KPI based management for multilevel companies (Part 2)
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
