Measures should focus on strategy, not on control

The Manila Times
Business Times p.B1
Thursday, December 02, 2004
http://www.manilatimes.net/national/2004/dec/02/yehey/business/20041202bus5.html

LEARNING & INNOVATION
By Moje Ramos-Aquino
Measures should focus on strategy, not on control

Welcome again to your Journey on Entrepreneurship via the Balanced Scorecard (BSC) Road. How have you been? Have you finalized your strategy? How many objectives were you and your BSC Team able to generate to ensure execution of your strategy? At this point in building your BSC, it will help to identify as many potential objectives for each of the four (or five or six, if you may) perspectives you could choose from when you finalize your strategy map.

Along with these objectives for financial, customer, internal process and learning and growth perspectives, you also need to identify as many measures for each objective. There is time for you to edit and refine your thoughts and ideas later.

Let us brainstorm on these measures. In his book Balanced Scorecard Step-by-Step, Paul R. Niven wrote that these measures are the tools you will use to determine whether you are meeting your objectives and moving toward the successful implementation of your strategy.

Niven said that measures are quantifiable (normally, but not always) standards used to evaluate and communicate performance against results. Moreover, measures communicate value creation and function as tools to drive desired action, provide all employees with direction on how they can help contribute to your organization’s overall goals.

Generating measures may not be easy, though. Niven identified a number of issues relating to financial measures, such as:

• They are not consistent with today’s business environment, in which most value is created by intangible assets.

• Financial measures 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.

Some commonly used financial measures are total assets, total assets per employee, profits as a percentage of total assets, return on net assets, return on total assets, revenues/total assets, gross margin, net income, profit as a percentage of sales, profit per employee, revenue, revenue from new products, revenue per employee, return on equity, return on capital employed, return on investment, economic value added, market value added, value added per employee, compound growth rate, dividends, market value, share price, shareholder mix, shareholder loyalty, cash flow, total costs, credit rating, debt, debt to equity, times interest earned, days sales in receivables, accounts receivable turnover, days in payables, days in inventory, inventory turnover ratio, net sales, operating income, product related costs, capital turnover, sales rate, investment rate based on sales, number of employee for developing new products and sales growth, among others.

You may derive these measures from existing or intended financial systems in your organization. You make sure that you use them to deliver your strategy and not eventually turn them into operational management control system. Measures should always focus on strategy.

(Moje Ramos-Aquino, president of Paradigms & Paradoxes Corp., assists organizations in their strategic thinking, planning and balanced scorecard initiatives. She invites you to share your experience at moje@mydestiny.net)