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Your balanced scorecard should be helping you in an uncertain economic climate

The current environment is an excellent test of your balanced scorecard. Does it still serve you well as the economy changes, with credit tightening, interest rate and exchange rate changes, with concerns over governance (just ask a banker), as you need to find ways to change costs, or as you seek ways to maintain existing revenues or find new ones?

There are ways of doing well in this environment? Given all the doom and gloom in the car industry I have a friend in the trade who has never been busier. Why? He is exporting UK cars to people who are finding the pound so cheap that it is worth buying cars here. In every cloud, as they say. Of course it’s a change of strategy but you do have to spot opportunities and grasp them and youir balanced scorecard should be helping you. Here’s how:

1) Supporting governance and decision making

The first thing that your balanced scorecard should do is provide your board and your management with good quality governance and assurance. To do this it needs to provide a clear overview of performance across the balanced scorecard’s perspectives (Financial, customer, process & learning & growth). The relationships between perspectives provide lead and lag indicators of success so you know you are staying on track or something is going wrong that will lead you off track. You have the ability to drill into detail as you need it. The well presented information should promote and encourage informed discussion, backed up with evidence. Overall this should provide your board with information they can trust so they understand the risks, can act with confidence, or be assured that things are in control.

2) Knowing what drives costs and revenues for better decision making

If you are going to make decisions about costs and revenues you have to be clear what drives them. Your balanced scorecard’s cause and effect model that crosses the perspectives should be telling you what drives costs and what drives customer behaviour and revenue. If it isn’t, particularly if you have measures in perspectives that don’t have any relations between perspectives, you won’t be able to make informed decisions about which levers to pull to change costs of revenues. You might cut costs that undermine quality or sales.

As an example, some colleagues of mine have recently been using lean management practices to eliminate waste from processes and activities. The lean principles map well onto the cause and effect model of the balanced scorecard. In one case (from financial services) they identified savings of £300,000 per annum, in just one department. This was in an organisation with a total operating costs of only £11m. That is nearly 3% improvement in profits. In another example (from the public sector) a customer’s application took 3 months and travelled 1.5 miles to get processed. This was reduced to 45 minutes and 1 yard. You can imagine how this improved both services and costs. In each case it is the underlying capabilities that drive processes, to serve customers and deliver revenues, economically: that is the cause and effect model of the balanced scorecard.

3) Focusing on the right investments, Eliminating the wrong ones

One danger at the moment is across the board cuts. Perhaps cuts to discretionary spend or perhaps 10% across the board in every department. Of course some costs, such as rent or IT system costs, are fixed and indirect. They are hard to cut. Others, like training, marketing and even wages, are easier to cut. However these might not be the right things to cut, they get cut disproportionately because they are softer targets and the internal dictate dominates the logic of business performance.

In one organisation we worked through their projects aligning them to their strategy map. From a total project spend of £100m we found £40 that were not directly contributing to their strategy. That is potentially a £40m saving. In another organisation the simple process of exposing their project portfolio (over 130 projects in an organisation with a cost base of only £150m) and allowing that portfolio to be seen as a whole, provided the management team with the incentive to get a better grip on project approval, project costs overrun and, most importantly, the delivery of promised benefits.

4) Refining measures, whilst maintaining objectives

Modern balanced scorecards don’t start with measures. They start with objectives. This means you know what you want to achieve and the characteristics of the objective help you to tell what you should be measuring.

When things change, and some measures have become inappropriate you don’t just want to add more measures, do you. That will add cost as well. When your approach is anchored in objectives, it is far easier to refine your measures, and targets, whilst still communicating your overall objective. Your balanced scorecard should be able to adapt like this.

While you are asking these questions you might just wonder how out of date or “modern” your balanced scorecard is.

I hope your balanced scorecard is as least as good as those from 1995?