Why Should We Focus Beyond Financial KPIs?

When I ask my MBA students about the purpose of corporations, the typical answer that I hear is that it is to make a profit, to make money.  But if they are right, why should we focus on managing a company by any non-financial metric? After all, the company either makes a profit, or it does not.

Why should we focus beyond financial KPIs?

Financial results depend on risk

There are two major problems with this kind of thinking. The first one is occasionally picked up by my students when they start to speak in terms of  maximizing shareholder value. When they do that, often a debate ensues that results in the class realizing that risks, as well as returns, are crucial to the long term success of the company.

No amount of short term profit can justify fraud that will land everyone in jail, for example. And even though risk is a very pesky, hard to measure concept, on the intuitive level most people seem to get that it is worth keeping in mind.

While Kaplan and Norton’s Balanced Scorecard does not directly address risk, it at least gives us room to include those variables in the final equation, which is a lot more than what we can say for the traditional, strictly financial view of business.

Financial indicators depend on other variables

The second problem is not apparent to most MBA students, unless they have had Six Sigma training, or they work in a role and for a company that really emphasizes non-financial performance.

The problem is that financial variables by a vast majority are dependent output variables. This means that they cannot be effectively changed directly.

For example, revenues cannot increase unless we do something to boost our actual sales and we cannot increase our sales without changing our process, improving our people, or forcing it by squeezing the juice out our employees. The last one is what typically happens in the companies with a strictly financial view.

Input variables for financial indicators

Perhaps more importantly, the financial variables, by the time we find them out can no longer be changed, as they are in our past. Thus, unless we are content chasing our own tail, it becomes essential to identify and monitor the input variables that feed in to these outputs.

Long term value of human development

For example, by focusing on Human Development, an organization is typically impacting its financial performance three to five years down the road. The bigger the organization, the longer is the delay.

Yet, in the short run such a focus looks like an added expense, with no immediate value. Intuitively, we all get that it is important, but the financial statements tell us to cut out any human development and if our only focus is the financial objective, there is a good chance that we will.

The investment in processes

Just as human development is the real bedrock of growth in an organization, we also have to value the process and the customer as investments in our medium term future.

For example, any investment in process improvement will likely require six months to three years to really recoup itself.

The investment in marketing and customer relationships

The investment in marketing and customer relationships has the quickest payback and is the easiest to measure for a non-financial objective, thus it gets almost as much lip service as financial perspective.

But even the customer relationship issues, which can often pay for themselves in three to six months, are often neglected because they are not as precisely measured and monitored and because many of those issues are really just outcomes of good human development and effective processes within the organization.

The only true input variables

Thus, the organization which employees a balanced scorecard where human development and innovation are the only true input variables, the process and the customer view, which build on each other, all are there to support the financial view, the output variable that everyone wants to focus on has a much stronger path to long term success than an organization that simply ignores all non-financial variables.

Short term profit

If you want your company to do great this quarter, and be as it may six months from now, avoid balanced scorecard implementation at all costs.

Long term growth

However, if you are in for the long haul, a meaningful deliberate participatory implementation of the balanced scorecard is essential to your continued long term survival and growth.

Even Balanced Scorecard is not enough

But my challenge to you is to not stop there. Don’t just settle for concepts that were first introduced close to 50 years ago with the total house of quality and Toyota’s view of People, Process, Product, and Profit, which has an eerie resemblance to the Balanced Scorecard’s:

  • Financial;
  • Customer;
  • Internal Business;
  • Innovation and Learning.

Don’t get me wrong, it is a great place to start. Even Andrew Carnegie’s 19th century assertion in his Gospel of Wealth was that to be successful a business must focus on People as well as profits will get you ahead of many companies that stubbornly only look to their accounting books. But don’t stop there, I have already mentioned Risk Management as a dimension that trumps even the Financial dimension, which can be integrated in to your implementations of the balanced scorecard.

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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.

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