Key Performance Indicators (KPI – 1 of 2)

Revenue is one performance indicator; Net Income is another performance indicator – what drives these measures and what defines successful company performance?  What key indicators should be used to monitor and drive company success?  Among the myriad of performance measures that can be used to track and improve company performance, some broad based categories have been shown to provide significant improvement.  In this first KPI segment I’m going to briefly discuss, and present evidence validating, the Balanced Scorecard model proposed by Kaplan and Norton in their seminal work1.

Kaplan and Norton recommend using performance measures from four categories: 1) Customer; 2) Financial; 3) Internal Business Processes; and 4) Learning and Growth. This makes intuitive sense: by including measures from four perspectives, a well-rounded (balanced) comprehensive set of measures is promoted, helping drive well-rounded balanced health for the organization.  Fowke (2011)2 compares this balanced monitoring system for organizations to a system used by living organisms as follows:

The ability to change quickly in a world of change is essential for survival and the organism has a need to monitor feedback from all parts of the system for health and longevity.  In living organisms, the comprehensive network is exhibited by the autonomic nervous system.  In this study, this “autonomic” comprehensive feedback network is considered analogous to the Balanced Scorecard concept of maintaining total organization health by monitoring not only financial, but also customer, internal business process, and learning and growth metrics… (p. 65).

Does company performance increase with increased use of these categories, or does it simply “make sense” with anecdotal evidence?  Fowke provides statistically significant evidence* that using multiple categories of measures from the balanced scorecard model correlates to higher performance:

Balanced Scorecard Utilization by Performance Category (p. 159)

[click image for clearer view]

In the cited study, survey results from 76 publicly traded companies representing 29 different 3-digit NAICS categories show increasing performance with increasing use of the four categories. As exhibited in the graph, responding high-performing companies in almost all cases use measures from all 4 Balanced Scorecard categories [Company performance was ranked low, medium, or high (standardized by 3-digit NAICS category to eliminate cross industry variance) based on percent change in 1-year rolling average stock price (to eliminate seasonal or year-end variance) over a 5-year period].

As a final comment, it is important to not only measure and monitor metrics from multiple categories as indicated above, but to also take corrective action based on the information derived from these measures.

*Statistical significance: p = 0.06; inclusion of the 2 respondents indicating -0- categories results in p = 0.009

References:

1Kaplan, R. S., & Norton, D. P. (1996).  The Balanced Scorecard. Boston: Harvard Business School Press.

2Fowke, R. (2011). Performance Measures for Managerial Decision Making: Performance Measurement Synergies in Multi-Attribute Performance Measurement Systems. (Doctoral dissertation, Portland State University, © 2010).  ProQuest-CSA, LLC, Ann Arbor

Attribution:  By Phoenix7777 [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons