De-emphasize KPIs and emphasize action
Despite popular belief, the Balanced Scorecard is not a measurement system. Key Performance Indicators (KPIs) are an important component of that system, but only third in the hierarchy of importance. First is the Strategy Map (that visually describes the intended results (outcomes) and the capabilities and relationships required for their delivery (enablers). Second is the initiatives (supported by process improvements) that deliver change. KPIs are simply a mechanism for monitoring progress to the objective.
Now, in building a scorecard system, it is proper to build objectives, then KPIs and then initiatives. The actions to drive change should be focused on closing performance gaps on the KPI (the gap between current and targeted performance). Herein lies an issue.
The fallacy of seeking the “perfect” KPI
As we build KPIs straight after objectives, we tend to spend an inordinate amount of time finding the “perfect” KPI. As if by doing so, performance will automatically improve. Marginally perhaps, as people do pay for attention to what they are measured on, but step-change transformational change will certainly not happen.
Moreover, as identifying the “ideal” KPI is notoriously challenging, we often end up selecting many KPIs, with the hope that somehow they will meld together into something that is perfect. Consequently, the scorecard system becomes a bloated mechanism for capturing and reporting measures. Of little real value, and generally an annoyance to the business, who have better things to do than amass data for lots of KPIs.
Something I always stress in my work is that there is no such thing as a “perfect” KPI. There are good KPIs and good combinations of KPIs, but not a perfect KPI. Moreover, although we have 500 years of experience of working with and evolving financial KPIs, we have only relatively recently began working with non-financial measures. Therefore, our understanding is a lot less mature – thus, a long way from anything close to perfection.
Something I always stress in my work is that there is no such thing as a “perfect” KPI.
Non-financial KPIs: a dynamic interplay
I also believe that seeking the perfect strategic KPI for a non-financial objective is something of a red herring. These KPIs differ from most of their financial counterparts in that they are rarely of value in isolation. Customer, process, and learning and growth KPIs work together, in a difficult to capture dynamic to deliver ultimate financial value.
Note too, that the value of an intangible asset is influenced by its interaction with other assets – technology, people, and culture are interdependent (and becoming increasingly so). So, it is difficult to determine the value of a single intangible asset in isolation: no KPI can do this.
Customer, process, and learning and growth KPIs work together, in a difficult to capture dynamic to deliver ultimate financial value.
Indeed, and particularly at the Learning & Growth perspective, organizations might have a KPI that is at best a proxy, in that it provides some, but by no means perfect, measurement of the progress. But that is OK as these can be improved over time. This helps overcome the barrier of spending a lot of time worrying over what is the best KPI for creating a collaborative culture, for instance, and focusing on what needs to change (technologically and culturally) to enable collaboration.
As a result, the chosen KPI can still be used as an indicator of progress to an objective, with an identified performance gap. But it is an “indicator” of performance (the I in KPI is there for a reason) and not an absolute measure of performance, and certainly not a goal in itself. This is particularly true at the enabler level.
In facilitating the design of scorecard systems, I encourage organizations to de-emphasize KPIs and emphasize actions. Getting them to spend less time on KPI selection (although tools such as driver models and key performance questions are powerful and simple mechanisms for identifying more appropriate measures) and expend more energy on thinking about the actions (initiatives and process improvements) that are required to deliver to the objective (which will typically affect multiple internal process, and learning and growth objectives).
Even more important is to resource, manage, monitor and report on the implementation of the initiatives/improvements. I also advise on making much better use of advanced analytic systems to gain insights as to how the changes delivered by the actions affect performance (from this, better KPIs can also be identified).
Even more important is to resource, manage, monitor and report on the implementation of the initiatives/improvements.
The marketplace moves way too fast these days to rely heavily on static KPIs and in spending months finding the “perfect” performance measure. The key to a successful strategy is speed and agility. An overblown, over-engineered KPI system is a showstopper. To expand on a quote from John Ruskin, “In the final analysis, our goals and measures are of little consequence. Neither is what we think or believe. The only thing of consequence is what we do.”