THE MANILA TIMES
Business Times p.B1
Thursday, October 28, 2004
LEARNING & INNOVATION
By Moje Ramos-Aquino
Balanced Scorecard presents a mix of lag and lead indicators
ONE of the benefits of a Balanced Scorecard is that it provides us the venue for constant conversations about what we do, why we do, what we are doing and how well we are doing-in living facts and figures.
Organizations, though, still exclusively rely on financial measures of performance. Paul Niven (Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results, Wiley & Sons) describes financial measures as:
* Not consistent with today's business environment, in which most value is created by intangible assets.
* Provide a great "rearview mirror" of the past but often lack predictive power.
* Consolidation of financial information tends to promote functional silos.
* Long-term value-creating activities may be compromised by short-term financial metrics from activities such as employee reductions.
* Most high-level financial measures provide little in the way of guidance to lower-level employees in their day-to-day actions.
Many organizations still use these lagging measures of performance as basis for many important business decisions instead of developing leading indicators. Niven advocates using two columns for collecting performance measures, i.e., one for lagging indicators and another for the leading measures that will drive your outcome measures.
To build a good Balanced Scorecard you should mix lag and lead measures. Niven made these differentiations:
Lag measures focus on results at the end of a time period, easy to identify, normally characterizing historical performance. Examples are market share, sales, lost-time accidents and employee satisfaction. However, since they are historical in nature, they do not reflect current activities and lack predictive power. A high sales volume in the last quarter or year will not guarantee similar or higher sales volume in the future.
Lead measures drive or lead performance of lag measures, normally measuring intermediate processes and activities. Examples are hours spent with customers, proposals written and absenteeism.
They are predictive in nature and allow the organization to make adjustments based on results. However, they are difficult to identify and capture and are often new measures with no history at the organization.
Lag indicators represent the consequences of actions previously taken while lead indicators predict performance of lagging measures. Examples: sales may be driven by hours spent with customers, market share may be driven by brand awareness, and lost-time accidents may be driven by the safety audit scores.
Lag indicators without performance drivers fail to inform you of how you hope to achieve your results. Conversely, leading indicators may signal key improvements throughout the organization, but on their own do not reveal whether these improvements are leading to improved customer and financial results.
Lead indicators are what make your organization stand out in the marketplace or in your industry by identifying the specific activities and processes you believe are critical to driving those lag indicators of success.
A well-constructed BSC gives you a reliable and more accurate story of your organization, using both lag and lead indicators, and gives you a better handle at decision making and lots of confidence at managing and leading.
(Moje, president of Paradigms & Paradoxes Corp., assists organizations in their Strategic Thinking, Planning and Balanced Scorecard initiatives. Her e-mail address is firstname.lastname@example.org)