This article is a continuation of our series of articles on KPIs. In the last installment, we gave an overview of David Parmenter's explanation of Key Results Indicators (KRIs), Performance Indicators (PIs), and Key Performance Indicators (KPIs). In his book, Key Performance Indicators (KPI): Developing, Implementing, and Using Winning KPIs, Parmenter goes on to describe the creation of a Balanced Scorecard (BSC) to help track the execution of the activities necessary to increase performance via modifying an organizations KPIs.
We thought it would be helpful to share some information about Balanced Scorecards for those who aren't familiar with the concept.
So what is a Balanced Scorecard?
A Balanced Scorecard (BSC) is a strategy and performance management device or diagram first introduced in the early 1990's by Robert Kaplan and David Norton with input and inspiration from Art Schneiderman of Analog Devices, a semiconductor company. The Scorecard is based on business ideas and practices that go back much further - GE's performance measurement in the 1950's, the tableau de bord or dashboards devised by French process engineers in the early 20th century, and even back to the management of American companies in the 19th century. What distinguished the Balanced Scorecard from other strategic devices was its incorporation of financial as well as non-financial data, and the use of targets against which strategies can be measured.
The Balanced Scorecard has gone through three major iterations since 1990, but most agree that it should start with at least 4 "perspectives":
- Financial - the obvious one
- Customer - relates to satisfaction
- Internal Process - relates to efficiency
- Learning and Growth or Organizational Capacity - relates to better skills and better technology
Some, including David Parmenter, may add more perspectives or different ones. Parmenter recommends starting with the 4 mentioned above, as well as these more modern perspectives:
- Employee Satisfaction - relates to staff retention and positive company culture
- Environment/Community - relates to community image, leadership, and responsibility
Within each perspective, the Balanced Scorecard might then include:
- Strategic Priorities
These subheadings provide management teams with a place to define, track, assign and measure their approaches to increasing organizational performance.
Vision Statement and Critical Success Factors
In order to determine strategic priorities, objectives, and what measures should be included, it might be helpful for an organization to take a step back and start with a Vision or Mission Statement - one for the organization as a whole, and perhaps even statements for each perspective. This can help you discover what your Critical Success Factors are and how they relate to one another.
Once the critical success factors are identified, it may also help to map them out to find their relationships. BalancedScorecard.org shows the following strategy map as an example:
Here's how they describe this strategy map and process:
"Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows)."
David Parmenter writes that the strategy map is also a good way to determine which critical success factors are most important: look for the ones with the most arrows emanating from them. He also writes that an organization's KPIs will usually reside within these key critical success factors. So whether you're creating the Balanced Scorecard in order to track the initiatives that will improve your company's KPIs, or using the process of creating a Balanced Scorecard to help figure out what those KPIs are, it seems clear that the very act of going through this process will yield rewarding insight into your business. As they say, the reward here is in the journey...and hopefully also the destination.
Resources and Real World Applications
In putting together this series of articles on KPIs, we've found a number of differing perspectives and approaches to the problem of how companies and organizations can increase performance. We recommend looking at BalancedScorecard.org and DavidParmenter.com for more information on what we've presented today. The Wikipedia entry on Balanced Scorecards also has some good background information.
We can see the practical application of some of these concepts in the current trends toward "Big Data" and Business Intelligence Applications, like Domo, or the Budgeting and Forecasting solutions from Host Analytics and Adaptive Planning, or the inclusion of business "dashboards" in most reporting applications. As an Intacct partner, we've seen first-hand the importance of including operational as well as financial data in real-time reporting - a key element of the Balanced Scorecard. Intacct has industry-leading reporting capabilities and can pull non-financial data from multiple sources and combine it with financial data to give companies more insight. Intacct has also recently incorporated Performance Cards into their dashboards to quickly show management how an organization is performing against certain targets. These Performance Cards are in essence a Balanced Scorecard that is updated automatically and in real-time.
So we can see that while technology and new tools are making it easier to gain real-time insight into key metrics and targets, to present them to different roles, and to share that information in a consumable format, the process of determining what should be measured and what strategies should be put in place is still a complex endeavor for any organization. If you have questions about this task, we're here to help.
We will continue to present information about KPIs, Business Intelligence, Financial Planning and Analysis, and other related topics in this blog. We'd like to learn from you as well, so please comment on what you think, what we've missed, and what you'd like to read more about.
If you have questions or would like us to help your organization gain better insight, automate and streamline your business processes, or increase the accuracy of your metrics, please fill out the form below. Or you can click the button on the right to receive a complimentary assessment of your company's finance function and where you can make improvements.
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