Tracking Performance: When Less Is More

TRACKING TOO MANY PERFORMANCE MEASURES AT ONCE MAY CAUSE MANAGERS TO LOSE SIGHT OF WHICH ONES CONTRIBUTE DIRECTLY TO STRATEGIC OBJECTIVES. HAVING EMPLOYEES FOCUS ONLY ON THE KEY LEADING PERFORMANCE INDICATORS HELPS COMPANIES ACHIEVE BETTER RESULTS AND INCREASED FINANCIAL PERFORMANCE. EXECUTIVE SUMMARY With or without a balanced scorecard, it is easy for managers to become inundated with metrics and measures. In this article, we first highlight the differences between lagging and leading measures. Second, we illustrate the importance of differentiating the strategic leading indicators-the key leading measures-from those that may improve operational efficiency without significant improvements in profitability. Third, we use a business simulation to demonstrate that focusing on and improving the key leading measures has the greatest impact on profitability, but getting lost in the secondary measures dilutes the effect. Combined, the results illustrate that less may be more when it comes to measuring performance. Companies have long used various performance measures to quantify their results. Public companies use quarterly and annual net income, operating income, and earnings per share to summarize their results for the past period, and these are widely reported in the business press.1 Measures of financial performance are dubbed "lagging indicators" because they reflect the results of the prior period. But in today's fast-paced global economy, many companies focus on leading indicators as well. When appropriately identified, measured, reported, and evaluated, leading indicators can inform management of the progress being made on initiatives undertaken to achieve higher profits. Leading indicators are not a new phenomenon. For example, the variances computed with standard cost systems have traditionally provided managers with timely information on production inefficiencies, allowing them to focus their attention on unfavorable outcomes, to take corrective action, and to improve profits. Since the early 1990s, many companies have developed balanced scorecards to link their strategic objectives, financial performance, and metrics associated with initiatives related to customers, internal business processes, and learning and growth. Many of the metrics associated with these last three categories are leading indicators. Favorable performance on these metrics is expected to lead to more favorable financial performance in the future. In describing the balanced scorecard, Robert S. Kaplan and David P. Norton suggest it should include 20 to 25 measures. They break this total down into five financial, five customer, eight to 10 internal, and five learning and growth measures.2 While upper management may find it possible to track and evaluate that many measures, those in distinct operating locations-such as individual stores, warehouses, and restaurants-may lose sight of the goal as they juggle their operation's performance to meet these various targets. In fact, a 1998 report indicated that 70% of scorecard implementations fail.3 Too many metrics and too much reliance on historic financial measures prevent the balanced scorecard implementation from adding value to the firm.4 It is no surprise that a 2004 study of successful scorecards found that the effective scorecards included only a limited number of metrics at the top, with supporting metrics listed below. Companies that have not developed balanced scorecards track their performance using a variety of measures. In fact, there is some evidence that these companies may track a great number of measures to assess their performance. Think about your own firm. Whether or not you use a balanced scorecard, identify how many measures you track on at least a monthly basis-either because you believe they are important or because someone else believes they are important. Is it less than five? Less than 25? More than 50? Even in firms that use a balanced scorecard to assess performance, managers may find themselves evaluating performance on more than 15 measures. …