Balanced Scorecard Designer

Employee morale is second only to the quality of the management team in influencing the long term success of a business or for that matter of any organization. It (the employee morale) is a very good indicator of the quality of the management team since it is the most direct outcome of good management. After all  a good management team will do everything to engage their employees.

The best way to measure employee morale is not however the traditional survey. After all, this is not just costly and very periodic information, but it is typically very biased and unrepresentative. People are generally not very aware of how they feel and are unlikely to express their feelings in a place where management whom they might not trust will see it. They are even less likely to produce meaningful responses if they are faced with  a multiple choice or likert scale to describe their morale. Even if the data was perfect, the management would have limited ability to analyze it and  act upon it, since they would have no way of separating the aspects of how people feel that are due to things happening within the organization from the feelings that are just their frustrations or joys bleeding over from other aspects of their life.

Neither is absenteeism, or tardiness necessarily a good indicator of employee morale,  because appropriate external threats and rewards can cause people to show up on time and be there every day even if they dread their jobs.  They would be miserable there and have very low productivity.

This leaves us with engagement. After all if employees love their job they will care and be engaged. And even if it were possible for them to love their job but be disengaged and not care, this would be of little value to the business.

Thus engagement is what we really want to measure.  But how do we measure it? The best approach that I have found is based on the assumption that people who care will tend to want to improve the facilities around them and that if they are allowed to do so, they will like where they work and care about it even more. By picking this variable we can insure that the very process of measurement will propel the organization in the right direction. (Unlike a survey, since someone might not even realize that they are unhappy until they have to say that they are on a monthly survey)

So, the KPI of employee engagement is the number of employee recommended changes that have actually been implemented per full time employee equivalent.

This indicator should closely correlate with the quality of the management team, since the changes can only get implemented and employees can only be happy when there are open channels of communication between them and the management. Study after study  have shown that good employee morale has a positive impact on the bottom line and I suspect that this is a large part of the reason why.

While employee engagement is a lagging indicator for management ability, it is a leading indicator for process improvement, customer loyalty and financial performance.

—

Oleg Tumarkin, JD, MBA, CSSBB 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.

oleg_tumarkin Balanced Scorecard Theory BSC, E-M8, Employee Engagement, Employee Morale, key performance indicator, kpi, management

As Balanced Scorecard is gaining popularity, there appear increasingly more issues and questions related to use and maintenance of this popular business performance measurement tool.  These days, we can see more publications in mass media devoted to Balanced Scorecard, problems associated with this system, most common mistakes, stories of failures and success.

Balanced Scorecard is evolving together with the business environment.  More and more companies occupied in various business and non business spheres choose to use Balanced Scorecard which helps companies reach strategic goals and measure performance.  As said above, Balanced Scorecard is being used by various businesses in various parts of the world.

It needs saying that Balanced Scorecard is becoming increasingly popular in government and nonprofit organizations.  If large companies have one major goal of making more profits, increasing value of the company and competitive advantage in the market, nongovernment organizations have limited funds, and so they need to make sure that the money is spent wisely.

The company strategy should be formulated in financial terms/indicators.  Of course, most businesses have financial goals, and this is normal.  But if the company owners and management do not have strategic vision it will be very difficult to reach these goals even using Balanced Scorecard system.  Companies that view their mission as obtaining a certain position in the market or in the society can make a very effective use of Balanced Scorecard.

You may ask “Why are so many companies interested in Balanced Scorecard?” It seems like there is the dozen (or even more) other alternative business management systems.  As a rule owners and managers of top companies want to use Balanced Scorecard with just one question: “How can I optimize performance of my company to increase its value?” To answer this question, experience of top companies needs to be analyzed.  Such companies as UPS, Mobil, AT&T Canada showed great growth largely due to successful implementation of strategy based management. That’s why managers often view Balanced Scorecard as a tool that can improve performance of the company.  However, one should be careful when analyzing successful experience of different companies, since every company is individual, and thus requires different measures, approaches, response actions, and strategic goals.  Do not forget that this is somebody else’s experience.

It is also important to realize when the company needs implementation of Balanced Scorecard.  There are 4 major signs indicating that the company requires Balanced Scorecard.

1. The company has both strategy and mission, but for some reason top management is not involved in strategic planning.  About 85% of managers spend less than an hour a week for strategic planning, or have a very vague idea of strategic management.
2. Company’s personnel does not understand strategic goals of the company and thus fails to participate in implementation of these goals.  Balanced Scorecard, when implemented properly, serves as a great learning tool for employees.  It is very important that every employee understands his contribution to implementation of strategic goals.  It is imperative that everything employees do is aimed at reaching strategic goals.  Discrepancies between operational and strategic management may have negative consequences to the company performance.
3. Use of Balanced Scorecard system is highly recommended for holding of companies with no common strategic goal.  If every company pursues own goals, or some companies may not even have any, overall performance of the holding may not be satisfactory.  BSC implementation solves the problem of communication between companies belonging to one holding through development of a comprehensive strategic management scheme.
4. There is no operational control on implementation of strategic goals.  Strategic management is a continuous process which includes setting of the goals, implementation of the goals, control and response actions.  If a company is unable to control implementation of the set goals it would be fair to think that it will never reach them.

Major mistakes in implementation on BSC

Of course, even the most successful companies faced problems when implementing Balanced Scorecard.  Moreover, these mistakes are typical and as a rule do not depend on the country of the company or the market it operates in.  They can be classified as follows:

1. Balanced Scorecard is implemented in the company that has no clear and comprehensive strategy.  A company with no strategy will never be able to make an effective use of Balanced Scorecard.
2. A company has a clear strategy but the Balanced Scorecard is implemented without clear budgeting, human resource management and compensation systems. About 60% of companies cannot combine Balanced Scorecard with budgeting systems.  If personnel is not properly motivated, for example with system of bonuses and rewards, Balanced Scorecard is unlikely to bring some positive results.
3. It often happens that the company implements Balanced Scorecard, but its personnel is not ready or doesn’t want to use BSC in the everyday routine work.  If a management doesn’t need Balanced Scorecard there is no reason to implement it in the first place.  As a rule, if the company management is reluctant to use Balanced Scorecard, implementation of the system fails even before the initial stage.

Balanced Scorecard: future prospects

It seems like Balanced Scorecard is not going to have tough competition in the nearest future. These days, there are many strategic development tools. However, it is only BSC that can combine strategic vision with everyday routine work of the company (operational level).

Of course, the system will further develop and improv to effectively use such modules as investment planning, budgeting, human resource management etc.

Does your company need BSC?

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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

What KPI to include in the map?

While defining and selecting KPIs to be included into management level KPIs map, the special corporate concept is forming, aimed to create and form set of criteria for indicators to be satisfied with the needs of the company. The list of them could be mostly like the following (starting with the highest weight value and finishing with the lowest one):

• The KPI present the key aspect of the company’s business activity (key business process);
• The KPI’s value is an important condition, influencing managerial decisions;
• The KPI could be managed directly, i.e. responsible managers might influence on the performance of activity, measured by the indicator;
• The KPI has a potentially stable cause – effect relationships with other indicators;
• It is easy to collect and calculate data referring to the KPI. It also easy to report KPI’s value to the higher level;
• The KPI is based on economical (statistical) meaning at consolidation (aggregation) on higher levels of responsibility.

Deciding whether to include the particular KPI to the responsible manager’s dashboard or not, it needs to use the clearest and most common (referring to the business sector, or to the company, or to the department) term, conditions and criteria.

Perspectives distribution of both leading and lagging indicators could be performed the following way: leading KPIs are going to the perspectives, related to human resources, company’s development, internal technological and business processes, PR and marketing (Customer, Internal Process and Innovation and Learning Perspectives, according to the original BSC concept); while lagging indicators are going to the perspectives, related to the financial and accounting activities (Financial Perspective, according to the original BSC concept).

It needs to be noticed that KPI based Management offers to use not only financial indicators, but also other, non material ones to measure the whole company’s performance. It is not enough to use the only financial KPIs not only for top managers to gain an objective dashboard, but also for translating the strategy of the company and its priorities to employees and group managers. Nevertheless for-profit organizations need financial indicators as an important measure, good performance of which could result for company to succeed. But the map of KPIs needs to balance the weights of perspectives the way to pay a bit more attention to leading indicators, because the activity they present might be managed directly and fast. Leading KPIs provide top managers with an opportunity to react rather fast to the problems appearing, preventing their growth into local crisis. Also leading indicators help managers to better understand the key processes and ensure managerial decisions to cause a long term effect. As for lagging indicators (most of which are related to the financial activities), they oppositely provide a short term view and managerial decisions based on their information are not able to cause a long positive effect. But not absolutely all the KPIs in Financial Perspective are lagging ones. “The index of budgeting management quality” as a KPI, related to Financial perspective could be a good example, presenting leading indicator of financial activity.

As it is known, the system of budgeting management is mostly focused on financial indicators, the meaning of which are linked directly to measures of operational plans and budgets. That is why it needs the system of KPI management to be focused on non material indicators, which measure the customers’ satisfaction, internal process effectiveness, the potential of staff, innovation ideas and other activities, oppositely to budgeting system. KPI management concept in this case is based on the idea to improve non financial activities in order to increase financial ones; in other words, it is aimed to gain profit (certainly, not always right away, but absolutely always in long term perspective). But however the range of KPIs to be focused on is not limited by the only indicators, which are linked directly to the budgeting measures: there are also KPIs, the linking between which is sometimes hard to determine and formalize, could be used in a map. However those links are hard to determine and formalize, it could be used to put forward a strategic hypothesis (for example, such cause and effect point as “The market capitalization increase depends on satisfaction of consumers”). It increases the number of KPIs and motivates managers to look for initiative solutions to realize and support those links between indicators and the activities, they are associated with.

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, BSC, key performance indicator, kpi, strategy, studies, theory

Leading and Lagging indicators concept as an inherent part of KPI based management

It certainly is not enough just to create and use the set of indicators measuring such activities as financial results (effectiveness) and cash flow to manage the company in balanced way. Such indicators show only one part of operational activity, which appeared as a result of fulfillment of current plans and budgets.

It is usual for practice of companies that most of financial indicators of efficiency actually are derivative of the approved financial budgets, i.e. forming the structure of distribution of the resources, but not of processes. But for purposes of management it needs to fund KPIs, which could be influenced directly by managers. It is knows, that the only way for manager to influence on indicator is to know exactly all the chain of delegation (all the part of cascading) referring to this indicator, translating to the set of more and more detailed and specified tasks. For example, the return on assets as the major indicator (which is derivative of the budget of incomes and costs indicators and the balance of forecast) is usually controlled by the financial executive officer. Certainly, it needs to control all the chain of parent indicators to receive a precise value of this KPI. In this case the chain consists of: Profitability of earnings and asset turnover, which, in turn, depends on productivity of resources, success of realization of investments into development of the company and a stable market share.

Lagging indicators are mostly historical metrics; they are aimed to measure the performance of company’s past activities. For example, most of financial KPIs are actually lagging indicators. Managers are not able to receive up to date information from lagging indicators (reports might be received once quarter or even a year). That is why they are not able to monitor these processes directly. Lagging indicators present the performance of the overall system’s work and there are lots of factors that influence on them. These metrics show the results and effects of management actions that already have been applied.

Leading KPIs are the metrics that refer to the current and future effects. Oppositely to lagging indicators, leading ones are linked with manager’s decisions directly. After a decision is taken, it could be resulted in changing the performance of activity, that leading indicator show. Lagging indicators are needed to be used as a tool to manage the company’s future (which is actually one of the most important goals of the Balanced Scorecard concept).

It needs to be known that leading and lagging KPIs terms might be used by both strategic and operational management. As for strategic management, it uses those KPIs as elements of the strategic map. As for operational management, the current planning might use leading indicators of efficiency as a part of an operational cycle frameworks. Since the duration of operational cycles is usually from a week to a month, it is necessary to make special demands to periodicity of reports on leading KPI’s, because those indicators allow to measure the performance of process and actually refer to up to date problems of subsystems.

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, 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