In Practice Publications
A Balanced Scorecard for the Board
By David Parmenter
May 11, 2010 - 11:44:57 AM
Kiwis love fresh starts but avoid at all costs the in-depth planning, consultation and empowerment which, are the building blocks needed to ensure the success of any change project. We also hate “finishing”. If many of us had been on Edmund Hillary’s successful 1953 Everest expedition I believe we would have looked for another peak to climb when we were at Camp 9, a thousand feet or so from the summit and wandered off in that direction!
The second reason so many great management ideas falter is, in my opinion, linked to an insipid process that undermines initiatives. It is called the annual budget process with its associated annual performance contracts. This antiquated process, which some say has been with us since the Romans invaded northern Europe, is no longer relevant to managing a modern organisation.
Hope & Fraser, in their groundbreaking study “Beyond Budgeting – breaking free from the annual performance trap”, point out that the balanced scorecard and many other management tools can never successfully operate in tandem with a negative process that dominates business culture and workload.
I think the balanced scorecard concept will be around for as long as double-entry bookkeeping. In other words, for centuries! And the concept works for boards just as well as it works for management. Creating a governance balanced scorecard, I call it a ‘dashboard’, requires both an understanding of performance indicators and a clear understanding by board and management of their respective roles.
There is still some conflict about what organisational information is appropriate for the board. But with the board’s role being to govern and direct, not manage, I believe it is inappropriate to provide the board with management KPIs. These are the heart of management and should be monitored daily, or at least weekly. They are not measures to be reported monthly or bimonthly to the board (See “Winning KPIs revisited”, Management, October 2002).
Boards require indicators of overall performance that need only be reviewed on a monthly or bimonthly basis. These measures must reveal whether the ‘ship’ is being steered in the right direction and at the right speed. Are customers and staff happy? And is the organisation acting in a responsible way by being environmentally friendly.
I call these five-to-eight measures key result indicators (KRIs). These measures will help boards focus on strategic rather than management issues and support management in its programme to move board meeting discussion away from the monthly trading cycle and onto more strategic issues.
Board meetings are not simply another form of monthly management meeting. They should evaluate organisational performance against agreed strategic objectives and keep focused on the future direction of the business, rather than the minutiae of day-to-day management.
A dashboard is a one-page display like the one opposite. The commentary is included as bullet points and focuses on the major issues. A dashboard with the KRIs headed in the right direction, will give a board confidence that management knows what it is doing and that the ‘ship’ is indeed being steered in the right direction. Directors can then concentrate on what they do best, scanning the horizon for icebergs or attractive new ports of call. The dashboard should be ready within three working days of month end and sent to board members. It is no good giving a dashboard to the board four weeks after month-end.
Other graphs for the dashboard include:
A composite index based on a variety of statistics such as “delivered in full on time”, portion of idle machine time (measuring key machines only).
Monitoring the capacity of key machines and plant. It would go forward at least six to 12 months. The board needs to be aware of capacity limitations, and such a graph will help focus them on the need for additional capital expenditure.
Return on capital employed:
The old stalwart of reporting. The difference now that it is no longer a KPI but a KRI. This graph needs to be a 12 to 15 month trend graph.
Some key points about these graphs:
Trend analysis should go back at least 12 months and 15 if you have a seasonal business.
There no room to show a flawed monthly or year-to-date budget line.
Key turning points on graphs should be explained by a note on the graph and comments need to highlight major issues and rectification actions that are planned.
Maintain somewhere between eight to 10 graphs and report the six to eight most relevant in the board’s dashboard.
David Parmenter is the CEO of Waymark Solutions, a Wellington-based performance management company.
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