicators. Those are timing relationships. A balanced scorecard reports the causal linkages, and its key performance indicators (KPIs) should be derived from a strategy map. Any strategic measurement system that fails to start with a strategy map and/or reports measures in isolation is like a kite without a string. There is no steering or controlling.
My belief is there is confusion about what the difference is between a balanced scorecard and a dashboard. There is similar confusion differentiating key performance indicators (KPIs) from normal and routine measures that we can refer to as just performance indicators (PIs). The adjective “key” of a KPI is the operative term. An organization has only so much resources or energy to focus. To use a radio analogy, KPIs are what distinguish the signal from the noise – the measures of progress toward strategy execution. As a negative result of this confusion, organizations are including an excessive amount of PIs in their scorecard system that should be restricted to KPIs.
When someone says to me our organization has 300 KPIs, I ask them, “How can they all be a “K”?
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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 then 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 vital and few 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, then 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 the question: “How are we doing on what is important?” More importantly, the scorecard should facilitate analysis to also know why. As mentioned, the idea is not to just monitor the dials but to move the dials.
To go one step further, a truly complete scorecard system will have business analytics embedded in it. An obvious example would be correlation analysis to evaluate which influencing measures have what degree of explanatory contribution to influenced measures. This way the scorecard becomes like a laboratory to truly optimize size and complexity.
To read more about the difference between a scorecard (strategic KPIs) and dashboards (operational PIs) read my article, How is a Balanced Scorecard and Dashboard Different?
