The balanced scorecard is the set of metrics, focus areas and strategic objectives that describes the specific outcomes the organization is working to achieve. This is all done within the context of the vision and strategy, translating it down to specific metrics that determine progress toward the long-term strategy.
During the annual corporate planning process, the balanced scorecard undergoes an evaluation and update which essentially pushes it out one more year into the future. Areas within the scorecard where corporate performance is in the ideal range may not change from year to year, while other areas which are performance deficient generally increase year over year to move the organization toward the long-term objectives.
The measures describe the levels of performance in each focus area that are required to position the organization for success in the current and future environments.
Choosing the metrics / Rationale for a tiered performance matrix:
With some businesses, we recommend using a tiered process once the usage of the scorecard within the organization matures. This is primarily with organizations that are performing at or close to their ideal state. It allows for a more stable performance measurement platform, although it sometimes lacks the â€œburning platformâ€ results that a progressive target system creates.
Reasons for target ranges include:
– Ranges provide a longer-term view of measurement and performance indication
– Define the levels of performance that the organization needs to achieve in both good and challenging times
– Allow for fluctuations in the market conditions
Within the tiered target system, the organization is defining the desired level of performance, with the recognition that market forces or exception internal performance often sway the outcomes higher or lower than specifically targeted. The primary consideration in the development of targets involves the degree of performance within a certain area required to support the strategy, with a secondary consideration being the environmental factors acting for and against the organization. Within a normal environment the range should allow for regular market sway, while extraordinary market conditions sometimes require adjustments to the scorecard to recognize the realistic challenges of delivering results within those conditions.
Performance in the various ranges of a tiered target system have the following implications:
– Threshold (expressed as a fixed percentage)
* Minimum acceptable performance to avoid the creation of a significant business risk
– Target (expressed as a range)
* The desired level of performance, meeting all expectations
* The range accommodates business condition changes
– Exceed (expressed as a fixed percentage)
* Higher than anticipated level of performance
In other cases, we recommend setting 3 years of targets when possible, which starts at the level of performance required to deliver on the 3 year strategy, working back from there to define the 1, 2, 3 year targets. This is a great way to connect the strategy to the measures in a way that makes sense to people, but also clarifies exactly how the business will be required to perform in order to achieve the strategy.
Consider the following guidelines when choosing balanced scorecard metrics:
– Provides direction and creates a call to action
– Defines what we are working to achieve in each upcoming year
– Clearly describes the level of performance (threshold, target, exceed)
– Are tangible, measurable outcomes of actions
– Supports management decision making
Managing the performance of the organization
Every organization is only as effective as their ability to create and move toward a singular focus. The balanced scorecard is an integral part of the organizations ability to create and communicate that focus, but then ensure regular attention is paid to the effectiveness of delivery. Achieving the targets determines whether the organization is successful, therefore an absolutely critical component of the management practice.