However, for enhancement of business performance it is important learning to assess factors that influence its increase, to compare routine operations performance with the strategic goals. The subject of performance measurement has become popular recently.

KPI (Key Performance Indicators) and such methods as BSC (Balanced Scorecard) give a company an opportunity not only to estimate its work, but also to compare the given results with the similar indicators of competitors, suppliers, customers.

The philosophy of Key Performance Indicators is as simple as that: “If you try to manage something, you must be able to measure it. Until something is not measured, it is ignored.” Here is an example: everyone realizes the importance of the so called pre-sale period in the company’s operation. Pre-sale preparation of goods or service usually takes much effort and resources. Time and resources, spent on “manipulating customers”, are often incommensurably bigger than the final result: the contract is signed, but its amount does not cover preliminary pre-sale expenses. Perhaps, this is a potential customer and the expenses may be compensated in future, but maybe not. How to assess whether time and resources, spent in the pre-sale period, is up to the final result?

Key Indicators system helps to see a posture on a strategic prospect. And to see, for example, in a close margin of profit of a certain deal long-range investment into account management, which within the next months will have an economic effect.

Balanced Score Card (BSC) methodology also uses key activity indicators. With the help of business process analysis the spheres significant for a company are defined, in which key regularly measurable indicators are set.

Every sphere has its goals, coherent to strategy, and key activity indicators are used for the assessment of goal achievement. Exactly this approach allows to compare the measured performance indicators with the strategic company goals.

Let us suppose that company defines four areas in BSC system – finances, markets and customer relations, implementation of projects, organization development and staff, each of these having measurable indicators. For example, for a financial sphere it is an economic added cost, free cash flow, liquidity, turnover of holdings, etc.; for implementation of projects – increase of sales, cost price and project profitability or a share of projects, made without any reprimands.

While developing KPI system it is important that the used indicators should be clear to all employees, taking part in a process. Usually people involved in a certain deal concentrate only on their responsibility, understand dealership efficiency differently and practically never understand the importance and place of the deal in the company goal structure. Some of them concentrate on timeliness of document preparation, some – on signing of contract, others – on reduce of expenses etc. KPI allows to have an idea how to function, particularly, do the project, have a common understanding, make market selectivity in employees’ activity and units.

Common coordinate system allows all the participants to understand the process and to speak one language. Its lack greatly hampers company work as a managed mechanism, as employees spend much effort and time to negotiate informally and to achieve common understanding, realize further actions.

The first and most significant condition for usage of performance measurement methods is recognition by company management the necessity of this step. The other condition – presence of well-developed data system. On this basis one can implement analytical system, supporting usage of KPI.

After indicators have been assessed, design procedure has been developed and supplied with data, discount data systems have been implemented, performance measurement system must be integrated in business processes. Otherwise, it will remain useless plaything – may be nice, but still alien and nonviable to a company. Commonplaces cannot be used here, so interactive approach is inevitable at organizing the system of this class: at first, a tentative draft, that will be further improved, is done.

For overwhelming majority of companies, that devote due attention to its performance and internal organization, implementation of such methods is just a matter of time.

With this comment Gary Cokins illustrated the practice of the unreasonable cost reduction, tendency which became popular lately among some short-sighted companies during the worldwide financial crisis. Gary Cokins is the famous expert of enhancement of efficiency in corporate business and his comment obviously doesn’t lack the expressiveness. The public interest to his statements warmed up by the uncertainty which characterizes not only the condition of some companies but the condition of the whole world economy.

Gary Cokins pointed out some tendencies in Corporate Performance Management (CPM) which call special attention. He emphasized particularly that the statement defining CPM as a system of budgeting, managing and controlling of strategic development is very narrow. The definition should include also “conscious risk management”. The main goal of such management is not to minimize the risk exposure of the company but offset the company with risk appetite because only taking the risk leaders can achieve competitive advantage. But to be able to gain such advantage a leader should know market risk, risk transfer, operational risk and legislative risk. The special attention should be paid to transfer risk because these risks are not depending on external circumstance as much as others and could be controlled. Gary Cokins said that in this case Key Risk Indicators (KRI) and Key Performance Indicators (KPI) should be controlled at the same time. It is also important to monitor the right indexes for KPI and KRI of corporate level through all management hierarchy up to the personal rates comprehensible for average employee. For example according to Mr. Cokins resignations of leaders of some of the companies which were the Media headlines during the crisis actually were activated long time ago. He asserts that it was already obvious in 2007 and the main cause is that the top management unable to carry out strategy adopted by shareholders and specially they cannot make it clear for all employees.

Talking about expenses reduction Gary Cokins paid special attention to the Activity Based Costing analysis. The Activity Based Costing analysis now is not only fixing on overhead charges and indirect costs for some products and services but more and more focusing on finding the most advantageous products and services, and the most profitable distributors and customers.
In that context the role of CRM-system is also changing. The system now is not only individualized client communication means but also a very important mechanism of differentiated approach to each customer based on the importance and profitability.
The timely issue considering correlation of the short-range planning (operational planning) and long-range planning (strategic planning) also was in the writer’s focus. Gary Cokins pointed that traditional annual budget became inadequate under the present-day conditions. Indeed the annual budget very often is impracticable for a multitude of reasons and holding fix the activities of some of the managers while the others just ignore the plan. For the timely adjustment of the annual budget are very useful means of the prognostic analytics. But it seems that the management of the strategy in its wide extent is very difficult in conditions of market instability and probably does not have a complete solution. “The strategy should never become static for a long time perspective, – says Gary Cokins, — the external factors like rivals appearances or changes in client’s preferences will always force you to change the direction.”

But it is different issue when in a short period of time you have to change the strategy completely because small adjustments are helpless. At that point fundamental change should be made for strategy map as well as for KPI sets and operational goals.
The author does not give well-defined answer but it is possible that the well adjusted and organized BSC system support can handle the problem. Certainly automation of strategy map translation into operation goal seems impossible (and actually it is) but the reduction of time to apply at least operational level changes might already become a big step. Please read more in the article: “Balanced Scorecard: improving communication in the company and adapting to market changes“.

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.

We have designed some templates for Balanced Scorecard. These templates make it easy to represent ideas about Balanced Scorecard visually. Check below some examples of these templates and download the file with templates.

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Balanced Scorecard Template with initiatives

Practical aspects of using Balanced Scorecard for HR

The document reviews different aspects of using Balanced Scorecard for HR unit of company. How to control and improve hire process, how to manage candidates, how to improve interview with BSC, how to control and improve trainings.

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HR and BSC in Company Strategy

1. Company strategy with Balanced Scorecard
2. Achieve its strategic HR goals
3. HR strategy in a form of Balanced Scorecard

Practical usage of Balanced Scorecard for HR
4.1. How to control and improve hire process with Balanced Scorecard
4.2. Better management of position’s candidates with balanced scorecard
4.3. Better interview with balanced scorecard
4.4. How to control and improve training process with balanced scorecard
4.5. How to evaluate current state of employee with Balanced Scorecard
4.6. How to control processes of employees’ promotion a compensation with Balanced Scorecard

Design Balanced Scorecard for HR
5.1. Step by step guide on how to design HR Scorecard
5.2. Do-It-Yourself with Microsoft Excel
5.3. Do-It-Yourself with BSC Designer
5.4. Trainer scorecard: Do-It-Yourself with Microsoft Excel

eTraining: Test and update Balanced Scorecard

In the part of the training will explain how to test your Balanced Scorecard system. The duration of the training part: 58 min. Coaching part includes 1 exercise.

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In this part of the training we will discuss problems associated with testing current balanced scorecard and finding some problems inside, as well as regular update of your scorecard:

• Why we actually need to test and to update our Balanced Scorecard regularly;
• What are simple questions that you can ask your employees to test your Balanced Scorecard implementation quality;
• We summarize all main ideas about testing and updating the scorecard into the checklists;

Play Example: checking the number of financial indicators in your KPI.

In the coaching part of the training we discuss:

• What if Balanced Scorecard is used by top management only?
• What if your employees work only to improve the values of indicators and not to achieve business goals?
• What if you have too many indicators?
• What communication channels should exists in the company for Balanced Scorecard;
• How to check if the scorecard is actually linked to your strategic goals;
• How to test Balanced Scorecard cascading and strategy maps in your company;

eTraining: design winning KPIs

In the part of the training will explain how to design winning Key Performance Indicators (KPIs). The duration of the training part: 60 min. Coaching part includes 2 exercises.

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In this part of the training you will learn how to create winning KPIs:

• What is actually one indicator? What properties are there?
• Who should design KPI? Who stakeholders are? How to use the Balanced Scorecard consulting service.
• How to link indicators to your strategic goals
• What indicators are good and what indicators are bad? How to check them!

When we are talking about KPIs, we want you to remember, that KPIs are just the model of the business, not business itself, that’s why on one hand you cannot measure all 100% of your business with KPIs, but on the other hand you can measure the significant part of the business and control its performance.

Play Example: answering the question about the number of indicators.

During the coaching section we answer the questions:

• What is the best number of indicators;
• How to check indicators that you already have;
• How to analyze the values of indicators in time; What is the value didn’t changed in a month?
• We explain who should update indicators and how;

• If you need to design Balanced Scorecard you need to learn how to create KPIs
• Indicators in your dashboard should represent and measure your business;
• Strategy maps that you create should include high-level indicators too;

So, the purpose of the coaching is to explain how to create winning indicators for Balanced Scorecard or for Strategic Map and so on.

• We train how to address business problems with indicators;
• Our coaching includes information on how to implement KPI into your business system;
• With Balanced Scorecard practical training and coaching you will learn how to test indicators that you already have;

Learn more about eTraining Practical Balanced Scorecard and KPI

The key risk indicators and key performance indicators can be made to work in direct collaboration with each other to facilitate business growth and excellence as both of them are two different sides of the same coin. The key risk indicators provide an early warning signal to the management regarding the impending risks involved in a particular activity, the key performance indicators provide quantifiable inputs to enhance performance and enumerate the critical success factors vital to success in an organization.

Key Risk Indicators

Businesses have become more and more widespread and diverse and aim their strategies for enhancing the long term growth prospects and success. The utility value of the KRI is proven from the fact that they are instrumental in reducing the losses that are bound to occur without the initial risk management planning and building the framework. Careful analysis of the risk indicators enable the organization to convert the same to performance inputs and link them directly with the business goals and achieve higher business distinction. Although, accurate measurement of such risks is not feasible for any organization; however careful in depth enterprise risk management (ERM) will facilitate better internal control and planning that will prepare the organization for future perils. Further, care must be taken not to rely on such plans as they do not have a proven track record and keep them only as a reference measure.

Key Performance Indicators and Balanced Scorecard

The KPI or key performance indicators can be commonly defined as involving the use of inputs designed by the organization and management to gauge the performance ratings and direct them positively towards achieving the business objectives. Whatever the means are chosen, they must be the stems of the organizational inputs from which fruits of success evolve in due course. Moreover, the KPI must facilitate achievement of organizational goals and described simply to be easily followed and executed by the workforce. Furthermore, the theory of Balanced Scorecard provides metrics to measure the business performance and KPIs are a set of metrics designed to achieve the business goals. The KPI and Balanced Scorecard do not have much difference and differ only by means of metric use; however, since the depiction of the metric is quite abstract, the management must not blindly depend on them.

Overall, the key risk indicators and key performance indicators, both are vital to an organizational planning and objective strategizing along with the critical success of a business and hence, must be accounted for in the designing the long term plans of an organization.

As businesses expand their operations and processes become complex, the propensity of risk factors involved becomes more elaborate and necessitates careful analysis and management. Further, to elicit business performance in the long term, the need for measuring the risks in advance becomes an important procedure for management to assess the potential impact of an activity performed and the possible risks it carries. Such evaluation metrics are essential to pro-actively manage the prospective risky ventures and facilitate timely detection and take appropriate steps to prevent malfunctions. The timing plays a significant role as the sooner a risk is identified and tackled, better would be the chances to avert it and would ensure timely action and assist in long term success of the organization.

• Definition: The key risk indicators are parameters that effectively measure the risks involved in a business procedure and activity and provides us with a prior notification of its possible harmful consequences. More and more organizations are turning to Enterprise Risk Management (ERM) to manage their risks and provide a framework to work out their business strategies in the direction of consistent growth and excellence.
• Reason for Usage: The Key Risk Indicators are far becoming the most sought after concepts to understand and adopt by businesses as they perfectly complement the Key Performance Indicators in contributing to an organization’s growth and success and relate to the key business objectives too. The concrete identification of inputs that have the potential to hamper productivity and performance automatically relates to the inputs that facilitate performance and are positive contributors to business growth.

Developing an effectual risk framework is a daunting task for most businesses since the chief risk possibilities are laid out in financial terms only, and generating effective operational risk indicators in relation to these is a taxing proposition and challenging task. It is imperative to have a periodical risk assessment process working on regular basis and the management must take apposite steps to emphasize on the efficacy of the risk indicators and review it appropriately.

Communicating the risk appetite and working out the routine services and performance levels are the important utilities of key risk indicators. The implementation of the risk indicators should be done in a way that it assists in improvising the consistency levels, the relevance of their adoption and the relative transparency of the entire process. The risk indicators are positive contributors to track the loss making activities and the shaping up the factors that contributed to the losses. The basic vagueness of the actual concept makes it hard to organize and systemize the entire execution process; however standardization of the procedure by the use of commonly comprehendible language around the business activities and related risks will lead to strong development of the key risk indicators and their specification.

The ERM i.e. the concept of Enterprise Risk Management is steadfastly gaining momentum amidst the corporate honchos and business units to manage their risks and enhance their performance levels.  The age old saying that what gets measured gets managed is perfectly applicable under such scenarios and to effectively measure the risks involved in a business,  a series of steps are undertaken to build the foundation of a corporate risk management program that is critical to business performance.

Benefits of KRI

The application of Key Risk Indicators holds a promising future in the corporate world and has great potential if implemented in a methodical way with a commonly understood configuration and lingo and goes a long way in ensuring the smooth flow of business processes and activities. Organizations can reap rich dividends from adopting KRIs as the clear defining of these expresses strong commitment to risk management involving stakeholders at all levels.

Building KRI also facilitates significant risk appetite and allows accurate reporting for timely detection and action, besides meaningful comparisons across situations where risk is applicable, and further permits effective monitoring of those risks and provides framework for dealing with them.

The full description of the indicator available can easily provide an Early Warning Signal to the management and prevent impending losses and other related issues that can be detrimental to an organization’s growth and long term profitability.

The key risk indicators are immensely useful in supporting the top management decisions and actions as they effectively lay out the risky propositions and manage the groundwork vital to achievement of business objectives and enhance future prospects with their benchmarking.

Limitations

The system of organizing and managing the Key Risk Indicators is a vague concept in itself and calls for in-depth understanding and structuring for collective comprehension. The accurate measurement of the KRI is not a feasible option and not fully trusted by a business.

Any business develops various plans of actions to achieve their objectives and avert risks, however blind faith in such strategies is not a viable option as their value cannot be fully supported with concrete proofs, which makes their development not worth the effort.