Jeff Amerine:
The key thing, though, is it’s got to be measurable and meaningful and something that is truly going to be an indication that is important in terms of driving value or reducing risk for the organization.
Jeff Standridge (Intro):
If you want to drastically improve your business, learn proven growth strategies and generate sustained results for your organization. You’ve come to the right place. Welcome to the Innovation Junkies Podcast.
Jeff Standridge:
Hey guys, Jeff Standridge here, and welcome to another bonus episode of the Innovation Junkies Podcast. How we doing, Amerine?
Jeff Amerine:
Oh, we’re doing great, Jeff. Glad to be back on. And these bonus episodes are like gold nuggets. You just can’t get enough of it.
Jeff Standridge:
That’s right. What are we talking about today, partner?
Jeff Amerine:
I think we’ll talk a little bit about balanced scorecard and kind of how that fits into the whole strategic planning perspective. What do you think?
Jeff Standridge:
I think that’s great. So, we work with our clients to do strategic growth planning and there are a few things that we find are critical to actually building out a strategic growth plan. Three things we believe in that are at the very top of a strategic growth plan is mission, vision, values. Who are you? What do you do? Your purpose for existence, that’s your mission. Where are you going in over what period of time, and how are you going to behave and treat one another on the way? That’s your core values.
Then we talk about your long-term targets, the things that have to happen and/or occur or be accomplished over the same period of time as your vision in order to make that vision become a reality. And then your short-term goals. What do you need to do in the next 12 months? But we also talk about that which gets measured gets done. And so, this balanced scorecard kind of fits in the area of what we call key performance indicators. So, Jeff, give our listeners kind of your perspective on how to go about crafting those key performance indicators.
Jeff Amerine:
Key performance indicators. So, the whole idea is you have short-term goals or your long-term objectives, you want to have a way of measuring progress against those objectives. And that’s where having a good set of key performance indicators is really important. So, the balanced scorecard methodology actually came out of a book called The Balanced Scorecard that came from the 1980s written by Kaplan and Norton. You can still find it. It’s a classic and they’ve also got a previous site called balancedscorecard.org. But in there, they talk about four key pillars.
The first one is financial or financial stewardship. The second one is customer, the customer focus, customer and stakeholder focus. The third is internal processes, making sure that you’ve got measures around internal processes. And the fourth could be viewed as talent development or organizational capacity. And within each one of those, it’s important to have measures or key performance indicators that show how you’re progressing. And so it gives a good framework to make sure that you’re being kind of comprehensive and holistic in your short-term objectives. And this all came about because for the longest time, particularly in publicly traded companies, they were tied to just financial measures and short-term measures. And people began to realize you need a more holistic view to make sure that you’ve got a healthy organization.
Jeff Standridge:
So, give us some examples of maybe some key performance indicators you’ve seen in, maybe not every area, but in one or two of those is balanced scorecard areas.
Jeff Amerine:
A good example on financial targets you might very well have,a profitability target, and you might have a top-line revenue growth target. You might have margin targets. Those are typical sort of financial KPIs, that’s key performance indicators, that you have. You might also have things around hurdle rate or around capital sources. It’s just something that you can measure that shows that you’re making progress. And it’s important that these KPIs, even if they’re top-level organization are also rolled down to the lower levels so that you’ve got accountability and traceability. So another good customer-facing category for KPI would be a net promoter score. And NPS or Net Promoter Score gives an indication as to whether or not a customer after they’ve had an experience with you would recommend you to another company, a really good indication that you’re having good customer experience and customer engagement.
Some other examples, if you look at internal process might be efficiency measures. So, have we reduced the cycle time on production? Have we improved a yield of a particular manufacturing process? And then as you look at talent development, you might have measures in there about whether or not you’ve got a performance enhancement program for employees, whether or not they’re able to get to professional training or education a certain number of times a year. The key thing, though, is it’s got to be measurable and meaningful and something that is truly going to be an indication that is important in terms of driving value or reducing risk for the organization.
Jeff Standridge:
Strategic growth plan. So, key performance indicators for your strategic growth plan. And I like the words of Jim Collins who said figure out what fuels your economic engine, figure out the fuel of your economic engine for your company, and then build key performance indicators around that. And what we’re really talking about… And I tell people a P & L, Profit and Loss statement or an income statement is an absolute necessity for any organization, but it may generally be 10 days to 15 days, sometimes 30 days post-month closing before an actual income statement gets delivered. And so, for that matter, and for that reason only, it’s a rearview mirror view. It’s the months already gone, there’s nothing we can do about it, maybe even two months are gone or at least half of the next month is gone before we can actually do something. So it’s a rearview mirror.
Key performance indicators are really that dashboard view that you’re looking at on a daily, weekly basis, preferably maybe up to monthly, but most of them should be on that daily, weekly basis. Another framework if you will to the balanced scorecard, and I’ve been a proponent of the balanced scorecard for a long time, but another one came out in 2012 by a guy by the name of Kevin Cope called Seeing the Big Picture and Talking About Building Business Acumen. And he as well has five different categories that you’ll see some overlap and some relationship to the balanced Scorecard, but he says cash, profit, assets, growth, and people. Cash, profit assets, growth, and people. So, things that you might be looking at on a weekly basis in the cash area are, what’s your cash position, how much cash do you have across all of your different accounts, things that you could turn to cash very, very quickly in order to meet your obligations as an organization.
Cash flow; how much cash are you generating for a given point in time, how much cash did you generate this week, how much cash did you generate the following week, how much cash did you generate for the month. And then on profit, particularly in larger organizations where cash and profit are considerably different because of non-cash expenses and accrual-based accounting and what have you, looking at what are your gross margins, in other words, what does it cost to produce your product or service, and then what are your net margins or your net income basically looking at at the end of the day, once all of the expenses have been covered, what are you producing from a net profit perspective.
Assets; what are the assets that you have, what’s the liquidity of those assets, what’s the strength of those assets and how are you leveraging those assets to produce value, as Jeff said referring to the balanced scorecard to produce value for your customers. Growth; there are a lot of vanity measures out there in terms of growth, like how many locations do we have, how many customers do we have, how many employees do we have because that makes us feel good that we’re growing. And we’ve gone from two dozen to five dozen to a 100 customers or employees, but the only real measures of growth are how much are we growing the top line, which is sales or revenue, and how much are we growing the bottom line, which is net income or net profit or net margin. So, those are your really only two fundamental growth measures to get beyond just the vanity measures.
And then finally people; people measures relate to customers and they relate to employees. We just finished a fantastic podcast with Stacy Sherman talking about customer experience. And so perhaps, there are some measures there about customer retention, maybe about the level of effort required to do business with our customers or that they have to do business with us rather, the net promoter score that you just talked about, Jeff, but then also we start thinking about growth or people measures for the employee aspect of our company like net promoter score internally. How willing would you be to refer someone to work for this company. Retention rates; how much are we retaining our employees or how much is our turnover of employees, and then to what degree are they able to get to training and to achieve additional certifications and whatever.
So, another framework very closely related to the balanced scorecard. I don’t think it’s critical which framework work you use, but I do believe it’s critical that you pick a framework even if it’s some amalgamation of these two and you begin identifying those things that fuel your economic engine and you begin measuring those things relentlessly and taking action on them consistently.
Jeff Amerine:
I couldn’t agree more. I think this is the interesting framework that’s complimentary and supportive of balanced scorecard. As we think about it in a digital sense, we talk a lot in digital ventures and e-commerce about customer acquisition costs and lifetime value. And all of those measures lead to that. A great customer experience is going to lead to a better lifetime value and a higher repurchase rate, efficiency on the front end in terms of how you go through the sales process and how you’re acquiring customers will impact all those other areas like the cash position and a variety of other financial measures. So, all of these pieces, these KPIs, it’s not that they’re siloed and they’re not related, they all are tied together. And I think it’s really useful to think about what measures really matter to make sure your business is on track.
Jeff Standridge:
That’s right. And if you’re in a specific industry that we haven’t talked about today, do some research. There’s a great piece of technology out there called Google. And you can do some research on key performance indicators for a SaaS company if you’re a Software as a Service company. Key performance indicators for an online eCommerce company if you’re that. Use the phrase “OKRs,” which is an acronym sometimes used to talk about the same kind of thing. And so Google your industry, maybe SaaS and balanced scorecard or what have you. You’ll see some really unique things that people are doing to measure the health and vitality of their business on a daily or weekly basis. Critical things you need to do to ensure that you’re accomplishing the sustained strategic growth that you set out to achieve.
Jeff Amerine:
If you can’t measure it, you can’t manage it. And KPIs and balanced scorecard are really great ways to think about that.
Jeff Standridge:
That’s right. Jeff Amerine said it best, if you can’t measure it, you can’t manage it. This has been another bonus episode of the Innovation Junkies Podcast. Thanks for joining.
Jeff Amerine:
See y’all.
Jeff Amerine (Outro):
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