In evaluating its metrics, the company should be sure to select measures that are balanced. There are two primary axes of balance to consider: across stakeholders and across degree of predictability (i.e. leading vs. lagging). Both of these should be included in developing the performance management system.
Balance across stakeholders:
Companies serve many audiences. Public companies serve investors first and foremost; but, successful companies recognize that serving investors best is to serve well the customers, employees, and communities in which companies operate. Consequently, measuring the satisfaction of these stakeholders can be helpful in understanding whether the company is achieving its business objectives. Companies that consider only the various stakeholders can become unbalanced, which may ultimately lead to the company’s demise.
Balancing the Degree of Predictability:
Some measures are ‘lagging measures’ and tend to indicate the result of working processes. Financial measures are generally lagging measures. These offer little room for a company to change the poor processes that might result in poor financial performance. Case in point is quarterly earnings reporting. By the time a company posts their financials it is far too late to improve the bottom line for that quarter. In other words, managing a company with only financial measures is equivalent to driving a car by looking only in the rear view mirror!
Consequently, performance management programs should include a healthy dose of predictive or leading measures. Leading indicators provide an early warning system to help the company detect problems either before they occur or before their impact is significant. An example of the predictiveness of leading indicators can be found in understanding how out-of-stocks (a leading indicator) impact cash flow and sales (lagging indicators). When a company runs out of stock and an order is placed on backorder, the customer suffers a delay in receiving the product. The customer payment to the company may depend on the customer receiving the product; this delays cash coming to the company. The customer may do nothing immediately, but eventually the customer may switch suppliers, especially if stock outs are common. Implementing a measure that tracks stock-out situations closely will help warn the company well before the customer makes a move to a new supplier.
The most popular balanced framework is the Kaplan and Norton Balanced Scorecard.
In their Harvard Business Review article and book, Kaplan and Norton provide a framework reminding companies to select metrics that take into consideration four key areas: financial, operational efficiency, customer, and people. Financial metrics get to the heart of serving investors; operational metrics get to the heart of running an efficient organization; customer metrics address operation performance in the customer's eyes, such as being on time, quality, etc.; and people metrics look at productivity. Their framework provides the company with an excellent view of performance and an early warning system to change course as needed if the processes are veering away from strategic objectives.