In his classic 1955 book, The Practice of Management, Peter Drucker argued that all employees should have personal performance objectives aligned to company goals. “Each manager needs clearly spelt-out objectives. These should always derive from the goals of the enterprise and every manager should participate in the development of them,” he wrote. “He must know what is expected of him and why, what he will be measured against and how.”
Drucker called this ‘management by objectives’ (MBO). And when, in the mid-1970s, my boss decided to introduce MBO into the farming business where I was employed, I was dubious, to say the least. Measurement of budgets and the like, I could understand – but was it possible to measure management performance? As a cocky young manager, I voiced my scepticism, but was soon forced to eat my words.
You can, of course, measure almost anything and set meaningful targets for almost everything. Where I got it wrong is that you never measure intangibles such as ‘skill’ or ‘hard work’ – you measure the results of applying these intangibles. In other words, as I’ve indicated before, the focus is on results, never on the person.
The balanced scorecard system develops key measures of individual performance perfectly aligned with the vision and strategy of the organisation. Adapted from Kaplan and Norton (Harvard Business Review, Jan-Feb, 1996)
In the late 1990s, Harvard Business School’s Robert Kaplan and David Norton developed their ‘balanced scorecard’ system (BSC). The principles are precisely the same as MBO, but Kaplan and Norton took things to another level entirely. They developed a strategic planning and management system that has since been widely adopted by organisations of all types and sizes.
The BSC develops several key measures of individual performance – always looking at results, of course – which turn vision and strategy into action. The conversation between boss and subordinate in developing and monitoring the BSC also greatly improves communication between the two, and gives both a much fuller understanding of what is required to achieve the objectives set.
Kaplan and Norton realised that there is a natural tendency to focus on short-term goals, and that it was necessary to develop a better ‘balance’ in setting goals. They suggested that measures be based on the following four perspectives:
- The customer perspective – The meeting of a human need is why any organisation exists. Customer focus and customer satisfaction are the leading indicators of the success of any organisation. Poor performance from this perspective is an indicator of future decline, even though the current picture might look rosy.
- The learning and growth perspective – People are the main resource in any organisation, and everyone, from the lowliest worker to the big boss, should be in a permanent learning mode. Measurements can be put in place to guide managers in focusing training into the area where it will benefit most. The BSC system also emphasises that ‘learning’ is much more than ‘training’. It includes mentoring and getting help easily if required.
- The business process perspective – This covers the internal processes of the organisation. These measures tell you how well the business is running, and whether its products and services meet customer requirements.
The financial perspective
Timely and accurate financial data, including elements such as risk assessment and cost-benefit analysis, is always a priority. Without it, all organisations eventually founder. Whatever the type and size of your company, business or organisation, you cannot ignore the power of the balance scorecard. Study it, modify it, adapt it – but adopt it.
This article was originally published in the 18 October 2013 issue of Farmers Weekly.