Balanced Scorecard Theory

Basic Indicators: Doing it legally

When I used IRS definition of a business as a Going Concern in my previous articles, I wanted to emphasize that businesses are nothing more than a series of ongoing transactions. But that is only true within a critical constraint: business must be legal. Drug cartel is not a business by Internal Revenue Service definition. Neither is any business whose transactions exist outside the law. I assume that if you are reading this article, it is most likely not your intention to engage in something purposely illegal. But there is an other possibility, doing something legal in an illegal or dangerous way. You do not want to be at a place where you build a business only to find out later that you did not comply with some rule that could land you in jail. It is probably not a good idea to build a business by putting in danger life or limb of your customers, your employees or for that matter, yourself. So, now that we have secured some level of business, it is high time to review this business to insure that we are doing it in a way that is safe, and legally compliant.

Too many start-ups never get started because they try to figure this completely out before they even engage in the first transaction. Unfortunately, until you have the transactions lined up or at least you have a very clear understanding of the types of transactions that you will engage in, there is no way to clearly plan for safety and compliance. For many micro businesses, though, we do not really know, and often we stumble in to it. For example, my first business just happened because I was a kid with a boat on the lake. Somebody asked me to take them to the other side. I did, they paid me. Soon enough I was looking for people to take across. The allure of just doing it and getting money was too great for a kid to resist. Yet, in retrospective what I was doing was neither safe, nor legal, even though fundamentally it was something good and productive. It is quite likely, if I had considered my personal safety and legal compliance I would not have done it at all.

Once the business is started though, especially if it is turning in to a business instead of a hobby that occasionally pays for itself, it makes sense to consider the risks. For Mary, with her babysitting business, she has to consider both her safety and the safety of a child and a little bit of planning will go a long way. Should she have a plan for what happens in case of an emergency? Should she see if insurance is appropriate to her business? Also, at what point should she start reporting her income? Are there other government rules with which she will be better of complying? There is a myriad questions that are worth considering, and thus from the standpoint of measurement there are a number of variable to track, so that improvement can be identified and acceptable levels can be established.

These measures can be quite subjective, but that does not mean they will not be accurate. After all, just asking yourself if you and your customers are likely to lose your life or limb, or have any other losses is a measurement. Just considering the ways in which government compliance should be enhanced, and making a note of how well you are doing is also a measurement. Often it is very much a pass or fail measurement, but it is still an important measurement.

Only when we have succeeded at having a high level of confidence about being safe and compliant, can we safely move on to examining other priorities of our business.

Let’s consider Sara’s lemonade stand, after all, being in the food and beverage industry, she may have even more opportunity for unsafe practices and non-compliance. We often brush off kid businesses like this with the thought of what could go wrong, but consider the impact of unsafe lemonade, that might be served to hundreds of people in a single day. What are the water sources? What about other ingredients? What keeps contaminants out? How do we make sure that if Sarah is sick with an easily spreadable sickness, she knows to not sell lemonade? What happens if something bad happens in spite of all the precautions. There are also a myriad of government rules that exist around this industry precisely for that reason, that one should comply with.

Now let’s face it, if we had to start with considering every risk before we even set out to start a business, there is an extremely high probability that we would not even think about starting one. Sometimes, just common sense and a little bit of care go a long way to manage a vast majority of these risks if we are not doing it as a business. After all, I am not advocating that Sarah, or millions of kids around the world do nothing. Frankly, the chance of that lemonade doing more than causing a minor stomach ache are quite small. Doing nothing is the most dangerous thing of them all because it guaranties that a child’s talent will never develop and it creates a society where people do not know how to take responsibility and act to provide for themselves. But, at the same time, if we want a legitimate business, not just a kid selling lemonade on a sidewalk for two hours because they think it is a good idea or because their parents put them up to it, we need to figure out how to bring our business in line with basic safety and government compliance rules.

And a big multinational conglomerate is not above this basic need for safety and compliance. Many a great corporation failed precisely because they failed to watch this performance gauge. Even if currently your performance is exceptional, there is little to assure that it will always be so, thus you have to watch what you are doing regularly, checking in at least occasionally.

So, now that we have a steady pipeline of business, we are getting paid adequately to perform the work and we are doing it in a safe and compliant way we have to consider how to become more effective and efficient in what we are doing, so that we have the capacity to grow that pipeline. But that conversation is for another article.

Oleg Tumarkin, Juris Doctor, Master of Business Administration, Certified Six Sigma Black Belt, Practitioner of Theory of Inventive Problem Solving (TRIZ) is an Adjunct Professor of Business at Concordia University of Wisconsin. His firm, FutureWorks, in partnership with Bucket Brigade and AKS-Labs provides business coaching and Balanced Scorecard implementations. His life’s passion is the development of a universal business measurement and management system that would cause management out of the realm of unpredictable black art and closer to the realm of a repeatable, replicable, yet humane and flexible science.

oleg_tumarkin Balanced Scorecard Theory

Basic indicators: Getting paid

Landing a job is never good enough if you do not have the confidence that you will get paid. In Mary’s babysitting business, this may not normally be a problem, yet if you have been around different businesses long enough you know this is a bane for many a business. Neighbors could tell Mary that they don’t have cash on hand and that they will pay her next time. Next time they will apologize profusely and say that they will pay her next Thursday when they get their own pay check. Next Thursday they will tell her how her husband was let go and that they would not be able to pay her until later. Meanwhile, Mary could be out two weeks of pay. If she is a teenager living in your household, she would be able to deal with it. But what about the same situation if it was her only source of income?

This is another fundamental challenge of a micro business. It can get worse if it is providing services that a customer can argue to be inadequate, or if the length of engagement is of necessity long. We have all been taught to placate the customer, we don’t want to lose the business. Except, it is not business if you are not getting paid. Remember the definition of a business: a going concern, a series of transactions, if you are fulfilling your side of the transaction, but not so with the other side, there is really no mutually beneficial transaction, just a vampire sinking his teeth in to your skin and sipping slowly, while expecting you to say thank you.

To be sure, micro business owners often bring it on themselves, by taking on work they cannot deliver effectively, in a timely fashion; by grossly underestimating the amount of necessary work; by not defining the boundaries of the work; and perhaps most importantly, by being willing to do business with those with whom most other businesses seek to avoid: flakes, delusional, high credit risks.

Mary needs to overcome this constraint, since she wants to get paid. Sarah’s lemonade stand business is much safer from this perspective, in that she always gets paid before people drink the lemonade, and anyone drinking lemonade without paying clearly becomes a thief. Of course, Sarah in desperation for more more business may start offering free trials, or have people paying only after they drink and like the lemonade, but even there, if she sees people abusing these practices, she could curtail it quickly. Sarah has a different challenge, that of charging enough. When sales are down, she may well be tempted to lower prices and it may not become apparent for a while that she is charging less than she is spending on supplies until after she has suffered a significant loss.

While the challenge Sarah faces requires doing some basic accounting, she still faces a lot less complexity than a bigger business, she does not have to consider the cost of fixed assets. She does not have payroll to meet. But fundamentally, the measure of her bringing in more money than it costs to operate a business – positive cash flow is a foundational measurement of business success and it applies to Sarah, Mary or any other business.

Mary will not likely get paid up front, she can ask for it, but it not being customary or the exact number of hours she will work being for sure identified may prevent it. When she gets paid, the customer could tell her that since after 8 pm the child was asleep and Mary was doing homework, she will only pay her until 8 pm and unless Mary has lots of other work, Mary may be tempted to swallow it. Mary may not be compensated for the money she spent taking the kid to the park, and unless there is a prior agreement, she may have to swallow that as well. And many micro businesses and up swallowing lots of bitter pills just like that.

Even big businesses dedicate a considerable amount of often hidden resources to getting paid. Collections departments are a common fixture in many hospitals, dealerships, financial institutions. Thus we need to measure it, and we need to put procedures in place that will allow us to maintain this indicator at acceptable levels. The measures for this are simple and common: Accounts Receivable outstanding, Average days outstanding, Accounts Receivable Aging past a certain date, and many more. Pick one that makes sense to you and use it religiously.

But measurement is not the hard part. The hard part is avoiding the problem in the first place, and addressing the problem when it does happen. So, let’s talk for a minute about basic ways in which this problem can be avoided and then about how to spot and handle the exceptions that get through our process anyways.

Let’s look at some big business practices for prevention of this problem: they often do credit check or ask for references, they often open only a small credit line and extend it over time, they define their contracts precisely and may charge an up front retainer, they will commonly bill on a regular basis even if the project is not complete and make sure to get paid, before they proceed, they often do not turn over the work until payment is received, they dedicate considerable resources to making sure their estimates are high enough to cover the business costs.

As a micro business, Mary may feel like she lacks the resources to do a credit check and she may not feel like asking for references, yet asking for references is not at all unreasonable, after all, parents who want their kid watched will likely ask for references themselves. Mary will likely expect to get paid in the end of each day, and this is a reasonable expectation for every micro-business.

How do you get paid for just a day, if you typically do website projects that typically take between one and two months to complete? What about large corporate customers or working with government: they often do not pay for well over ninety days? If what you are doing is so complicated that it will take a few months to perform, just putting together a work scope and reviewing the work context should take you some time, and while the tendency is to give it away (and do less than thorough job in the process, since you are not being paid), you need to keep yourself from this tendency. You will be doing all parties a favor by charging them to put together an execution plan and negotiating the contract based on all parties viewing the execution plan as reasonable. This means a much longer sales pipeline, since you will not commence work on the contract until you have gotten paid for this portion of your work and have next opening in your project schedule, but if you are keeping your sales pipeline full, this should be OK. The trick is to never substitute jumping in to half baked projects for having a full sales pipeline. Of course, if the other side can provide other credit assurances and you are OK with waiting to get paid later, moving forward is fine, but it should be a deliberate step, rather than something you got pushed in to because you need work.

The other reason early startups fall in to the trap of doing projects for which they never seem to get paid, is because they get in to something that is too big for them. Obviously, putting a plan together first would largely alleviate that problem.

This brings us to the final reason that micro businesses find themselves in this position: they want to prove themselves. Lacking proper references and demo accounts, or hoping for referral business, start-ups fall in to the trap of giving away work just to look good. This is a problem for a number of reasons: it is not likely that they will do a great job if they are working under this arrangement, it is not likely that people who will accept this kind of work will serve as credible references, and if they get referred, it is often only to more work where they can be taken advantage off. Mary might babysit for free to build her reference list, but not only will the people for whom she worked for free have every incentive not to lose their free babysitter by giving her good references, but they might refer her to other people who also want a free ride. It is for this reason that reference and demo projects need to be billed accordingly, with up front explanation that this is a short term offer and that there are expectations of reference and referral. It is even more critical to put boundaries on these projects as they can get ugly. Further, it is only a good idea to do this under special circumstances and with accounts where results will definitely impress the rest of the potential client pool. Even there, some nominal fee should be charged, so that the transaction is complete. Even if that fee is writing of the reference letter. Finally, these projects should not serve as substitutes for good prospecting and sales conversion efforts.

Once the prevention approaches have been in place, you may want to consider the warning signals and actions necessary to deal with the exceptions. But that is a topic for another article.

oleg_tumarkin Balanced Scorecard Theory

Basic indicators: Lead Conversion

All the qualified prospects in the world will not land you sales without additional effort of engaging them in the conversation. For many businesses, the entire prospect of lead generation is outsourced (under names like marketing agency, for example) precisely because it is a function where being a specialist is a huge benefit. Unfortunately for two of our friends Mary and Sarah, they did not have resources or track record to be able to outsource this function, so they must master it, at least well enough to be able to keep the sales pipeline full.

But what happens once a lead gets in to the sales pipeline? Really, only two factors are necessary for traditional assessment of the sales effort: number of contacts and percent conversion. But are these really adequate? Let’s think through each business and consider the implications.
Mary, who does babysitting, starts out her sales process by telling her prospects that she is fund-raising money to pay for a missions trip with her church, she says that she has had a lot of practice babysitting and has worked with kids as young as couple a months. She promises that while she will babysit, not only will the child learn 4 foreign languages, but she will also get laundry done, clean the house and take care of the yard. Excited parents, quickly agree, only to come back to see Mary sitting with her friends, smoking on a porch, house unkempt, a child unattended… Obviously, this is an exaggerated example, but how many times have you heard sales and operations people pointing at each other and saying that operations people failed, or that sales people over-promised or outright lied to get the sale? After all, if as a sales person, Mary is paid on commission, while she might not lie quite so blatantly, she wants to close the sale and than let operations figure it out down the road. Sales people, naturally tending to be optimists, often do it without any malice or bad intention.
Even Mary, who both has to sell and do work, will tend to embellish upon herself, even if unintentionally, after all we all tend to think we are better than we really are, otherwise I fear, the world would be full of very depressed people. The same problem exists with Sarah, and it may be even harder for her to discover it, she may be convinced that she is selling great lemonade, because that is what she is hearing from her customers, but after a while if she pays attention, she may notice that most people only buy her lemonade once. If she is on a busy square, she might not notice it at all. Further, her experience will tend to be a poor indicator of what is really happening, because the one day, a group of people came by the park and it was hot, the next day a different group came, but they all had water bottles. Besides, even if she tries to tweak the recipe, it will be fairly subjective and what makes it more attractive to some, will make it less attractive to others, and with no controls for general friendliness and the weather, Sarah will be at a loss to know what is happening with her lead conversion. Now, she could take longer time spans and seasonal or weather variations in to account. She could even, by keeping track of her leads, such as counting number of people with no water bottles in the park who appear hot and thirsty, protect the purity of her conversion variable. By still she would struggle to make key business decisions: Am I selling in the right place? Am I selling a product that people want? Is my product of the quality that would make people come back? Am I accurately describing the product? And am I selling it at the right price? Am I selling hard enough?
Mary, may have an easier time answering some of the same questions, due to the nature of her business, but if she is diligent enough to keep a Balanced Scorecard and track her performance, she will still want indicators that will tell her that she is right about her answers to these questions, and perhaps the main reason to keep these indicators around and to check them occasionally, is she still right about her answers, or has something changed.
Well, now that we have defined the questions, let us consider the answers:
The first question: “Am I selling in the right place?” is really just a question of “Are the leads we sell to really qualified?” Since we are using conversion ratio as one of our Key Performance Indicators, we can have some indication by just watching the change in that number. But how to keep what we are seeing distinct from second question “Am I selling a product that people want?” since if the consumer tastes and preferences have changed, my conversion ratio would drop just as much as if I started getting less qualified leads. This is where tracking rejection reasons becomes very important, in spite of rarely getting an honest answer. For example, I cannot see too many people telling Sarah, “I don’t want to buy your lemonade because it tastes bad, or because I have concerns about it nutritional value, or because yesterday you decided not to go on a date with my second cousin.” Most people would avoid the stand entirely, or just say that they did not want any today, or were not thirsty today.
Similarly, in Mary’s case, she might hear things like, “Well, we will call you when we need you.” Nobody would tell her that there is a bad rumor that was started by her classmate and competitor going through town.
So, what are Sarah and Mary to do, to really find out why their sales are down? Maybe it is just seasonal variation? Maybe everyone’s sales are down because the economy is slow. One possible answer lies in not worrying about that question too much and instead considering a different group of prospects and watching their reactions.
There are few possibilities:
If initial sales to a potential customer pool are good and then they drop off again, there is a disconnect between what sales are selling and operations are delivering, it is not the fault of either side necessarily, but it is a good time to get outside input to help figure it out. Nobody will tell you what they will tell third party. For Sarah, getting one of her friends to snoop around could give her a wealth of insight. For Mary, she would discover the ugly rumor and put a stop to it by confronting it directly.
If sales are lousy across different market pools, well that could mean that pricing is not in line with market expectations, that further qualification of prospects or improved sales pitch are necessary.
Of course, if the sales are good and you are getting lots of referral business, it is worth considering if the pricing is adequate. Either way, just diving in to sales conversion rates, as well as customer retention should give us lots of clues as to what is really happening to the market place and our place in it.
Of course there is the final question: “Am I selling hard enough?” This is a question of how many leads were contacted, or in a more marketing driven company, how many impressions were communicated. While I am not a fan of activity based metrics, it seems there is no way around it, we must measure activity. But instead of blindly doing more activity, we have to look at this number in light of the conversion ratio. Further, by looking at dollars of potential sales contacted, rather than number of contacts made we tend to get a better indicator of actual productive activity. (It may make sense to keep the indicators separated by market segment even in a micro business, since a bigger lead may have a different conversion ration).
If you think this is too much work for a micro business. I agree and disagree. That is why often they tend to rely on intuition instead of hard numbers. But how can we aid the intuition? Surely, making a note that there were 20 people who could have bought something and 4 of them did, by keeping a notepad and adding a tick mark every time Sarah sees a qualified lead, or makes a sale and putting in her totals in to a computer by the hour in the end of the day, at least once a week, will give her a better idea of things her intuition probably already noticed.

When lead conversion process is solid, the bottleneck moves to an interesting legal question: How do we know we will get paid, but we will save the conversation about getting paid for another article.

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oleg_tumarkin Balanced Scorecard Theory

Advanced Performance Institute Review

Company: The Advanced Performance Institute

Website: http://www.ap-institute.com/index.asp

Scope of business

The Advanced Performance Institute (API) is a world’s leading company that offers consulting, training and research services on organizational performance and globally recognized frameworks like Balanced Scorecards, Corporate Performance Management and Performance Measurement. The Institute was established in the mid 1990s and has now grown into a leading company offering training, research and consulting in the field of performance management. API has headquarters in UK and international branches all over the world, for example Europe, the US, Australia and Middle East. The web sites offer info on postal address of main headquarters in UK, as well as phone number and several emails. Among customers of API are such well known and even icon companies like Bank of England, Shell, University of Cambridge and Fujitsu.

Personalities

Bernard Marr is chief executive of API and world known author of best sellers on business success and organizational performance. The CEO Journal named him one of the most prominent business brains. Mr. Marr worked as consultant, research and business consultant in all parts of the globe. He is the author of over 200 books and researches on managing performance, such as “More with less” “Intelligent company” and the others. Bernard Marr has offered consulting companies to leading world companies such as Barclays, DHL, Astra Zeneca, Fujitsu, BP, Royal Dutch Shell. Besides, he is now lecturing at the top business schools, having previously held influential posts at Cranfield School of Management and University of Cambridge. The most influential financial mass media take it as a price to publish Mr. Marr’s commentaries which regularly appear in The Times, The Financial Times and the Wall Street Journal.

The API is constantly collaborating with experienced academics or practitioners who offer their knowledge and skills to help companies optimize organizational performance. Among the most prominent API fellows are Professor David Teece, Dr. Robert Austin, Bruno Aziza, Prof. Dr. Klaus Moeller who hold influential positions in world’s best Universities and commercial organizations.

What is offered?

API offers a variety of services, namely, research, consulting and training/events. The Institute conducts own researches as well as works with partners on joint projects/researches with the aim of better understanding the leading trends in managing organizational performance. It should be noted that the bulk of researches refer to Balanced Scorecard and BSC best practices. A number of studies look into specific industries, while website visitors may find various case studies on organizational performance, BSC and performance evaluation.

The consulting section is the most “populous” since it is practice oriented. Consulting services fall info several categories: designing scorecards, designing performance measures, auditing and benchmarking, aligning strategies, performance management and choice of software. Each service type has description and customers’ reviews which are extremely helpful in understanding the essence of the offered services, professionalism and dedication of the API team etc.

API regularly organizes a variety of seminars and workshops on Balanced Scorecard and all aspects of successful implementation of this system in an organization. Trainings vary from theoretical introduction to specifically tailored 1 week master classes.

What deserves attention?

The choice of software section deserves a particular attention. The API itself is not software developer but it created the list of most popular and reliable applications used in strategic management and performance evaluation, including, BSC Designer from AKS-Labs. Managers who start implementing BSC in their companies for the first time know perfectly well how important it is to use the right software. BSC software reviews are extremely helpful in making the right choice. The majority of chosen software developers offer trial versions, so website visitors may test various applications.

Also, there is a personal online survey section. API members can order customized survey form own companies and organizations which is very convenient taking into account busy schedules of most company managers who order such reviews.

Articles and studies about BSC and performance evaluation

Perhaps, API is a number one website in terms of available articles, white papers and researches. Readers, however, need to register with the website to access the documents. API offers books, case studies, white papers, articles and reports, academic articles and news on BSC. Without any doubts, API employees do a great job selecting the latest pieces of new and publishing own researches. Besides, there is an overview sections that outline Balanced Scorecard, performance management and key performance indicators. Such overviews are rather short but describe the abovementioned concepts in full. Thus, if you are new to BSC it is an excellent opportunity to learn Balanced Scorecard basics. On the other hand, even experienced managers may find helpful articles and white papers.

Interesting pages

The API has own blog where it publishes interesting info on performance management and Balanced Scorecard. To read blog posts one should not register which makes it convenient for readers.

bsc_ideas Balanced Scorecard Theory

Basic indicators: Most critical struggle of any business

Anyone starting out in business, even if it is your daughter who want to get a babysitting gig, has to face this first and fundamental challenge: Who will be on the other end of the transaction and not just once but repeatedly, time and time again.

Prospecting for potential customers is perhaps more important in a micro business, particularly a young micro business, but it is never completely obsolete, even if you are General Electric or Exxon Mobil. The type of prospecting you do and they type of potential customer you are looking for may change, but fundamentally, we all face this challenge.

If you ever thought about being in business so that you would not have a boss, that last paragraph should tell you that quite to the contrary, business, especially starting out, is the process of looking for many many bosses. Being able to select more reasonable bosses out of the group will be a luxury that you will first have to earn by building a bigger business. (There is one exception to that, producing a commodity. If you produce a commodity, you don’t ever have to deal with a customer, the overall market will be your boss. But market can be a cruel boss, ever squeezing the margins, or changing the game rapidly, when you think you have it figured out. Besides to be in a commodity market, you need some resources, so just starting out, this will be highly unlikely).

So, your daughter, let’s call her for simplicity, Mary, is faced with the challenge of every business: How do I get enough customers to keep me busy. It is the first and most fundamental question in every business, without answering it to some degree, all other questions become irrelevant, business seizes.

Mary can explore many routes, and from standpoint of the Balanced Scorecard it is not important what routes she will explore, only that she tracks cost and effort for every one of those routes against the quantity and quality of potential customers that each method allows her to generate.

So, how do we measure Mary’s success in getting clients? We could look at operations and ask ourselves: How busy is Mary? Or we could look at Money and ask ourselves: How much money is Mary making? But being busy is a dangerous indicator, because being busy today tells us nothing about sales pipeline, in fact one of the challenges in consulting world that every micro business seems to face is that when a consultant gets too busy working, sales efforts drop off and the sales pipeline dries up. Even if we look out over foreseeable horizon, there are many fundamental problems that being busy does not address: Did sales and marketing functions do a great job or are we just in a market that is desperate for this service? Maybe our operations are so good that we are getting all the business with no sales or marketing effort at all? Are we undervaluing our services? Maybe on the other hand, sales are doing their job, but we have operational issues that end up losing us every customer? Maybe we have a terrible product and use great sales to mask the issue.

Using financial indicators alone does not answer the question fully, either. Aside from all the same concerns that apply to trying to judge market performance by operations, money tends to be a lagging indicator, even more so. Besides, what is to protect Mary from thinking that she is doing a bang up job, only to find out that the reason the neighbors are so eager to pay her so much and have her over so often is because they are thinking about divorcing and leaving the area and are too preoccupied to realize that Mary is making a killing.

So, since Operational or Financial indicators may mislead us, while we can use them as a control (sales are saying that they are doing a great job, yet there is no work or no money, better check what the story is, and the problem could be with sales after all). We must come up with indicators that would help us gauge success in the prospecting customers.

Well, let’s start by throwing out of the window an idea that we can measure everything with one number, that will give us answers to all our questions. Even in a micro business any one of the measures that I am about to list will not by itself explain how Mary’s efforts in prospecting for new business are doing. There are many typical measures such as: number of referrals received, number of long term customers, customer satisfaction, number of prospects that call for the first time, a conversion ratio of prospects becoming customers or number of customers that become frequent, well-paying customers. Knowing precisely the trends and even being aware of standard deviation (hard to do in a micro business, since the volume is so low) and understanding seasonal variation (even less likely in a first year business) for each of these Key Performance Indicators will not by itself tell us it Mary is succeeding. Frankly, even tracking all of these indicators might not suffice, since random variation and special causes will likely outweigh the trends in Mary’s micro business.

The fact that Mary started a month ago, talked to 2 people, landed both accounts and even got a referral out of it, does not necessarily mean that she has or will continue to deliver better results than her friend Sarah, who talked to 5 people, landed only 1 account and even lost that after the first week. We simply do not have enough data to say definitively that Mary is a better sales person, or that she delivers better service. It could have been a fluke. Obviously, if we have a rolling average of 2-3 months, it will reduce an opportunity for random variation to have quite so much impact. Yet, traditional company may likely promote Mary and fire Sarah based on that evidence alone. And that company would miss an opportunity to study what went right with Mary and what went wrong with Sarah altogether. So, next month when Mary produces no new sales and Sarah has already been fired, we will have to ask ourselves: Did the company really look out for its best interests?

Let’s for now, set these concerns aside and consider what should Mary really track and in which way? The variables that may be meaningful are: Number of new qualified prospects identified, number of prospects contacted, percent conversion along with watching the rejection reasons for trends, likely size of untapped prospect pool, number of customers who continue to do business after initial engagement and number of referrals.

Obviously last 2 variables are more indicators of operational performance, rather than sales alone (though, sales do play a part in these numbers, since they set the expectations and through account management should continue supporting the relationship). While they are worth tracking, they don’t tell us anything about the prospecting side of the business. On the other hand, if there are more referrals than Mary knows what to do with, the prospecting side of business is no longer the business constraint, and while it should not be forgotten completely, it means that other indicators will be of by far more importance.

Likely size of untapped prospect pool is typically not important, unless, of course, Mary is looking to babysit in a village where there but 20 families with children of relevant age (in such a case that measure becomes exceedingly important).

So this leaves us with three indicators: Number of new qualified prospects identified, number of prospects contacted and percent conversion. If we’d like in a bigger business we can talk about a number of new qualified prospects as marketing function, whereas contacting and converting them is a sales function. But that is a rather dangerous division, since how well qualified the prospect is impacts conversion rate almost directly.

Before we dive deep in to the best way to combine these metrics, in order to produce a Key Performance Indicator that will at a glance give us an idea of prospecting efforts, let’s take a step back and talk about Sarah, who has found no luck with babysitting and decided to setup a lemonade stand by the playground. The nature of her business is such that she does not have qualified prospects in the same way Mary does, yet fundamentally she faces the same challenge: not only does she need to generate sales today, but she needs to estimate sales for the future, so she can plan her business operations and sales efforts accordingly. What is Sarah to do? Can she consider the traffic at the playground as her potential prospects? Can she guess what percentage of them have money and in principle might buy lemonade on any given day? Would it be fair to call that pool of people, qualified prospects? I would tend to argue that these people would be indeed no different than Mary’s qualified leads, except in Sarah’s case it is her marketing message, rather than a sales contact that will initiate the conversation.

But can we equate Mary’s lead to Sarah’s lead? After all Mary’s lead may mean $10,000 in revenue over the next couple years, whereas Sarah’s lead will likely mean $2 on this particular transaction and if the summer stays hot and nobody has the same idea as Sarah, $100 for the summer.

This brings me to the point that we should not measure leads by number, but rather we should be measuring dollars in potential leads, and to keep it honest, we need to be using a rolling conversion percentage as a multiplier to keep from the lead $ inflation. By doing this we create a measurement system with a feedback loop, every time marketing throws over the wall leads that sales cannot convert, their multiplier drops and they have a harder challenge for themselves next month. Thus, now Mary, the marketer, has to be more honest about the value of the leads she generates and the degree to which she supports Mary, the sales person, who needs to go out and sell to these leads.

And the indicator of lead contacts (again in dollars of revenue, or better yet likely contribution margin, as opposed to shear number of leads) will tell Mary when she should spend more time as marketer and when as a sales person, so that she can maintain a small, consistent backlog for her to sell to. Once this has been achieved and is maintained, the bottleneck moves to sales, but we will save the conversation about lead conversion for another article.

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Basic indicators: Before you begin

Business is nothing more than a series of transactions. At least that’s how I interpret IRS definition that a business is a Going Concern. So, before a business can even begin functioning, the founder must decided what can be offered. In a micro-business the question of what is sought to be gained is rarely a legitimate one, since in all likelihood, an engagement in this kind of a business is done for the simple reason of making some money. This question might get more complicated in a bigger business and acquire many nuances, but in a healthy micro-business, this is the only legitimate goal, otherwise, it is not a business but a hobby, or the founder is looking too far to the future, when the business has acquired enough resources to allow and require thinking about questions like making money now.

On the other hand, deciding what can be offered is a critical question and in micro-business it is usually time of the business owner. Anyone starting out in business, even if it is your daughter who want to get a babysitting gig, has time. So the question becomes one of qualification. What is her time worth and what can she do? Is she qualified to work with a two month old? Does she have sufficient experience to handle an emergency situation? These questions should help her both shaped her market and identify if there are things she needs to learn prior to looking for customers. Would her own relatives trust her to babysit? Would she even trust herself? Or is she the girl to whom others call for advice when they run in to problem with their babysitting?

Ability is a tough thing to measure in the traditional way, since we can not easily put a discrete number on it. I can not say that my babysitting ability is 55.6, while yours is 65.2. What I can say is that in the context of babysitting a six year old, I would be confident to deliver reasonable competent performance and can even put together a list of tips and recommendations for a person who lacks such an experience. That’s a lot of words. How do we put it on our balanced scorecard? Well, at least I hope you see why we should. If I cannot assess my improvement in something so critical, so basic, any other measurement is meaningless. If I cannot communicate my level of expertise to my potential customers either I will not be able to sell at all, or worse yet, I might commit myself to work that is outside my ability to deliver it.

Yet I avoided a critical question: How do we put the measurement of our ability on our balanced scorecard? By defining transition points: Think in terms of red, yellow and green. How do I know that someone is unable? How do I know that I am unable? That’s hard to answer. But we can clearly answer the question of how do we know if someone is able – they have done it before, or they have other similar experience and they have performed adequately. Note that we cannot reverse our assumptions, just because someone performed inadequately once it does not follow that they are not able. Aside from myriad of circumstantial reasons for things not going smoothly, there is just natural variation and occasional inconsistency in performance. Just because Michael Jordan can not dunk a ball to save his life for a few minutes, does not mean that he is not capable of dunking a ball.

But how do we know if the performance is going to be generally good, or generally marginal? Well, we can measure the difference in expertise by asking ourselves a question: does this daughter of yours who wants to babysit feel herself generally confident, even to a degree of advising others, or is she just feeling confident enough to muddle her own way through it. Admittedly, it is a subjective assessment at best, but it is better than no assessment at all.

Perhaps, we should also add one more way in which ability can turn caution Yellow. When your daughter is so confident that she is overconfident, thinking that nothing could possibly go wrong, that there is nothing at all new she could learn through this engagement. In some ways this is a more dangerous sign of caution, since she is likely growing bored with her work and is not aware how her performance has started degrading.

Being certain that she is capable of performing her work is a great place to start before facing the biggest business challenge of them all: getting work. But that challenge warrants a separate article.

oleg_tumarkin Balanced Scorecard Theory

Basic indicators: Balanced Scorecard in a micro business series

Traditionally, balanced scorecards have been the domain of major corporations. Yet, in the next series of articles I endeavor to look at a micro business and to see what are the Key Performance Indicators that they deal with and how they might go about measuring them. What is important about this set of Key Performance Indicators is that they are so basic, so rudimentary that they will apply to a business of every size and can only be neglected when the performance on these indicators is adequate. This means that while these articles target and talk about micro business, every one of these measures should be relevant to any business, albeit hopefully, your performance on these measures is so good that you don’t have to consciously consider them. That said, these are the basics and it helps to revisit the basics, because if you do not have them right, building on top is that much harder.

For the sake of simplicity, let’s consider a very tiny business that we are all familiar with, your daughter babysitting for your neighbors. What are the challenges she faces, what should she be tracking, how does she know if her business is succeeding? More likely than not she did not go through a formal process of considering this struggle, but if she has been at it for a while, she may find many of these indicators intuitive.

Some of these indicators may not come up, if you are in a different line of business, but for the most part they all do, it is just that in some industries, some indicators are not worth watching since they will never be an issue. In my consulting practice, for example, I rarely have to consider if my actions will be dangerous to life or health of human beings, yet it is still a valid measure, just not one that comes up a lot for my industry. Clearly, in industry like childcare this is a critical question to concern ourselves with and we would hope that your daughter is considering her own safety and safety of a child she is caring for every time she takes on a babysitting assignment.

As we look at these various Key Performance Indicators consider which of them will be relevant for your business. Also think about the Key Performance Indicators that may not be an issue right now, but are worth taking an occasional look at, to make sure that they are still in order. After all, most major empires crumble not so much from the outside pressure as from neglecting of the basic internal disciplines that leave the external shell to be more and more hollow.

oleg_tumarkin Balanced Scorecard Theory

One size does not fit all

In my article, Balanced Scorecard Adoption, I argue that Balanced Scorecard tools when properly leveraged should go way beyond arbitrary Key Performance Indicators, they need to produce trigger points that cause us to make decisions. I also argue that there is a need for benchmarks and standards that would help a business to know what are the healthy decisions and which are not.

But right now I want to address the pendulum swinging too far the other way. There is no one size fits all answer after all. We cannot use the same Key Performance Indicators for a couple kids who are selling water on the side of the road to a large corporation like ExxonMobil. Well, some Key Performance Indicators apply to both, and I would argue that the ones that apply to the micro-business of selling water or lemonade apply to any business. But ideally a corporation does not just meet the Key Performance Indicators that are a requirement for every business: sell for more than what you bought, stay cash positive, make sure customers want to keep doing business with you, do not do anything that would get you arrested in the process, it needs to go well beyond it and consider Key Performance Indicators like return on research and development or employee upward mobility.

The problem is that if we apply the Key Performance Indicators and expectations of a big business to a smaller one that has not yet successfully performed on more basic Key Performance Indicators, we are dividing managerial attention, instead of focusing it. And that is itself a Key Performance Indicator that we never want to affect negatively.

So, how do we know which Key Performance Indicators are appropriate to our business? By considering diagnostic questions that help us identify where in development cycle our business is. It is too bad, but these questions have not yet been developed and there is a reason why not: business growth and development evolves along many dimensions simultaneously, it sometimes retreats and has to be maintained at each previous level. Not all is hopeless, though. If enough questions can be developed to gauge growth along every dimension the net result will be that we will have not just Balanced Scorecard but a precise guide that fits the needs of any business.

How are we to know, which Key Performance Indicators to use? Right now, we don’t and that is kind of exciting. It is an opportunity for a major seismic shift in thinking, in doing business.

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oleg_tumarkin Balanced Scorecard Theory

Balanced Scorecard Adoption

The world appears to be waking up to the need of rapid and multidimensional performance assessment and rapid feedback mechanisms. We are starting to see a whole slew of phone applications that help people track the food they eat, the miles they walk, the time they use to engage in various activities. Measurement is becoming the need of the modern psyche. More importantly, many of these measurement tools provide guidelines, benchmarks. For example, our diet programs might be able to make suggestions like based on your height and weight and your lifestyle, you should be consuming X of calories, they should consist of combination of the following food groups. Now, these suggestions are not yet fully refined or have been universally tested, but nevertheless, they provide recommendation that enable us to have a much better than our likely performance without these recommendations. What’s more, many of these programs allow us to share this information with our friends, since transparency will likely help us stay motivated. This has resulted in more than one friendly competition among my friends, and they were all better off for it. After all they all were able to do more push ups, run faster and farther, and eat healthier as a result.

Yet, in business context, it appears that measurement is just now becoming common place. Don’t get me wrong, measuring business performance predates Frederick Taylor, but a comprehensive measurement system that would allow feedback and provide guidelines and recommendations based on best practices has not yet been developed.

I can hear the arguments already. Business management is more complex, there is no one size fits all formula, the way we do our business is unique. And I have one thing to say to that, it is bunch of baloney.

If business is more complex than a human being, and that’s a big if, we would need to have more measurement and guidelines, rather then less to help us navigate it appropriately. Yes all businesses are different, but so are all humans. Just like a diet that is appropriate for someone preparing for a marathon would kill a two year old baby, so in business context, though we can find guidelines that are appropriate to the business’s stage of development, it’s goals and abilities. Let’s face it, the reasons you are in business are not unique, there are only a small variety of options and they likely include making money and changing the world to some degree. Moreover, even your business practices are likely not too different from everyone else, otherwise your business would either fail or be growing so rapidly that you would not be able to take the time to read this article.

The reason we are not looking at measurement in business in this way appears to be for a very different reason, it is a matter of personal pride. While we are ready to acknowledge that a dietitian or a trainer can give us guidelines for managing our body that are much better than what we would create if we just arbitrarily picked our guidelines based on our own perspective, it is not so with managing a business. How could somebody outside our organization possibly know what might be the guidelines or direction for our management? Yet, the parallel is clear, if we know where you are and have a general idea of where you want to get to, the way you do it might be unique, but there are some fundamental measurements that you absolutely must hit in order to get to your goal and not allow it to blow up your business in the process.

This means that our Scorecard Key Performance Indicators should not be random or arbitrary, the targets should not be arbitrary either. Within the indicators we also need to account for common cause variation and separate it from special cause variation. But more importantly, we need to have clear trigger points. If I am eating 3000 calories a day and burning 2500 calories, It’s not that relevant if the actual numbers 3100 and 2400. Clearly, unless my goal is to gain weight, the action should be to reduce calorie intake or to increase calorie consumption. What is relevant is that there is a trigger to spring in to management action. The parallel should exist in the Balanced Scorecard design for the organization. We need indicators that become trigger points for action and it is not that relevant if they are perfect, it is more relevant that they cause us to make good decisions.

There is another reason in business that we do not seem to make our decisions based on measurement. Frankly, as a civilization we have not learned to measure things like sentiment precisely and yet we have not learned to make decisions using imprecise data. So the measurement inversion sets in, we measure things that we can measure precisely, yet it is the other imprecise things that commonly act as the input, rather than output variables and it is they that need precise measurement.

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oleg_tumarkin 6 Sigma, Balanced Scorecard Theory

Palladium Group Review

Company: Palladium Group

Website: http://www.thepalladiumgroup.com

Scope of business

Palladium Group is a recognized leader in providing consulting strategy execution services, education, training and certification of the Balanced Scorecard. The company has founded its own Hall of Fame which consists of companies that achieved positive results in implementation of the Balanced Scorecard. Besides, Palladium Group has developed own proven framework – The Palladium Execution Premium Process – which is based on Drs. Norton and Kaplan works and used by hundreds of organizations throughout the world.

Palladium Group has offices at all continents except for Africa, including 5 offices in the US. Without any doubts numerous worldwide locations are the best proof of the company are the best proofs of its reliability and reputation. Among Palladium Group Hall of Fame member are companies like Volkswagen, UPS, US Army, Hilton, French Ministry of Defense, City Council of Barcelona and dozens of other respectable organizations.

Palladium Group is offering career opportunities for consultants, executives, project managers and marketing specialists. Without any doubts, employment with Palladium Group is an excellent opportunities to develop professional and personal skills and pursue ambitious career goals.

Personalities

John McClellan, formerly a managing director of Thomas H. Lee Partners (THL) (a world famous equity funds firm), is a chief executive with Palladium Group. He is in charge of the company operations and global strategy. Mr. McCellan experience as an executive and strategy management guru is incredibly versatile and thus valuable.

Robert L. Howie, Jr. is a Chief Marketing Officer and the Director of the Palladium BSC Hall of Fame. He is also a founding publisher of Balanced Scorecard Report which is released by Harvard Business Publishing. Mr. Howie consulted a variety of organizations, including the US Department of Defense and Abu Dhabi Government.

What is Offered?

Palladium Group offers a unique framework Palladium Execution Premium Process which is a six stage program that helps hundreds of organizations with strategy execution, namely with translation of strategy, clarification of mission and values, articulating differences of the organization among competitors etc. the consulting services fall into such categories as strategy management, performance management and business intelligence. Strategy and performance management are thoroughly studied by BSC experts while business intelligence is quite new and interesting field of study which focuses on reliability and accuracy of data used in strategic planning.

The Palladium Group is an established leader in organization of BSC related events, including the ones in which creators of BSC Drs. Norton and Kaplan take a direct part. Even the most experienced managers and shareholders will be surprised with a variety of seminars, training sessions, summits, conferences and webcasts. The Palladium Kaplan-Norton Balanced Scorecard Certified Program is really unique since where else can you participate in a seminar lead by the creators of BSC?

There is also an e-store at Palladium Group site. Two products from this store deserve a special attention – The Executive Strategy Manager (ESM) which is web based BSC software and Strategy Execution Toolkits that contain a wide range of learning materials and helpful tips for managers. Besides, Palladium Group offers assets from its e-library which are materials from various seminars, training sessions, conferences, articles, interviews, books etc. Use of e-library materials is recommended for self education and coaching of managerial groups.

What deserves attention?

Traditionally we pay more attention to BSC software options offered by various companies. As said above, Palladium Group recommends its customers The Executive Strategy Manager – web based software managed and designed by creators of BSC Kaplan and Norton. Since it is an online application it does not require any setup time and can be accessed from any PC connected to the Internet. The software will reflect all changes in the BSC methodology that is being constantly improved. The software price is not available, however it is possible to request a quote and a free trial to evaluate the application. It is possible to view the list of companies that are using The Executive Strategy Manager, and this list is quite impressive. Besides, there are success stories that vividly demonstrate the power of this software.

Articles About BSC

Palladium Group website has Articles sections, however the content can be accessed only if visitors fill out a little web form.

Other interesting BSC related pages

Industries section contain success stories and testimonials from representatives of companies that have been or are now customers of Palladium Group. Currently, the list of industries contain Energy and Utilities, Financial and Business services, Healthcare, Government, Manufacturing, Life sciences, Retail and Transportation.

There is also a list of BSC communities such as BSC Online Newsletter, Risk 360, Execution premium Community and OSM Community. Certainly such communities will be helpful both for aspiring and experienced executives and managers since it is possible to find loads of helpful information and even take advantage of “ask an expert” opportunity.

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