Performance Measures and the Balanced Scorecard

Performance measurement is a critical element of good Balanced Scorecard design and implementation. Research examining organisations and performance measurement practices has shown that leaders of performance measurement share four characteristics:

• They use a performance measurement system as the cornerstone of their strategic management and reporting processes.
• They apply a rigorous analytical approach to understanding the nature and logic of their business model, which enables them to identify and select the right measures.
• They design individual performance programs for their executives and managers consistent with the business scorecards.
• They support the performance measurement systems with information technology that enables automatic data capture, drill-down and root-cause analysis.

These four characteristics are fully consistent with the approach taken by those companies who are successfully using the Balanced Scorecard as a strategic planning and performance management system.

Through our involvement with the development and implementation of numerous Balanced Scorecards, we have found that one of the most challenging aspects is choosing meaningful and appropriate performance measures for each of the objectives on the strategy map. Having the right measure (direct and / or indirect) is critical as this is the main way to know whether the strategic initiatives are effective in bringing about the desired improvements.

One important step prior to thinking about performance measures for a particular objective is to make sure that everyone involved is very clear about what the objective means; for example, what it includes and excludes. In doing this, it can be very helpful to write a description or word picture of what it would look like if the objective were achieved. This needs to be done using simple clear language.

When there are some candidate measures, there are a number of tests that can be used to assess the appropriateness of these measures. Some of the tests that could be applied include:

The truth test - is the measure definitely measuring what it’s meant to measure?
The focus test - is the measure only measuring what it’s meant to measure?
The consistency test - is the measure consistent whenever or whoever measures?
The access test - can the data be readily communicated and easily understood?
The clarity test - is any ambiguity possible in interpretation of the results?
The so what test - can, and will the data be acted upon?
The timeliness test - can the data be analysed soon enough so that action can be taken?
The cost test - is it worth the cost of collecting and analysing the data?
The gaming test - does the measure encourage any undesirable behaviours? 

Adapted from Kennerley M and Neely A (2003) Measuring Performance in a Changing Business Environment International Journal of Operations & Production Management 23 (2), 213.

Developing and implementing Performance Measures is a major component of Balanced Scorecard Australia’s Balanced Scorecard Methodology.  For further information, please contact Balanced Scorecard Australia on +61 (0) 3 9607 8530 or email admin@balancedscorecardaustralia.com