Recently I worked with a client who was in the process of cascading the Balanced Scorecard throughout their organization; taking that all-important step of using the power of linked Scorecard performance measures to generate alignment from top to bottom. Among the groups developing cascaded metrics that day was the Information Technology (IT) Department, and at one point during the workshop their team lead called me over with a question that had been bothering him.
IT Team Member: “We’ve been told that minimizing expenses is crucial to the organization, and so we’ve created a cascaded measure of reducing vendor costs. What we’re going to do is negotiate with software and hardware vendors, and consultants to try and drive down our overall IT costs.”
PAUL: “Sounds good. What’s the issue?”
IT Team Member: “Well, we’re concerned that if we insist on lower costs from our vendors that could lead them to cut some corners, and ultimately result in poorer service to our customers here in the company…and that’s the last thing we want to happen.”
It was clear from the look on his face this was a dedicated professional who wanted to do the right thing for the organization, but was concerned that measures on the Balanced Scorecard could actually harm his goals by creating some unintended consequences.
He was right to be concerned. It’s not uncommon, especially for those who are new to the Scorecard system, to populate their model with measures that have the potential of driving the wrong, or inappropriate, behavior. In this case, if the IT department pursued aggressive targets for vendor cost reductions, that could very well lead to poorer service and in turn negatively impact other aspects of the organization’s strategy execution efforts; a classic case of a measure producing an unintentional effect.
To overcome this issue, a useful diagnostic test for your Scorecard measures is to critically examine each and ask whether the potential exists for any to drive unintended consequences. If it does, you should add what are often termed ‘counter-balanced’ measures. In the case of my client from the IT Department he knew that reducing costs was important to the bottom line but didn’t want those lower costs translating to poorer service for his customers. Therefore, he chose a measure of customer satisfaction with IT services to counter-balance vendor costs. Over time he’ll monitor the two, looking for correlations that may require his intervention. If, for example, vendor costs do decrease but he also sees a decline in customer satisfaction he can hypothesize the two are correlated and use this information to possibly reconsider targets for vendor cost reduction. Maybe the initial target was too aggressive, leading to a degradation of the services provided to his customers.
When we create a Scorecard we’re attempting to tell the story of the organization’s strategy. Just as a story in a book or film is made up of distinct chapters or scenes, what really brings it to life and makes for a satisfying and compelling story is the way the individual components weave together. The same goes for the Balanced Scorecard. While the individual metrics appearing on a Scorecard are vital indicators of success, their greatest value comes when we look at them in concert with one another.
The level of service provided by the vendor would be worth looking at as well. The rate of change in service incidents reported, changes backed out, repeat failures, fix times a whole list of Service Management measures that could indicate a drop in vendor commitment. Obviously the vendor is going to redirect resources to counter the drop in revenue. Or, do things smarter, perhaps working with the vendor to partnership the measures. Could be a win win situation to drive efficiencies and share in the cost reduction?
In reply to Mike W.: Great comments all around, and I particularly like your last point about working with the vendor in partnership on the measures to create a ‘win-win.’
Its a good idea to partner with the vendor in improving customer satisfaction . What I feel additionally monitoring some lead mesures like QCT parameters together with response time and resoluton time by vendor in addressing customer complaints with suitable reward and recognition would help in building partership with the vendors
Primary measures (A) almost always carry half the meaning unless accompanied by well though of secondary measures (B). A to grow while ensuring B stays constant.
Isn’t this “balance” the soul of balanced scorecard anyway?