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Measure What Matters: Aligning Performance Measures with Business Strategy

  • ID: 42744
  • Report
  • May 2000
  • 85 pages
  • American Productivity & Quality Center, APQC
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Nearly 15 years ago, the unspeakable was finally spoken, and members of the
accounting profession began to acknowledge what was already well known to
operating managers: Traditional financial tools alone were inadequate for
prospectively managing contemporary organizations. This recognition was triggered by the emerging popularity in the Western Hemisphere of Total Quality Management and its dependence on nonfinancial measures, particularly in manufacturing. Two threads emerged from this long-awaited awakening: activity-based costing (ABC) and what eventually became known as the balanced scorecard. ABC represents an attempt to more realistically link costs to the underlying realities of operating processes and their usage of what economists call the “factors of production”: labor, materials, capital, and—more recently—knowledge. The balanced scorecard attempts to integrate critical nonfinancial performance measures into the basic management structure of the organization.

The balanced scorecard is a tool for quantitatively defining and managing the
most effective indicators of future strategic success. It can be used to rally organizational effort around the few activities that are most vital to this success. It therefore is a multifaceted tool that, in principle, can be used for communication, alignment, improvement, and control. To guide practitioners, the traditional balanced scorecard organizes measures into four interrelated “perspectives”: financial, customer, internal, and learning and growth. The theory behind it is that to achieve financial success—the ultimate purpose of the organization, according to scorecard advocates—organizations must satisfy their customers. To satisfy their customers, they must optimize their internal value-creating processes. To optimize these processes, organizations must learn and their employees must grow in their individual capabilities. Although this has been the dominant balanced scorecard structure during the 1990s, other logic paths have proved increasingly useful for some organizations.

But as appealing and simple as it appears, implementation of the balanced scorecard has proved to be a challenge for most organizations. It is the quintessential example of the phrase “It’s simple, but not easy.” Part of this difficulty is the scorecard’s reliance on logical causal linkages to relate metrics to strategic objectives. This logic breaks down if any link in the chain is weak or ill-defined. For example, some organizations find that they have not effectively articulated their strategy in the first place, so they lack the foundation needed for a compelling story. Others find that complexity masks the real drivers of success so that the resulting scorecard metrics are unconvincing. A third difficulty lies in the scorecard’s dependence on changing the organizational culture. Measurement affects behavior, for better or worse. Changing measurements from a one-dimensional emphasis on financial performance to a more balanced emphasis on an appropriate mix of financial and nonfinancial measures has significant cultural implications, ranging from changes in individual compensation and career advancement to increased dependence on teamwork. So, like any other culture change initiative, it brings with it a set of challenges to successful implementation.

It takes a strong and convincing agent to overcome an organization’s inertia or
resistance to change. In most Western organizations, the person at the top must have the final word on the scorecard contents and the achievement of its goals. However, leadership takes on different forms in different organizations. If there’s one area in which top managers need to get their collective hands dirty, it is the balanced scorecard, since they are the owners of the organization’s strategy and they must ensure that the result guide the entire organization in the chosen direction.

An organization’s immune system ensures stability and resists wasteful, whimsical changes. To break down this immune system, there must be a sense of urgency and a convincing argument that the proposed solution will, in fact, mitigate the source of that unwanted urgency. Internal success stories, resulting from pilot implementations and told by their champions, often provide that required proof. Systemization of the new approach, training and education, and information support systems facilitate the approach’s diffusion and maintenance throughout the organization. Reward and recognition of successful proponents reinforce the desired change.

The best-practice partners’ observations reflect the challenges and concerns
associated with initiating the balanced scorecard and its set of associated performance measurements. Of our three data sources —survey results, site visit reports, and debrief findings (discussed further in the methodology section of this executive summary)— the third provides a view of the best-practice organizations through the eyes of practitioners newly embarked on the journey. Immediately following each site visit, the study team held a one- to two-hour debrief with the site visitors. We addressed the observed major strengths and weaknesses and identified areas for potential follow-up
questions. We used a simplified form of KJ, or affinity diagram, analysis and voted to prioritize our observations. A similar analysis, based on the collective conclusion from the five site visits, revealed several interesting dichotomies.

For example, the greatest observed strength was sponsorship by a single senior
executive, usually the entity leader for the unit visited. On the other hand, it was often unclear as to whether that sponsor was simply encouraging or really driving the scorecard’s implementation. Also, to outsiders often not privy to confidential information, the linkage between the scorecard measures and the business strategy were sometimes unclear, except in the case where a structured matrix approach was used that not only captured the causal relationship but also quantified its strength. At all sites the study team visited, the scorecard implementation was limited to a particular business unit or function—a good starting point, but a recognized obstacle to significant strategic impact. Does all of this sound familiar? Every major change initiative in the past 50 years has had the same basic agenda, though most organizations have fallen short of completing theirs. However, the balanced scorecard provides the potential to unifiy the organization around issues central to its survival. Those who are successful will win leadership roles in the 21st century and transfer all of the associated benefits to their
stakeholders.

KEY FINDINGS

The key findings of this study were derived from primary research performed via
five site visits to best-practice organizations and detailed survey questionnaires completed by 18 organizations. Based on the Measure What Matters benchmarking study scope, findings are supported with data gathered from the 18 study participants (partners and sponsors). The findings, which are organized into three sections, address the following dimensions of our learnings:
- designing the performance measurement system,
- implementing and operating the performance measurement system, and
- communicating and driving behaviors.

METHODOLOGY

Benchmarking is the process of identifying, understanding, and adapting outstanding practices from organizations anywhere in the world to help an organization improve its performance. Companies participating in benchmarking activities report breakthrough improvements due to direct and indirect improvements in cost control, quality, cycle time, and profits. Recognized as first among a list of 10 leading benchmarking organizations’ models by the European Center for Total Quality Management in 1995, the consortium methodology, developed in 1993, serves as one of the premier methods for successful benchmarking in the world.

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- Sponsor and Partner Organizations

A listing of the sponsor organizations in this study, as well as the best-practice (“partner”) organizations that were benchmarked for their innovation and advancement in performance measurement.

- Executive Summary

A bird’s-eye view of the study, presenting the key findings discovered and the methodology used throughout the course of the study. The findings are explored in detail in following sections.

- Participant Highlights

A comparsion of the sponsor and partner groups across several dimensions.

- Key Findings

An in-depth look at the nine key findings of this study. The findings are supported by quantitative data and qualitative examples of practices employed by the partner organizations.

- Critical Success Factors

Additional important features of the partners’ balanced scorecards.

- Partner Organization Profiles

Background information on the partner organizations, as well as their innovative performance measurement practices.
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