Balanced Scorecard Designer

Cascading: conclusion

Indicative and Imperative KPIs

It is not a secret that in practice the system of budgetary management receives unflattering recalls and censures for the completely avoidance a company strategy, i.e. there is no direct connection of the budget of development (constituted on three – five years for fulfillment of KPIs of the Innovation and Learning and Internal Process Perspectives) and the master budget (the system of the interconnected budgets approved for no more than a year). At the same time, if the process of construction of budgetary management model is performed in coordination with the strategy, formulated in terms of KPIs, such system is really capable to solve the problems facing to top management of the company, referring to the corporate administration. To implement the model of KPIs to the multi level companies’ management systems (with the need of organizing cascading: the process of distribution of authorities and responsibilities for indicators among the lower hierarchy level subsystems’ managers and specialists) it is rational to divide KPIs into the following groups:

• “Indicative” indicators;
• Imperative (control) indicators.

The quantity indicative KPIs correlates with the purposes and processes of the services and divisions, associated with them. Examples of such KPIs could be: “Quantity of document circulation per week”, “Quantity of specialized exhibitions per season” and others. So “indicative” indicators can be both leading, and lagging.

Imperative (control) indicators are creating by the top hierarchy levels of management and their quantity is the same as the quantity of Perspectives, the top level categories, including the overall sum of the subcategories and KPIs. All the imperative indicators are actually lagging ones. These indicators are needed for top management (it also can be a management company) to control the performance of lower level management (it also can be an enterprise or a factory). Thus it is supposed that target values of control indicators are formed by the higher level management (or company) in an exclusive order and “lowers” them downwards for fulfillment. The purpose of lower level management is to form the target values of indicative KPIs the way, so: on the one hand, their achievement will be directly connected and aimed to achieve the imperative KPIs target values; from the other hand, they could direct the resources (Human, Financial and others) to full-scale realization of strategic goals. At the same time, to maintain of integrity of the management system, the overall set of indicative and control KPIs needs to be determined for all chain of management beforehand. such managerial technique promotes realization of a principles of Management by objectives (МВО). MBO concept’s important statement is all levels of management hierarchy to be involved in process of achieving strategic goals, using the language of KPI as all – fits – one to organize well functioning cascading and both ways feedback (for example, orders <-> reports).

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

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Cascading

One of the most important purposes of management is performing well organized cascading. Cascading could be determined as the process of distribution of authorities and responsibilities for indicators among the lower hierarchy level subsystems’ managers and specialists.

It needs to be mentioned that the cause and effect relations between indicators, presented in the map of KPIs, are mostly not function (can not be presented in a way of mathematical formulas). For example, the achievement of desired performance value for such budgeting indicator as “the percentage of innovation investment” (a part of Innovation and Learning perspective) does not cause directly improvement of the value of such indicator as “Cleanliness of metal fusion” (Internal Process

Perspective), but it creates «strategic base» to achieve this improvement. It means, it usually needs a lot of managerial work to focus human resources as well as other type of resources (and for example, financial) to achieve the target value of some indicator.

Classification of indicators for management according to their importance

While creating a model of KPI based management for the certain company, it needs KPIs for management to be divided into the following groups according to their importance*:

• KPI of strategic type;
• KPI of standard type.

KPI of strategic type are linked directly with the company’s strategy. The achievement of target values of such indicators cause significant changes in the whole company. It needs for managers to initiate and monitor the set of complex activities, usually in different hierarchy levels, to achieve the target values. It needs active management’s initiatives: the actions leading to essential “break” of one of process aspects (for example, product’s quality, automation, department and operation group management system construction, and others). Strategic KPIs usually show the nature of Strategic Plan referring to the language of measurement, being whole company’s first – priority. The last but not the least is that Strategic KPIs’ target values present the competitive advantage, the company is aimed to.

As for standard type of KPIs, its values could be supported by managers to be frozen within some particular interval in short term period. Oppositely to strategic KPIs, standard ones are linked directly neither to the strategy, nor to operational management. A good example of such KPI could be “current liquidity coefficient” indicator; its value could easily be supported by managers to be limited within the interval from 2 to 2.25.

In needs to be noticed that considering indicator to belong to standard or strategic depends on the strategic plan, top managers created and approved. The more important the KPI is, referring to strategic plan, the closer it comes to be considered strategic. The process of division the indicators into those two groups is an important company’s activity, because it needs a well optimized resources distribution for the strategy to be realized. Considering every indicator to be strategic, the company might face shortage of resources when it comes up to realize the strategic goals via directed operational activities. A good example of the importance of resources distribution according to the company’s strategic goals could be a work of subsystem of budgeting. Read more about cooperation of BSC (a type of KPIs based management concept) and the subsystem of budgeting in the article: “BSC and the systems of management: BSC and the Budgeting system”.

Plans (budgets) in the given context are meant as plans in the quantitative expression, displaying achievement of KPIs. Since the model of the interconnected plans and budgets needs to guarantee the consistency of the information in budgets, this instrument should be implemented to the process of balancing target values in model KPI. Thereupon the expanded demands are needed to be made to a planning and budgeting subsystem, integrated in the company: this subsystem should become the basic instrument of quantitative planning and modeling within the whole company. For example, the standard indicator of the “turn-around time of a debt receivable” can be calculated on the basis of the given operating budgets. In turn, it is necessary to form a special development budget, in addition to basic types of budgetary management subsystems, for the monitoring of KPI’s values of strategic type (for example, “The market share”, “Cleanliness of metal fusion”) could be performed as well. This special development budget (for example, the budget of investments, the budget of capital investments) needs to be aimed to realization of long-term projects with the established budgets (in contrast with achievement of certain target significances of data KPI).

(*) The importance of KPIs could also be presented and measured using a weight value parameter. Most of dashboards, aimed to support KPI and BSC management concept, provide weight values management as a necessary attribute of KPIs. Knowing weights of indicators, presenting on the dashboard or some type of report, helps resource distribution (for example, budgeting plan) to proceed according to the strategic plan, providing most important activities with more assets. Also weight values presence on a dashboard directs the attention of managers to the indicators, important for the priority strategic goals to be achieved and makes them to provide more initiatives to the activities, associated with those indicators.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

Cause and effect relations between KPIs

While building a map of KPIs for the departments and the responsibility centers, the process of defining cause and effect relations between KPIs is also performing. Those relationships could be divided into two groups: clear (the ones that might be calculated) and unclear (hidden) ones. Clear (computational) cause – effect relationships can provide the way to calculate a higher level KPIs on the basing on lower level KPIs’ values. Unclear (hidden) indicators present cause – effect relationships between KPIs, which belong to different categories or subcategories. While building the conceptual map, it needs the quantity of KPIs, which refer to management level, to be limited by 15 – 20 ones for one level of management. It is urgent for big companies with sophisticated hierarchy; it is aimed to prevent the KPIs to be mixed up and present conflicting information. This suggestion of limitation of the KPIs is based on concept called “necessary minimum provides the best way to present the achievement of goals”, which appeared as a result of practical repots of companies in different business sectors and locations. It is certainly is not an absolute rule, but the logic of preventing the map of KPIs to be overloaded by the quantity of measures needs to be understood by top management.

The process of establishing cause and effect relations between KPIs, which form the structure of the system, is actually the process of balancing the scorecards. While performing the relations’ determinations and formalization, strategic hypothesis, related to the way on how one indicator’s performance value dynamics depends on another KPI’s performance value dynamics, appear as well as relatively redundant indicators are determining. Usually each hypothesis has a formalized nature, i.e. it actually represents the certain stable assumption, which usually is one of the strategic points (for example: «Achievement of the set market share promotes share price persistent growth»).

The presence of hypotheses, related to cause and effect relations of strategic goals between each other, can be revealed on the following basic points:

• Evidence of logical interrelation between indicators;
• The function relations between indicators exist and can be presented in a way of mathematical formulas;
• The correlation linking between the indicators existence is proved by the correlation coefficient, which had been determined as a result of the analysis and research (this point highly increases probability of existence of a cause and effect relation).

The process of balancing scorecards is the last stage to complete the creation and forming KPIs’ map. When the dynamics of KPI’s values, referring to the strategic management is defined, it needs the stability of cause and effect relations between indicators to be verified in an operative mode with the purposes of formation of more exact cause and effect hypotheses.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

BSC management system methodology

Balanced Scorecard concept is one of the most influential conceptual solutions of strategic management on indicators and also most widely spread among the companies worldwide. It offers to divide all the key performance indicators by the strategic purposes, the activity, they measure, is directed to. Those directions are called “the Perspectives” in Balanced Scorecard methodology (read more in the article: “What is Balanced Scorecard concept”). There are four of them according to the original concept: Financial perspective, Customer perspective, Innovation and learning perspective and Internal process perspective (read more about every perspective’s standings in the article: “What is Balanced Scorecard concept: the four perspectives”). All the KPIs become a part of one of the Perspectives. Financial perspective usually includes KPIs, which present cost indexes of the company, its yield, liquidity and solvency; such as: Return on investment, Cash flow and others. Customer Perspectives include KPIs, presenting customer’s satisfaction and marketing actions’ efficiency; such as: “New customers acquired”, “Complaints number”, “Customer attrition” and others. Innovation and Learning Perspective include KPIs, which present innovational techniques creation, finding and implementation as well as development and education projects progress; such as: Number of ideas developed within measurement period, Number of collected ideas that were implemented, % of ideas that are funded for development and others. Internal Process Perspective include KPIs, which measure the effectiveness of existing technological and administrative activities within the company also called business process; such as: Administrative expense (total revenues, %), Administrative expense (customer, $), Lead time, product development, days, Lead time, from order to delivery, Days and others.

There is no all – fit – one set of indicators, it needs every company to create its own. The main factors that influence on the KPIs are the following:

• Business sector;
• Business development directions;
• Company’s structure;
• Features of the company relations with macro economical and an operational environment;
• Top management’s needs and expectations of BSC implementation and functioning.

Oppositely to KPIs, the Perspectives are considered universal (according to the original Kaplan’s and Norton’s concept). Practically, the four Perspectives really could fit most of the companies but it is not necessary to be limited by them. One of the ideas of concept’s founders is to open manager’s eyes to such non-material activities as innovation or process optimization. That is why it is certainly up to managers to add Perspectives that are important for the company. It could be Ecological Perspective or Public Relations Perspective. Practically, first of all, the Perspectives are defining (usually from 4 to 8 ones) and after that, the process of creating, forming, selecting and substantiation of KPIs for every perspective starts. All the Perspectives and KPIs from operational plan are needed to be linked with the strategic goals they are aimed to achieve.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, multilevel companies, strategy, studies, theory

KPI definition

While creating a model of KPI based management it needs to define the directions of company’s activities aimed to achieve one or another strategic goal; also the strategy itself needs to be overviewed, rebuilt and formalized. Practically, every company has some type of goals. But nevertheless, when it needs these goals to be formalized and detailed, it often causes disagreement between persons concerned. One of the most important actions to be performed in order to direct the business to the strategy is to understand and adjust the main goals, the company needs to achieve. It is not less important, to learn how the system of internal operational activities is functioning and how its performance affects on strategic goals achievement. Defining the factors of influence is needed to establish the linking between operational and strategic activity, which makes it possible to create the strategic map, presenting all the strategic goals along with operational tasks, which work on its achievement. To monitor this map, it needs Key Performance Indicators to be defined. These indicators have to show the performance of the key activities of the company, including internal processes, activities of departments, managers’ decisions, and others.

In this case, KPI could be defined as effectiveness measurement indicators, which present one of the activities of the company, important for one of the strategic goal’s achievement.

KPIs are a kind of language to formalize the strategy and put forward hypotheses. It also needs not to mix up KPI with other measures existing in company’s process. The features, that make indicators to be KPI are the following:

• Answering the purpose of strategy;
• Presenting the performance values, taking into account both operational and functional processes*

(*) Operational process is the one, which involved directly in the creation of product’s or service’s cost and functional process is additional, serving one.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

When trying to define the qualities of the excellent manager, a term entrepreneurial comes to mind. Someone who can see trends, is aware of market dynamics, as well as dynamics within the organization. As a true entrepreneur, not only been keenly aware of the realities, but being able to envision things that are not yet. A visionary who sees opportunities and is able to impart these visions to others. The ability to dream, to envision, to imagine opportunities is no less crucial than anything else. After all, if a manager cannot dream, how can the come up with something truly new and unique.

For all the awareness and vision, an ideal manager is an actor, a doer, somebody who does not get stuck analyzing trends or dreaming up new markets, rather someone who quickly plans and rapidly executes activities in such a rapid succession that people are unable to comprehend how things can be done so quickly.

Finally, no manager can be truly excellent without the comradeship of his staff, without being keenly aware of their feelings and emotions, without being able to empathize with and support his co-laborers.  Communicating effectively, workload balancing and such are only possible when the manager is aware of both mental logic and emotional state necessary to successfully engage their team.

So, to summarize the foundations of good management are based on four variables that are listed in no particular order: 1) awareness; 2)task management/ability to execute; 3) cohesiveness of the team; and 4) ability to dream/use imagination.

If you think of these four variables, they are also the four ways in which we perceive the world and think. To borrow the language of Myers-Briggs and Jung these are 1) Sensing; 2)Thinking; 3)Feeling; and 4)Intuition. And while the whole old theory about the brain is questionable, these same four elements are often referred to as 1) Left Front; 2)Left Back; 3)Right Front; and 4)Right Back. To use our everyday language these four ways of thinking are 1) Thinking with our senses, eyes, hands; 2)Thinking with our mind, using logic; 3)Thinking with our heart; and 4)Thinking with our gut.

Awareness of these four ways to think is ancient, and yet the application of the awareness that all four must be developed and trained to work in a cohesive union has not been systematically applied to the development of leaders in the fields of management and business.

Conventional wisdom is that we typically have only one of these thinking approaches well developed, may be two, but rarely all four. I submit to you that it is true, but it does happen. Perhaps, what is more important then classifying and pigeon holing everyone to a specific mental process, it is more valuable to help us all develop our brain in such a way that we get better in all four approaches to thinking. Rather than seeing people as a particular personality type, let’s work together to insure that we all have a wonderful personality that is flexible enough to be the type that is necessary under the circumstances and tolerant enough to accept and appreciate people who deal with things differently than we do.

There are two ways to build teams that are much stronger than the sum of their parts. One is through a relationship of people who while personally lean toward one or two of these mindsets but can recognize and value others, who think in a way that is different from theirs and who grow in their specialization on the team. Another is in a team that is constantly cross training and consists of people who can perform all other functions on the team as well. These two are not mutually exclusive. But rather they both point to growth. Growth of each team member in their field, as well as growth in their ability to help out in the fields that are the specialty of their teammates. As well as growth in the closeness and effectiveness of the interconnectedness of the team that so greatly reduces the transaction costs of doing business.

This brings us to the actual measurement of the management team’s growth and business development. We can take a more combinatorial approach. By first measuring the change in in each manager’s skill in each of the four thought approaches and then combining those numbers as a total team score, while keeping in mind the team cohesiveness variable. This may be more precise and may even allow us to compare individual managers against other managers, across business units, thus assuring that we deploy our best talent on our most important projects, but it has two, in my mind, fatal flaws. It is great in theory, but the amount of measurement and calibration involved to assure this measurement may well be prohibitive for most organizations. Perhaps even more importantly, even if we can get past the difficulty of measuring the metrics precisely enough to avoid type one and type two errors that are so demoralizing to  the individual and the team, we still have a motivational problem.  The problem that emerges in the environment of individual measurement an internally competitive environment  that discourages cooperation is bred.  This environment vastly increases the transaction costs, lowering the cohesiveness of the team and defeating the whole value of the measurement.  This  introduces the death spiral of reduced organizational performance that is paralleled by the inevitable inflation of the individual ratings and of the egos. The whole fiasco resulting in the rejection of the measurement tool altogether, in light of better performance by the organizations who do not employ it.

Thus, I propose a different measurement route, one that is at the heart of a growth and development activity that all organizations should embrace anyways and that is collaborative gaming where monthly, or weekly a team is challenged to perform a task together that involves sensing awareness of the five senses and intuitive sixth sense of the gut, logic of the thinking brain and sensibility of the feeling heart. By performing this activity regularly, a change in the performance can easily be tracked and thus provide a crucial indicator of the quality of the management team, while acting as a tool for the improvement along this, most essential,  KPI.

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Oleg Tumarkin is an Adjunct Professor of Business at Lakeland College and 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 in to the realm of a repeatable, replicable, yet humane and flexible science.

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Intro

The basis of Kaplan and Norton concept seems to be easy: strategic plan is realized by tactical and operational results’ management according to the key activities of the company. This idea (of how easy the concept is) might cause wrong actions while implementation. Sometimes manager consider it enough just reading and understanding the summary of the concept or its interpretation by one or another scientist to start the process of creating a scorecard for the company. It often happens that the project, created this way does not result into something really balanced or systematic.

Common mistakes from practice of the BSC implementation and usage

The most common mistakes of the BSC concept’s wrong interpretation are the following:

• The map of financial measures is presented instead of the strategic map. It could seem innovative to present the existing financial, accounting and monitoring indicators as form of scorecard for all the company. But in this case, the system’s basic purpose appears to be forgotten. There is no actual revision of company’s strategy; such interpretation of the system will not turn the company’s direction into balanced concept. So the company is not going to grow into something better, then it had been before;
• Managers often use the mechanistic method of approach to the creation of strategy map. For example, those activities, which are associated with finance of economics, become a part of Financial Perspective; the activities, which contain the words like “market”, “customer”, “sells” are going directly to Customer Perspective. Meanwhile, the right thing is that, for example, financial indicators might be a part of any category. The important thing is their share, which does not exceed 30 – 40 percent in a “right” scorecard. In need to be known, what every Perspective in the BSC concept really means and directed for. For example, Customer Perspective needs to show the markets response to the company’s actions when those actions are needed to be described by the Internal Process Perspective;
• Managers make an attempt to use the BSC system as an overall controlling tool. Trying to perform total control on every operation activity of every employee, managers not just wasting their time, but also lose the benefits of the Balanced Scorecard concept usage. It needs to be known, that BSC is mostly a strategic management tool. If it needs to establish absolute connection of strategy with a complete functional stream of the company, the only strategy has to become a setting system for all the stream of processes. Operational activity needs to be directed to achieve the strategic goal and this is the only “correct” way to link functional stream with BSC. Certainly, the monitoring process should be aimed to learn if the operational activity is directed to strategic goals but not to control every action of employees.

Premises for elements of the BSC

It needs for managers to come to the main points of BSC map to create a really working system. The standard set of the four Perspectives (read more in the article “What is Balanced Scorecard concept: the four perspectives”) offered by authors of idea not as an all – fit solution, but is a particular case. As for a general case, the main perspective in the map of Balanced Scorecard is some kind of Strategic Result. For-profit organization needs financial result as its goal, and this is not something illogical or improper. But sure it is not always invariable. There are social responsibilities of a business, ecological responsibilities and many other things that could present the sense of morality. But it needs to be remembered, that the most important result, business is directing to, is money as a well-founded goal of the entire business concept.

But how the company ever could obtain the result, if it is exceeding its potential of smooth extensive growth? It needs to be mentioned, the company is an open system and it is able to use its environment’s resources. The environment will agree to share its piece with the company only if the company will manage to satisfy the External Resources (e.g. market and customers – Customer Perspective in the BSC theory) – the key players of environment, which are ready to exchange their resources for the company’s goods or services.

The important condition for the company to satisfy the market is a well functioning of its own activities and processes (Internal Process Perspective in the BSC theory). It is needed for the good or service, created by the company, to be well enough to please the fastidious market. To optimize the internal process, the company needs to set up well functioning of the following chain of subsystems referring to the staff: education, development of skills, planning, motivation and others. Paying attention to these HR activities, the company is going to increase the efficiency of the internal resources usage.

A well created and implemented Scorecard, according to this logic, is able to provide strategy realization. Using the management of staff’s mental models, the company is directing its internal process to satisfy the needs of the external players, which is sharing its resources. And finely, thanks to this circle, the company is possible to implement a plan of gaining the Result (money).

A common mistake, BSC implementers often commit is an aspiration to take another’s best experience. Even if the company from the same industry will share its strategic map, it will not fit the company which imported the map in every aspect. End it is not always about the uniqueness of company’s activities. Strategy map needs to be a quintessence of the entire company’s advantage over competitors. That is why if the company still wants to import someone other’s map, it would be better to use it as a fundament, adding to it the unique features and reconstructing it to fit the company’s both internal and external processes.

Several conditions of the BSC system proper functioning

There are tree conditions to be defined:

1. The Balanced Scorecard is an internal system’s tool. It is no need to cheat or trick when you are dealing with yourself. Monitoring function, the BSC provides is aimed only to improve the performance, not to show something to someone. Monitoring is needed to manage, not to show. If this rule is not observed, the BSC turns to huge inconvenient system that only bothers every employee but not helps in any aspect. Since the BSC and the strategic map is a tool of strategic management by operational and tactical control, tricking it means only tricking yourself.

2. One of the features of the BSC is “focusing”. The aspiration of management for extracting a synergy from cumulative influence of set of factors often leads to system contradictions. Even a well constructed system could turn to be mistaken and useless this way. It needs to focus the attention and resources on several main indicators when all other ones consider additional, having lower priority. It needs to analyze the set of key indicators concerning both to their influence on performance and the possibility to cause contradictions within the entire system of the BSC.

3. And the last one thing to be noticed in this article is an advice not to think “too much”. Do not try to build the most sophisticated BSC system for your company, as you are able to. There is no need to notice every single activity in the map; it needs indicators of the KEY activities linked with each other by well organized logical structure.

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Balanced Scorecard in the traditional execution allows us to measure the most crucial but also the most painful variable. This variable is management team’s development:  learning and growth. After all, given enough time, the right management with the right skill sets can fix anything, or even build the whole organizations from scratch. They would find a way to locate and meaningfully organize the resources necessary to produce the desired outcomes. No organization can go above and beyond their management talent and in most organizations, the entire business is nothing more than magnified picture of the eccentricities of the executive team.

However, the Balanced Scorecard does not hold the spotlight to the management’s learning and growth too tightly, allowing the leeway to pick the the Key Performance Indicators that either don’t really monitor their performance in a meaningful ways, or worse yet, apply to only lower echelon of workers in the organization.

Two thousand years ago,  James, brother of Jesus, made a statement that I think is highly applicable to managers today. Just substitute the word teacher for the word manager and you will get the point:

“Not many of you should presume to be teachers, because you know that we who teach will be judged more strictly. We all stumble in many ways. If anyone is never at fault in what he says, he is a perfect man, able to keep his whole body in check.

When we put bits into the mouths of horses to make them obey us, we can turn the whole animal. Or take ships as an example. Although they are so large and are driven by strong winds, they are steered by a very small rudder wherever the pilot wants to go. Likewise the tongue is a small part of the body, but it makes great boasts. Consider what a great forest is set on fire by a small spark. The tongue also is a fire, a world of evil among the parts of the body. It corrupts the whole person, sets the whole course of his life on fire, and is itself set on fire by hell.

All kinds of animals, birds, reptiles and creatures of the sea are being tamed and have been tamed by man, but no man can tame the tongue. It is a restless evil, full of deadly poison.

With the tongue we praise our Lord and Father, and with it we curse men, who have been made in God’s likeness. Out of the same mouth come praise and cursing. My brothers, this should not be. Can both fresh water and salt water flow from the same spring? My brothers, can a fig tree bear olives, or a grapevine bear figs? Neither can a salt spring produce fresh water.”

I believe that the description he has for the tongue and for teaching readily applies to the management of the organizations, as well. It is a lot easier to manage millions of dollars than it is to manage oneself and our own tongue.  One management decision can influence the fate of many resources, entire organizations. A failure by the manager is by far more devastating than that of an entry level employee. So, managerial development is essential for the organizational growth and development. It is crucial for organization’s health and survival that there is a significant emphasis on the development of the organization’s management team, or the organization is gambling with that which is the foundation of all else.

In most organizations you see precisely the opposite:  a lot more effort is spent on measuring and managing the performance of lower level employees than on those of the executive team. Nobody wants the spotlight pointing toward them. Yet, who has the most impact on the organizational performance? Is it the person who is capable of sending a shipment to the wrong location, or is it a person who can hire and fire that person, or a person who can institute policies and processes that eliminate the opportunities for these kinds of mistakes?

With that said, what are some good Key Performance Indicators that would help an organization insure that there is a culture of learning and growth that permeates its executive ranks? Well, the output variables are pretty easy to track: Engagement of the workforce, a clear result of great management can most easily be tracked by the number of improvements that are recommended by the workers and are implemented per employee.  Unlike good attendance or other such measures that can be forced by just paying or punishing for them, it cannot be achieved without a good working relationship between the managers and the workers. But while this is a valuable Key Performance Indicator, it looks at the output not the input.

Another variable that might serve as KPI for good managers, is dollars or Return on Investment generated by the new initiatives of the management team, but this variable takes years to materialize and can be affected by a bunch of factors that have nothing to do with the talents of the management team.

In all reality every KPI on the scorecard is a reflection on the management, but they are mostly all outputs.  In the next article I will discuss some inputs of good management.

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Oleg Tumarkin is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with 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 in to the realm of a repeatable, replicable, yet humane and flexible science.

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So, what are the strengths of the Balanced Scorecard framework and where do we need to yet  improve it?

I have already in other articles alluded to a need for more than four dimensions. More than four views or voices to truly have a comprehensive view of business.  In fact, later in the article, I propose eight on which I will be writing extensively in the near future. But there is quite a bit more that can be done without drastically departing from the current Balanced Scorecard that you may already have in place.

One weakness that I consistently see in most Balanced Scorecard implementation is the use of non-statistically controlled metrics. Thus, if we have a variable that tends to fluctuate over time due to reasons beyond our control, or because the process has that much of a variance, a given Scorecard may force us to periodically be overjoyed and at other times to panic about the variable being in and out the desired range. Yet, without having statistic controls for our variables we are entirely unable to separate special cause variation from systematic drifts, from variance within the normal range of the given process. While it is a bit more work in planning the variables and in documenting measurements, it is my experience that without it Balanced Scorecard becomes a source of frustration and is eventually abandoned by management, because their raw intuition can produce better results than this aid.

Long range plans. Aside from the variables being not statistically controlled, perhaps the biggest problem that leads to the development of unrealistic scorecards and thus to their eventual abandonment is the problem of setting too precise a goals too far in to the future. Richardo Semler, in his now famous lecture, Management by Omission, states that one of the most radical planning aids that his Semco experienced was when he ordered that the organizational plans would focus on the six month window rather than a year. As he says, before that all the plans always showed that all the good stuff will happen in the second part of the year. This is not to say that you should not keep your eyes on the horizon. It’s good to think long term, strategically. It’s just futile to wrap that thinking in the precise numbers in to seemingly independent constants when in fact those numbers are a result of variation in so many input variables.

Richardo Semler also addresses another bane of wishful unrealistic thinking that plagues the Balanced Scorecard planning and causes many organizations to disregard any kind of planning as an exercise in futility and that is of the unrealistic, and typically round numbered goals. “We always seem to want hundred million something”, he says and asks if we would be “dissatisfied if we got eighty four million”. He wisely suggest that we abandon these kinds of pursuits, by focusing on the pursuits that are more driven by our actual market conditions, opportunities and strength of our team.

If you have already mastered these basics it might be a good time for you to start looking at my more advanced Balanced Scorecard. To make it easier to remember I named each  all by starting with a letter M. These dimensions are: Management, the foundation of business and deserving of individual attention apart from the rest of people management, since if we are unable to manage ourselves effectively, how can we manage the business. Manpower, the people who make up the organization. Means, the business tools, resources, facilities, in accounting terms fixed assets of the business. Method, the process of coordinating Means and Manpower to serve the next M- Market. Market, is the customer and the judge of the firms performance, it is also the product that was developed and delivered with the right Method to support the Customer desires. Money is our sixth M, it is the traditional accounting/financial focus of the business, managing the cash flows, monitoring the financial accountability. While unfortunately the traditional Balanced Scorecard stops there, I propose we keep going to things that are more important than money and to insure which we actually do earn the money.  Mitigation of Risk is one such area, since no money in the world will do you any good if you are terminally ill, dead or in jail, if you blow up our lowly planet or kill all that is dear to you. Mitigation of Risk is an area that most resembles voodoo witch doctor approaches in that it is a new discipline that has not had a chance to fully form, but the fact that is so amorphous and imprecise nevertheless does not mean that we can disregard it in the decision making. But we must not stop there, unless that is your only goal is to survive. The final broad category is all inclusive, it is the Mission of the organization, it focuses on the very purpose of the organizational existence and begs the question: Why does we exist? It is only few and very blessed organizations that are in the position to wrestle with this tough question because it takes a degree of success and competence in the other seven focus areas before the managers can face the ultimate question of human existence and in a sense become philosophers, lovers of wisdom. But as Plato argues in his Republic no country is as blessed as one that is governed by the philosopher king. And I might add that the same holds for an organization that has reached the levels of success that allow such a reign.

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Oleg Tumarkin is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with 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 in to the realm of a repeatable, replicable, yet humane and flexible science.

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In many fields of discipline the world has experienced a transition from a period where the knowledge appeared to be magic and practitioners were regarded more as wise shamans than doctors. Chemistry has largely grown out of the Alchemy. Slowly but surely in the various aspects of human life we have experienced a move from imprecise guesses and hunches of the few expert practitioners who gained much of their knowledge by happenstance and experience, or some innate talent, to a world where everyone who graduates high school understands such basic principles as gravity, which just a few hundred years ago were shrouded in mystery and could only be guessed at by the experts.

I am not convinced that we have experienced such a transition in the world of business. Much about management is shrouded by mystery that seems to say that it is an art that can only be mastered by the talented few. Not that I am denying that there is an aspect of the unpredictable in management or for that matter anything that deals with human relationships, but as society develops and we all have to become more and more managers of, if nothing else, our own destinies, management has to transition from an art form to a repeatable, predictable discipline that can be learned systematically.

Balanced Scorecard is one of the steps in the transition from the world where truly talented managers could outperform mediocre ones by purely relying on their intuition, often by having an internal equivalent of the Balanced Scorecard in their head, to a world where management tools are going to finally become sophisticated enough where it will not take the same level of genius to just make the day to day decisions. In the world where there is a degree of precision to the decision making the truly talented managers will finally be able to focus on solving new problems, developing new markets, creating new products, engaging in new relationships instead of just doing the same worn out things that can now be put on autopilot.

Balanced Scorecard tools not only allow for the truly talented managers to focus on the new and exciting, but they help develop internal talent pool of the younger generation, since now, equipped with the tools and for the first time understanding the logic of the interrelationships of organizational objectives, even people who historically were not in a position to make business decisions have an opportunity to participate in working together to manage the organization to the benefit of everyone involved.

While the Balanced Scorecard does not quite get us to the world I am describing, it has set the foundation and provided a framework that will aid in the development of the more advanced models that are capable of achieving the promise of simplified, more consistent, straightforward management that is based on explicit principles, rather than on management that is based on a strictly unaided intuition, or worse yet, in many cases management based on strictly financial view of the business world.

In the engineering community community Genrich Altshuller brought about similar revolution by introducing the Theory of Inventive Problem Solving. Even though his first major publications became available in the late sixties, most engineers and inventors have never heard of him and his ideas, however, many who do are considered the elite in their field, and are usually employed by the invention powerhouses like Intel and Siemens.

The dynamic that is happening in that field is quite common in that for example, it took nearly a century for many people to adopt Mendeleev’s Periodic Table of Elements in spite of its clear superiority. Before periodic table we had craft of alchemy, after we have the science of chemistry, but the adoption rate was still painfully slow.

It is so also in business. The effective measurement systems that have to be developed around the framework of a Balanced Scorecard are not yet. Even the Scorecard may have to become more than four dimensional to truly represent the variables that are significant for business management. But the organizations that place themselves at the forefront with this new technology – technology of thought – can, if they use it wisely gain a tremendous edge on their competition.

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Oleg Tumarkin is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with 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 in to the realm of a repeatable, replicable, yet humane and flexible science.

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