How to Select Key Metrics for Strategic Decision Making in 3 Steps
Selecting effective metrics is the key to strategic decision making and putting the Balanced Scorecard into practice successfully. On the other hand, having the wrong ones could drown your decision making process in strategically-irrelevant operational data.
Developing them may seem simple but it can be one of the biggest challenges when implementing the BSC. Indeed, developing them in an inconsistent manner is one of the main reasons for the Balance Scorecard’s (BSC) failure.
Defining efficient metrics requires a solid understanding of the core business, of what factors produce results and of how business units interact with one another.
It also requires a systematic approach. The reason many companies fail in this process is because, instead of defining metrics in accordance with their strategy, they use their existing ones. Frequently these represent the things easiest to measure or measure exclusively operation results. In any case, the information they generate is not enough to evaluate strategic results. Another problem many companies face is that they focus too much on financial metrics which do not give the company a clear idea of how its performance is doing.
In other words, most of the metrics employed by companies do not generate relevant information for strategic decision making.
However, by following three convenient steps your organization can overcome these common mistakes. For each strategic objective, the executive team must:
1. Identify the critical success factors for the objective to be attained.
2. Brainstorm a series of potential metrics for the critical success factors.
3. Select the most appropriate metrics from the list.
The CEO should start out by making a list of the people who can be of help in the BSC’s development process. They can be people in charge of specific functions within the company’s day-to-day operation. Therefore, they are able to provide the technical experience needed to ensure that the metrics are both enforceable and appropriate to generate the information needed for strategic decision-making.
For example, to develop metrics for the customer perspective, the person in charge of Sales and Customer Service is a valuable source of information; for metrics related to product distribution, choosing the best in the Logistics department would be convenient. Whatever the case, the CEO must make sure that the people on his team have a global vision and won’t get caught up in the little details of the operation. They should keep in mind that the purpose of the BSC metrics is to show leaders what is most important, not to detail all aspects of the organization.
Step 1: Identify the Critical Success Factors
Determining the critical success factors helps the executive team know where to focus their metrics. In general, these metrics measure what the company must achieve to perform well in its objectives.
For example, in the objective “Reduce industrial accidents” the critical success factors are:
- Educating the workforce on the proper use of safety equipment.
- Providing employees with appropriate safety equipment.
- Periodically inspecting compliance with safety rules.
- Monitoring accident reports to identify potential hazards that may cause future incidents.
Some critical success factors may appear to be essential, but upon closer look we may realize that they are not. For example, another critical success factor could be “Reducing man-hours lost due to accidents” (those that are caused by a worker’s absence). While this may certainly seem like an important factor in reducing total accidents, imagine how the organization would respond to this metric. There would be pressure to avoid classifying missed hours as “man-hours lost due to accidents” to avoid hurting employees’ performance reports. In other words, the report would reflect a “higher” performance, when in reality the only thing that would be changing would be the way accidents are categorized.
Step 2: Brainstorm A Series Of Potential Metrics For The Critical Success Factors.
In this second step, the critical success factors must be used to define a set of potential metrics. We recommend developing one or more metrics for each critical success factor. The key is selecting those that allow the company a clear idea of how its performance compares to its critical success factors.
Executives should not discard potential metrics due to a current shortage of information or reports. Limiting metrics to those currently implemented can cost the company the opportunity of having better information available for its decision-making process. The executive team should focus on determining what information it needs and then what is the best way of obtaining it, making sure that obtaining said information does not take too long, as this might paralyze the decision-making process.
Likewise, executives should not lose focus on the big picture. Many organizations find themselves trapped in the tiny details of the process, thinking that they need to measure every step. By asking themselves “What happens if we don’t know ____? Can we infer how well we’re doing from other measures?” executives can make sure they only have metrics that offer relevant information.
Step 3: Select the Most Appropriate Metrics
After brainstorming, the team is now ready to select one or more metrics to measure each objective’s progress. The goal is not to monitor every single action that may affect the result, but to identify those that have a positive impact on it.
What would happen if team members do not agree that a specific metric has an impact on the objective? Obtaining historic results (where available) and then statistically determining whether a correlation exists is a rather time-consuming, but advantageous method. Decisions based on facts are much better than those that are made by instinct. Furthermore, this approach will ensure that the correct view will prevail over the most popular ones.
In other occasions, the team may not reach a consensus over which metric to select to better gauge an objective’s performance. If there is no clear reason to choose one over another, we recommend measuring both. Once there is sufficient information on both, the team can decide which is more relevant for decision making.
Metrics help executives identify where to focus their attention and where to apply corrective measures. Furthermore, it allows executives to identify poor performance levels sooner and prevent negative outcomes, therefore proving to be a must in all BSC implementations and strategy executions.
Author: Trissa Strategy Consulting
Source: James Coffey
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