Balanced scorecard perfection

A common concern for senior management at any organisation is tracking the effectiveness of their business strategy. Performance management tools provide the necessary feedback to gauge the success of a strategy’s implementation.

One of the most effective tools for this is the balanced scorecard-based key performance indicator (KPI) method. It allows you to cascade your vision down into the organisation’s strategic objectives, convert the objectives into KPIs, and identify the areas in which the organisation is performing well and those that may require further attention.

Scorecard basics

To understand how the balanced scorecard model is used in designing the KPIs, you need to understand the balanced scorecard model itself. Four key dimensions are used in designing and measuring the KPIs for the organisation, department and individuals:

• financial
• internal processes
• learning and development
• customer/stakeholder relationships.

The approach to designing KPIs using the balanced scorecard is quite simple: the organisation’s strategy is cascaded down to each department and individual within the four dimensions above along with their targets, and these are calculated by the KPIs.

This approach has proven to be very effective, as is evident by its wide-ranging use by organisations across the world and in the Middle East. Implementers include Dubai’s Community Development Authority, which has adopted the balanced scorecard approach to manage and measure the performance of its strategic direction, strategic objectives and KPIs.

According to the head of advisory and tax at Grant Thornton UAE, George Stoyanov, the increasing use of the balanced scorecard-based KPI method in the UAE post-pandemic, and on the back of the extended notions of work-from-home and hybrid models of work delivery, has raised the need to more prudently define corporate KPIs that connect the work/reward model with the balanced scorecard methods.

Understanding the vision

Although the approach set out for adopting this method is quite simple, KPIs must be identified and designed appropriately for the approach to work. While designing the KPIs, you need to fully understand the organisation’s current and future plans; the expectations of a particular job role, rather than the tasks that a particular individual performs; and the organisation’s mission, vision and strategy. Having this in-depth knowledge will allow the organisation to ensure uniformity in KPIs across the same positions across different locations.

In addition, each KPI should, as a minimum, include the following details:

• overall weighting of each KPI in the overall performance scorecard
• the calculation mechanism
• activities required to enable the calculation of KPIs
• frequency of  calculation
• tolerance level for not achieving the KPIs.

Subsequently, all KPIs should be compiled in a scorecard. This scorecard should determine the increments, benefits and bonuses for employees during the performance period.

A clear performance management system will improve employee motivation, as staff will link their tasks to the achievement of their own, their department and their company’s objectives.

A well-documented and functional performance management system will also enhance the objectivity of the appraisal process. The exercise will mean you can identify areas of improvement for employees, which can be fed into the human resources team’s learning and development programme.

Common errors

While it is important to document the KPIs, it is also critical to understand the common mistakes that can be made in documenting KPIs, which limit their usefulness.

• You need to determine the right number of KPIs for the job role. Often people try to include too many trivial tasks in the KPIs, which dilutes the overall weighting of key KPIs. As the name suggests, these should be the ‘key’ performance indicators for any job role and should not include all the tasks required of that particular job role.
• It is important to adopt the right mechanism for calculating KPIs, otherwise the overall process will be subjective and fail to yield the desired results. While setting out the calculation mechanism, you must identify the data sources for the calculation as well, as these will need to be integrated into overall job roles and responsibilities.
• If the KPIs are not properly linked to the incentivisation and compensation of the individuals, they may not yield the desired results.

While the balanced scorecard-based KPI method is useful, and easy to understand and adopt, management should be aware that if the KPIs are not cascaded down appropriately to reflect the organisation’s strategy, the entire performance management system designed using this method will not produce the required results.