6
KPI measures is more art than science. Associating KPI measures with action plans is key. Strategy maps, described soon, bring science to the art of select- ing measures.
An organization can have many layers of leading/lagging indicators. A lag- ging indicator typically becomes a leading indicator in the next higher level per- spective, and so on.
54 STRATEGY MAPS AND BALANCED SCORECARDS
Enterprise-Wide versus Functional (Local) Scorecards Strategy map and scorecard projects do not necessarily need to begin at an enterprise-wide (or strategic business unit) level. They can be first designed for a specific function or process—at the warehouse first, for example, and then for the top of the house. As described earlier, these variations should be referred to simply as a scorecard. The term balanced scorecardapplies to the enterprise-wide measurements. An enterprise-wide balanced scorecard is in- tended to balance the emphasis of four or more perspectives, and it is con- structed to assist in achieving the organization’s vision and mission. The functional or departmental scorecard is less strategic and more tactical. How- ever, it may not be balanced in the same sense as the enterprise-wide bal- anced scorecard. Functional scorecards will have mini-strategic objectives and break them down into smaller, more detailed projects, processes, and ac- tions for more intense monitoring.
Carrying the performance measurement methodology throughout an orga- nization eventually requires adoption of the principles of scorecarding at all levels. Commercial business analytic software enables the creation and man- agement of strategy maps and scorecards at anylevel in the organization. The proliferation of local scorecards throughout the organization results in a top- down cascade of performance measures that links the highest-level vision, mission, and strategy in the balanced scorecard with the actions at the tacti- cal level where strategic objectives are actually implemented and realized by the day-to-day activities of individuals on projects or in processes.
A modeling software environment allows for customized scorecards with an unlimited number of strategies, objectives, key performance indicators (KPIs), critical success factors, perspectives, or themes. Both numeric and text-based or subjective measures are supported by commercial software,a thus providing the greatest possible flexibility in designing a performance tracking system.
aRefer to www.sas.com for an example of commercial strategy map and scorecard software.
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Figure 6.2 visually reveals the decomposition and cascading of a top-level strategy to a front-line action. This ensures that managers and employees share a common focus on the strategy. The top of the figure is humorously referred to as the “O-zone.” This is because these are the measures for the CEO, COO, CFO, and other so-called C-level executives. The figure has teams at the bottom with their own operational measures. (Ideally, the separate, functional scorecard
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Figure 6.1 Scorecards: A Hierarchy of Cascading Measures
Selecting each measure is key. Then, when executives shift strategy, the selections and weightings are adjusted.
Organizational Scorecard
Business Units Performance
Dashboard
“I can see my =
contributions toward success.”
50% X 40% Y 10% Z
Line of Sight
40% C 30% D 35% E 20% A
30% B 50% C
50% E 40% F 10% G
30% G 20% H 50% J
Alignment:
Teams
Individuals
“What I do”
10% X Old 40% Y 50% Z
New
30% E 30% F 40%Q
Figure 6.2 Shift of Cascading Measures ccc_cokins_06_53-57.qxd 1/14/04 10:24 AM Page 55
decomposed from the enterprise’s balanced scorecard.) Presuming these lower- level measures align with the high-level measures, then if they are scoring high, the collective work efforts will be achieving the overall strategy.
With a properly cascaded strategy map, changes in strategy can quickly be mirrored in the measurement system. That is, leading and lagging measures are ideally selected by the employee team, configured among themselves, and weighted in parallel to the levels of importance of the strategic objectives and corresponding action plans or business processes that they support. Remember that the KPIs serve as the drive gears to the strategy map’s strategic objectives and its action plans or processes.
Note in Figure 6.2 how an employee can have a line of sight on how what he or she does can affect other performances that eventually affect the achievement of the strategic objectives. Employees can therefore see how what they do con- tributes to the organization’s success. If management is bold, it will allow the employee teams to see how coworkers are also contributing to success.
Figure 6.2 also illustrates that when the senior managers shift strategy, they can replace one or more of an employee team’s vital few measures with different and more applicable measures, and/or rebalance the weightings of emphasis for
56 STRATEGY MAPS AND BALANCED SCORECARDS
Driving a Scorecard System with Fact-Based Data
Scorecards require data. Without reliable and single-view data, the credibility of the scorecard’s signals is lowered. It is important to feed fact-based data in- formation to the scorecard system. A subset of the KPI measures can come from an ABM system. That is, ABM data can populate the scorecard frame- work with robust and high-octane information to be used as scores in the scorecard systems. For example, unit cost trends (e.g., the processing cost per invoice), customer profit margin levels, or cost of quality levels may be strategy- relevant. Each of these is reported by an ABM system.
In short, the outputs of an ABM system are excellent inputs to a weighted scorecard system. But let’s not confuse ABM and performance measures.
ABM is not the performance measurement system. As previously mentioned, the output of ABM can be an important input to performance measures. And the presence of ABM data can lead to actions and decisions, not just emo- tional sighs or an “oh my.” Also, ABM is not a prerequisite for designing and using a scorecarding system. Scorecards can certainly operate without ABM data, but scorecards can work better when managerial accounting data is a subset of the KPIs.
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the measures. That is, when senior management shifts to the new strategy, not only do the high-level weightings change, but also in one case measure Q re- places measure G. This does not mean that measure G is now unimportant. It simply means that measure Q has now become important and the desire is to have the vital few measures.
Rebalancing the weightings by modifying the coefficient percentages that reflect importance is comparable to an airline pilot slightly adjusting the ailerons on the airplane’s wings to slightly alter the airplane’s course. But re- placing an old measure with a new one is more intense—like banking the air- plane left or right.
What are the sequential steps to implement a scorecard? These steps are dis- cussed in much greater detail at www.wiley.com/go/performance.
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