In a competitive global environment, companies continually strive to improve sales, efficiency and profitability through substantial investments in the strategic planning process. The continued improvement in the accuracy and timeliness of data has resulted in the development of sophisticated management and tracking systems. Key Performance Indicators and the Balanced Scored play a vital role in establishing the foundational components in a comprehensive strategy.
The Importance of Key Performance Indicators Key Performance Indicators (KPI) serve as analysis tools that help a business measure their progress in achieving predefined objectives. After creating a specific mission or purpose, Key Performance Indicators provide benchmark measurements of relative progress at different points in the process.
By determining critical values and utilizing qualitative analysis, a business can accurately assess overall performance while exposing hidden process deficiencies. This allows owners and managers the opportunity to duplicate successful systems while modifying or eliminating defective or obsolete business models.
Developing Key Performance Indicators Constructing a valid set of Key Performance Indicators depends largely on the type of business to which they will be applied and the comprehensive objectives that have been previously defined. Most KPIs rely primarily on the availability of accurate reports and reliable raw data. Although many KPIs involve financial models, they can be developed for a wide variety of industry specific businesses. For example, a company may establish the broad goal of becoming the largest provider of a product or service in a particular geographic area. In such a case, the KPIs might include:
* Sales volume by company minus returns
* Sales volume by industry minus returns
* Percent of overall company volume relative to industry volume
* Number of customer complaints as a percentage of sales
* Number of days to resolve complaints relative to total complaints By tracking these and other metrics, certain relationships will develop that demonstrate a consistent and measurable influence on the overriding objective.
When designing Key Performance Indicators it is important to remember to include the following elements:
* Every KPI must be quantifiable
* Every element that impacts the broader objective must have an associated KPI
* KPIs must serve to present an appropriate action
* Each KPI must account for anomalies that affect the data
* Each KPI must be applicable to the defined objective
* KPIs should not be redundant The Balanced Scorecard The Balanced Scorecard theory was originally developed by Dr Robert Kaplan and Dr David Norton. The model combines both the financial and non financial aspects of business operations. This unique merging of disparate components provides management with accurate forecasting and an unparalleled view of overall operational effectiveness. A Balanced Scorecard revolves around the creation of a well defined vision and strategy statement. The development of the subsequent supporting model will serve to fulfill the company's fundamental vision. Around the vision and strategy statement there are four key areas that are used to evaluate performance and effectiveness. These include:
* Financial analysis: Sales and profit performance data such as return on investment, sales and operating costs
* Customer analysis: Focuses on the level of customer satisfaction, returns, complaints and retention
* Internal analysis: Examines operational efficiency and productivity
* Learning and Growth analysis: measures management efficiency, systems performance and employee satisfaction and retention Each of these perspectives are further broken down to include the following common measurable components:
* Objectives: Defines overall goal
* Measures: Provides the means to calculate progress
* Targets: Defines specific areas to be addressed
* Initiatives: Defines methodologies that will be employed to fulfill the objectives Once a Balanced Scorecard strategy has been designed and implemented, it can be used in a variety of ways to improve communication between departments. This in turn will result in enhanced operational efficiency while providing more accurate and focused forecasts. As each layer of the business becomes increasingly aware and involved in the process, they contribute their own unique insight which strengthens the company and helps achieve the overall objective.
Strategies will constantly evolve as conclusions drawn from the Balanced Scorecard illuminate hidden opportunities and structural weaknesses. By incorporating the Balanced Scorecard into budget and planning systems, the vision and strategy are constantly evaluated and compared against results being collected in real time.
How KPIs Contribute to the Balanced Scorecard Key Performance Indicators can be incorporated into a Balanced Scorecard and serve as the primary metrics. The use of individual KPIs to monitor and track the various elements of the Balanced Scorecard will result in the accumulation of more relevant and timely data. KPIs use comparative information to illustrate trends that either validate or invalidate the initiatives and targets for each Balanced Scorecard perspective. In fact, KPIs are almost always used to facilitate the objective evaluation of the performance of the various segments of the Balanced Scorecard.
How Small Business Benefits from a Balanced Scorecard Although the popular use of the Balanced Scorecard evolved through large corporations, multi-national companies have displayed varying degrees of success in its implementation. The primary impediment often lies with a lack of consistent execution across all divisions and departments. For a large company to be successful with the Balanced Scorecard model there must be a strong commitment to monitor the progress of the initiative as well as an apparatus to make necessary adjustments and changes. A small business usually doesn't encounter these cumbersome structural barriers. A well conceived Balanced Scorecard can provide small business owners with a powerful tool to evaluate their continuing progress in meeting goals and objectives. A Balanced Scorecard and the supporting Key Performance Indicators demonstrate a commitment to success that will impress potential investors, banks, shareholders and prospective employees. The Balanced Scorecard also can help a small business maintain its focus, improve forecasting, and better prepare for unforeseen changes in market dynamics.
The Importance of Key Performance Indicators Key Performance Indicators (KPI) serve as analysis tools that help a business measure their progress in achieving predefined objectives. After creating a specific mission or purpose, Key Performance Indicators provide benchmark measurements of relative progress at different points in the process.
By determining critical values and utilizing qualitative analysis, a business can accurately assess overall performance while exposing hidden process deficiencies. This allows owners and managers the opportunity to duplicate successful systems while modifying or eliminating defective or obsolete business models.
Developing Key Performance Indicators Constructing a valid set of Key Performance Indicators depends largely on the type of business to which they will be applied and the comprehensive objectives that have been previously defined. Most KPIs rely primarily on the availability of accurate reports and reliable raw data. Although many KPIs involve financial models, they can be developed for a wide variety of industry specific businesses. For example, a company may establish the broad goal of becoming the largest provider of a product or service in a particular geographic area. In such a case, the KPIs might include:
* Sales volume by company minus returns
* Sales volume by industry minus returns
* Percent of overall company volume relative to industry volume
* Number of customer complaints as a percentage of sales
* Number of days to resolve complaints relative to total complaints By tracking these and other metrics, certain relationships will develop that demonstrate a consistent and measurable influence on the overriding objective.
When designing Key Performance Indicators it is important to remember to include the following elements:
* Every KPI must be quantifiable
* Every element that impacts the broader objective must have an associated KPI
* KPIs must serve to present an appropriate action
* Each KPI must account for anomalies that affect the data
* Each KPI must be applicable to the defined objective
* KPIs should not be redundant The Balanced Scorecard The Balanced Scorecard theory was originally developed by Dr Robert Kaplan and Dr David Norton. The model combines both the financial and non financial aspects of business operations. This unique merging of disparate components provides management with accurate forecasting and an unparalleled view of overall operational effectiveness. A Balanced Scorecard revolves around the creation of a well defined vision and strategy statement. The development of the subsequent supporting model will serve to fulfill the company's fundamental vision. Around the vision and strategy statement there are four key areas that are used to evaluate performance and effectiveness. These include:
* Financial analysis: Sales and profit performance data such as return on investment, sales and operating costs
* Customer analysis: Focuses on the level of customer satisfaction, returns, complaints and retention
* Internal analysis: Examines operational efficiency and productivity
* Learning and Growth analysis: measures management efficiency, systems performance and employee satisfaction and retention Each of these perspectives are further broken down to include the following common measurable components:
* Objectives: Defines overall goal
* Measures: Provides the means to calculate progress
* Targets: Defines specific areas to be addressed
* Initiatives: Defines methodologies that will be employed to fulfill the objectives Once a Balanced Scorecard strategy has been designed and implemented, it can be used in a variety of ways to improve communication between departments. This in turn will result in enhanced operational efficiency while providing more accurate and focused forecasts. As each layer of the business becomes increasingly aware and involved in the process, they contribute their own unique insight which strengthens the company and helps achieve the overall objective.
Strategies will constantly evolve as conclusions drawn from the Balanced Scorecard illuminate hidden opportunities and structural weaknesses. By incorporating the Balanced Scorecard into budget and planning systems, the vision and strategy are constantly evaluated and compared against results being collected in real time.
How KPIs Contribute to the Balanced Scorecard Key Performance Indicators can be incorporated into a Balanced Scorecard and serve as the primary metrics. The use of individual KPIs to monitor and track the various elements of the Balanced Scorecard will result in the accumulation of more relevant and timely data. KPIs use comparative information to illustrate trends that either validate or invalidate the initiatives and targets for each Balanced Scorecard perspective. In fact, KPIs are almost always used to facilitate the objective evaluation of the performance of the various segments of the Balanced Scorecard.
How Small Business Benefits from a Balanced Scorecard Although the popular use of the Balanced Scorecard evolved through large corporations, multi-national companies have displayed varying degrees of success in its implementation. The primary impediment often lies with a lack of consistent execution across all divisions and departments. For a large company to be successful with the Balanced Scorecard model there must be a strong commitment to monitor the progress of the initiative as well as an apparatus to make necessary adjustments and changes. A small business usually doesn't encounter these cumbersome structural barriers. A well conceived Balanced Scorecard can provide small business owners with a powerful tool to evaluate their continuing progress in meeting goals and objectives. A Balanced Scorecard and the supporting Key Performance Indicators demonstrate a commitment to success that will impress potential investors, banks, shareholders and prospective employees. The Balanced Scorecard also can help a small business maintain its focus, improve forecasting, and better prepare for unforeseen changes in market dynamics.
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