Knowledge base
Indicators in BSC
Indicators in BSC
31.01.2016

Piotr Ukowski

“If you cannot measure something, you cannot manage it”: how to give the strategy a measurable dimension? How to balance, often contradictory, goals of different divisions of the enterprise, to reconcile short and long-term actions?

Historically, the measurement of the state of the enterprise started with the financial perspective. So far, the company has been evaluated as follows: increase of sales, profitability, indicators of return on investment or capital employed are commonly used measures. And it is very important – earning money is the foundation of every (almost) enterprise.

Analyzing finances is mostly based on the past, on historical data. Optimizing these indicators often means reducing costs, stopping investments, and does not force improvement of internal processes unless they directly translate into making money.

A Balanced Scorecard (BSC) allows you to look at the enterprise in a more comprehensive way. To make money (financial perspective), one needs to acquire and maintain Customers (Customer perspective), optimize performance (perspective of internal processes) and invest in the future (perspective of development). Indicators in individual perspectives must be connected to one another so that, when planning optimization activities of some, the others are not compromised. However, I will write about this when discussing methods of implementing the BSC. Let's focus on defining the indicators. [1]

Financial perspective

Despite widespread use, it should be noted that, from the point of view of strategic management, financial ratios will vary considerably from one enterprise to another. Different things are evaluated in start-ups (acquisition of the market), others in developed enterprises (optimization) and others in mature organizations (cashing of investments).

In general, the indicators can be grouped into three areas:

  1. Revenues
    Building a market position is especially important in a period of intense development. Indicators related to (quantitative, value) market share, share in the sales of new products, new use of existing products, price strategy or revenue structure are defined here.

  2. Costs
    The greatest emphasis on cost optimization and increased productivity is placed in the phase of the company’s “maintenance”. Indicators should describe: reduction of operating and unit costs, an increase of sales effectiveness and improvement of the distribution structure.

  3. Use of assets
    Cashing of incurred investments is crucial at the end phase of the enterprise’s development. There is emphasis placed on the degree of assets’ utilization and cash conversion time.

Risk management is another important thing. Identifying potential problems, minimizing the likelihood of their occurrence and preparing emergency plans in certain situations as it may be crucial for the financial perspective – excessive dependence on a key Customer, lack of reserves and stocks, etc., may jeopardize the company's stability.

Customer’s perspective

Preparation of indicators in the Customer’s perspective should begin with identifying the target segments of the market. Offering everything to everyone is generally not the best idea... The basis for market actions is, after identification, the analysis of the potential and the characteristics of the selected segment.

The basic measures in this perspective include:

  1. Market share
    Calculated against statistical data or external studies.

  2. Customer Retention
    Both passive counting of Customer loyalty and indicators describing the increase of sales to these Customers.

  3. Acquiring new Customers
    Rate of acquiring new Customers, effectiveness of marketing campaigns.

  4. Customer satisfaction
    Surveying and other market research.

  5. Profitability of Customers

Calculated, e.g. using the ABC (Activity-Based Costing) method.

There is also a number of enterprise-specific measures that can be grouped into three areas:

  • Product attributes (quality, price, delivery time, functionality ...)

  • Relations with Customers (convenience, flexibility ...)

  • Image (PR, brand, recognizability ...)

Perspective of internal processes

Processes occurring within an enterprise are usually very specific. Still, three basic groups can be distinguished:

  1. Innovative processes
    They group all activities from the identification of needs to completion of the design process and preparation of serial production. The measures used depend on the type of production and services and should reflect the most critical elements, from a financial or market perspective. Measuring the share of new products in sales and comparing the intensity of innovation with the competition are used. An interesting indicator is BET (break-even time) – the time from the moment of commencing works to the moment of earning a profit.

  2. Operational processes
    They constitute a group of activities best optimized in the enterprise, which is forced by financial analyses or quality systems. Measures in this area should be focused on time, cost and quality. The time perspective illustrates the way the warehouse is handled (large deliveries or production on time), the used indicator is also MCE (manufacturing cycle effectiveness) which shows the ratio of production time to the total operational process (including control, storage, delivery, etc.).
    Cost management is also based on the ABC method. Quality management is quite common, but often superficially used; here, the number of faulty products, returns, waste, etc. are measured.

  3. Post-sales processes
    Includes actions associated with warranty service, returns, and payment acceptance area. Optimization, as in the case of operational processes, should focus on time, cost and quality.
    Internal processes must ensure the implementation of indicators adopted in the two aforementioned perspectives. Therefore, with ambitious goals, simple optimization is not enough, and it is necessary to invest in innovative solutions or to seek completely new ways of action.

Development perspective

This is probably the most difficult perspective, requiring a careful approach when defining indicators. Today, the role of a qualified staff in enterprises is growing, and people are the company's most precious asset. This implies the need to introduce good HR measures. The most typical ones are those describing:

  • Employee Satisfaction (surveying, involvement in decision-making processes, evaluation systems)

  • Employees’ turnover frequency (percentage of employees departing from key positions)

  • Employee productivity (income or profit per employee, income in relation to total remuneration)

As I have already written, the development perspective describes the state necessary for the implementation of goals of the remaining three perspectives. The following three basic elements may be distinguished here:

  1. Staff potential

Here, the degree of preparation of the staff for the execution of tasks is measured (e.g. percentage of employees with the required qualifications)

  1. Capabilities of information systems

Decisions are always made based on information. The accuracy of the decision depends on its quality, availability and time of its acquisition. Thanks to IT systems, far-reaching optimization of the data delivery process is possible, and measurement should cover the degree of satisfaction of the needs in this area.

  1. Level of motivation and involvement of employees in the implementation of the strategy

It is crucial to involve all level employees in the activities of the enterprise. This is one of the main goals of BSC. Leading to a situation, in which the employee implementing their tasks also achieves the goals set in the scorecard, allows the effective implementation of the strategy and facilitates the achievement of a market success. Measurement should cover the number of reported and implemented initiatives and rationalization applications.

Indicators are a key element of a strategic scorecard. It is not easy to define them and it requires the involvement of the board of directors and the management board as well as their constant optimization. It needs a consensus. Out of hundreds of possible indicators, one has to choose a dozen or so which describe the company most accurately. Is it worth the effort? Hmmm. And is it worth having indicators in the cockpit of an aircraft?

[1] Developed on the basis of own experience as well as publications and books by Robert S. Kaplan and David P. Norton.