Tagged: financial accounting

Eleven (i)

I’ll jump forward a few weeks shortly, but sometimes a lot happens in 24 hours, and this was one of those 24 hours. Not that I’m Jack Bauer or anything.

My meetings with Sarah had focused on the profit and loss, balance sheet, and cash flow statement. This one was going to be our first joint in-depth review of the company’s strategy map and Balanced Scorecard.

The Balanced Scorecard has gained traction as the dominant business performance management (BPM) approach, and my predecessor and Sarah’s had introduced it to Attenzi. I’ll explain what it is here in brief, but you can find a longer summary online by clicking here if you’re interested.

Fundamentally, traditional financial accounting is all well and good when you want to know how well you did last month, last quarter, last year, but it’s not ideal when it comes to understanding how today’s performance might pay off financially next quarter, or next year. In the jargon of business performance management, it’s a lagging indicator. Managing a company by financial reports alone is like trying to drive a car with only the rear mirror to go by. As the saying goes, don’t try that at home.

What’s more, 20th Century business was founded on tangible assets (land, plant and machinery). The 21st Century business is more reliant on intangibles (intellectual property, brand, reputation), for which traditional accounting analyses are poorly designed.

So the Balanced Scorecard approach aims to get a balance of measures – as the name implies – complimenting the financial metrics with non-financial measures associated with customers, internal processes, and aspects of learning and organizational growth. These are called leading indicators, and each of these groups (or “perspectives” in the jargon) supports the one before it.

The precise mix and definition of measures depends entirely on what your organization is setting out to achieve, and the strategy it has developed in order to achieve it. And you can map your strategy onto your operations with appropriately named strategy maps, helping you identify the things you need to invest in to improve business performance.

Give anyone the incentive to maximize one metric and they’ll blast it, most likely with collateral damage to other important aspects of the work in question. Ask any individual to maximize six-dozen metrics in harmony and they won’t know where to start. People appreciate a small, select, balanced set of metrics to guide performance, to provide sensory feedback so to speak.