If you are going to be successful in managing your business, you need measurement. You need facts that tell you how well you are doing and where you need to improve. And those measures of business performance are much broader than just financial measures, such as profit, cash, margins, etc, however important they are. Performance reporting needs to be balanced.
How do you make sure that your business is heading in the right direction? How do you make sure that your strategies are working? How can you even tell if your strategies are being implemented effectively? Is profit the only measure of success? Does profit tell you anything about whether you are achieving your vision?
Let’s say my vision was to become number 1 in a particular market. How would I know how close I was to achieving that? Not by looking at my profit in isolation. And just asking that question leads to other useful questions that clarify what I am aiming at. For instance, what does becoming number 1 mean? Number 1 for sales volume, turnover, profitability, customer satisfaction? Best company to work for? Most environmentally friendly company in the market? Another question would be, who are my competitors? How do I measure their position or performance? How can I get reliable information about them that will tell me whether I am number 1 or not?
And I should also have strategies to follow that will help me to achieve the vision. So, in this example, I may decide that I am going to offer the best prices in the market in order to win market share. Nothing in my financial statements will tell me whether I am offering the best prices in the market, or whether I am winning market share. And yet if I have set that strategy to achieve my vision, it will be critically important to measure whether it is succeeding.
Other things are also important to measure, things that you need to be doing well in to achieve your vision and succeed in your strategies. For example, customer satisfaction, employee engagement, risk/compliance and corporate social responsibility.
I think my point is made by now, though it may sound strange for a finance guy to say that financial performance is not everything! The point is that even if profits and cash are ultimately what you want to maximize, you have to measure other things that help you get there. So your regular performance reporting must include other things.
The classic way of doing this is by using a Balanced Business Scorecard. We have not got the space to go into the theory and talk about Kaplan and Norton, who invented the concept. I guess you could talk more generally about performance dashboards. Just like a car doesn’t only measure speed on its dashboard, the point I want to get across is that if you want to measure the performance and the success of your business, you have to measure a balanced range of aspects. And you have to decide what those are, depending on what your business, your vision and your strategies are.
A few things I’ve learned about good balanced scorecards over the years are:
- Performance reporting measures must consistently and explicitly link to your vision and strategy. It’s no use measuring things that are not important to that, because measurement and reporting takes time and effort. So you ought to focus on the things that matter.
- It doesn’t all have to be done with numbers. Again, strange for a finance guy to say! But it’s true. Sometimes, something as simple as a traffic light measure can be all you need to see if a particular factor is ok, not ok or needs some corrective action.
- Use measures as both lead and lag indicators. Lag indicators tell you how you
have done. Lead indicators tell you how things might work out. For example, employee engagement can be seen as how your employees were feeling when they did the survey (a lag indicator), but engagement can affect attrition and motivation in the future. So low employee engagement can be seen as a lead indicator to attrition (and therefore higher cost) and low motivation (again, higher cost and potentially higher error rates, which may affect customer service, and so on).
- Keep it simple and focused. Too many measures, even if they are all relevant, will just make it too confusing to interpret, too costly and time-consuming to report on, and will cloud your decision making.
The performance information diet
Just on that last point, I once worked with a division of a big bank that used a balanced scorecard. We produced it monthly. But it had so many pages in it that it took almost four weeks to produce, only a couple of people in the management team read it all and it was impossible to review in monthly management meetings. So we revamped it, cutting it down by 50%, keeping only the measures that directly related to strategies. We also made the reporting more colourful. Sounds cosmetic, but it actually made it much quicker to read and digest. You could just look at it and focus on the red items, where attention was needed. It then also took half the time to produce every month. The effect of that was to give management more time to review the report, and more time for the Finance department to investigate some of the items further. In turn that led to more efficient and effective decision making in the monthly management meetings, and led to a more successful business.
If you don’t use a balanced scorecard or a dashboard for performance reporting in your business, I would encourage you to think about it. It doesn’t have to be huge and complex. Just think about all the different things that are important to your success, and try to find ways to regularly measure them and report on them.