Over the past few years, I’ve run across a few measurement related fallacies that I’d like to talk through. Some of these are verbally stated within companies and others are implied through their actions.
1) Small companies canâ€™t afford to do it, itâ€™s too expensive or takes too long
2) Financial measures are the most important
3) When the financials drop, an analysis of the market will explain why
Part of implementing a balanced is determining the measurement framework. For many smaller companies, the idea of implementing a balanced scorecard can seem to be a daunting task. It may feel like a â€œbig companyâ€ activity that is too labor intensive to justify the potential benefits. I doubt that many people would argue against using measures to help you manage your business, but to what degree should they play a role in smaller to medium sized companies?
Everyone uses some form of measurement but the majority of companies base their performance on the financial. Is this a mistake? Financial measures are almost always lagging. They only indicate end of the day results which are indicative of your success in other focus areas. Secondly, they only indicate one kind of performance. In a company where social, community or a more broad value proposition and vision exist, these measures fall short.
What you need are additional leading measures that explain WHY the financial measures occurred in the first place. Measuring other areas of your scorecard (balanced scorecard methodology) allows you to create information from which you can steer the organization rather than responding to after the fact results. Without monitoring the leading measures, you have nothing to let you know what is coming. Worse yet, without having this leading perspective, when a downturn happens, you will be playing catch up to determine WHY it happened.
Moving to more structure in the strategy management process is a change from how many small to mid sized companies operate, but it is achievable and will result in the same benefits that larger companies derive. Finding measures that connect with strategic objectives in each of your focus areas but are readily obtainable may be easier than youâ€™d think.
Smaller companies can often get away with less rigorous measurement frameworks than larger companies because the decision makers are closer to the business and have the same familiarity as line managers do in larger organizations. Interestingly so, this is probably the reason that people donâ€™t feel a measurement framework is required.
Here are three good reasons to do so:
1) By formalizing the structure, you will have better information and will be more likely to pay attention it.
Measures should be used to bring about change, and you canâ€™t evaluate direction without knowing specifically how the business is operating in all areas. Secondly, changes and trends will be less likely to sneak up on you. Entrepreneurs are highly intuitive, prefer to work from their â€œgutâ€ and often work in small companies.
2) Reporting your success to the board or owners cannot be done effectively without quantifying the impact you have created.
If significant business challenges are present, they will be quantified. Inversely, if progress has been made, it can be celebrated both by the board and by staff.
3) Changes in your environment will be less likely to sneak up on you.
The leading measures you put in place are designed to give you feedback when combined with market research will assist in deciding on what you need to do in order to position your business for the future. Once the board has set the direction, you will be able to see the gaps between how you look now and what you need to look like to meet the challenge.