Step 3: Supporting Corporate Scorecards via the Right BI Solution

The definition of the strategy map and the identification of optimal measures, both nonfinancial and financial, are important precursors to designing a performance management software system. However, even companies that make smart metrics decisions tend to underestimate the challenges inherent in defining, accessing, collecting, and integrating the data they need to report on their performance relative to those chosen measures. Doing so manually can be expensive, cumbersome, and lead to problems with data quality. This is where business intelligence comes in; BI solutions are ideal for addressing Balanced Scorecard data challenges.

Once a company has identified leading and lagging measures, it needs to evaluate each measure's relative business value versus cost of implementation. Such an analysis can guide performance measure implementation decisions. For example, the exhibit 2 measure — Ratio of products from completion of phase 1 to completion of phase 2, “test-market product,” on time — might be considered a critical leading measure since it indicates when products are likely to make it to market and begin generating revenue. In contrast, the measure — Ratio of products from phase 0, “product concept design,” to completion of phase 1, “design & develop product,” on time — may be considered a measure that would be nice to have but is of lower business value. Evaluating the business priority of candidate measures based on their criticality in supporting business performance objectives is an important first step in determining what investments to make in implementing performance measures.

When an organization has evaluated the relative business value of its candidate performance measures, it needs to determine how feasible, and how costly, obtaining the necessary data will be. Continuing our example, that company's next step is to determine whether the information needed to calculate each measure under — Ratio of products completing phases 1 through 3 on time — in exhibit 2 is available electronically. If it is, the company must figure out whether the software systems that can supply this data use consistent definitions to flag product status and whether those definitions logically align with the definitions used by the strategy map/Balanced Scorecard initiative.

Suppose that products under development are tracked in one or more databases specific to product development, and that once a product has completed test marketing it leaves the scope of the product development software. Then its performance is tracked only by the line of business responsible for selling it. To follow products from concept to commercialization, and to get accurate data on the company's P1.2 — Time to market metric, the company will have to access numerous software systems. The target for this corporate measure is nine months, but the company will have to determine whether the various systems calculate this information in the same way. Will they base a calculation of time, in months, on work days, or on calendar days? And do they define business events in the same way? It would not be surprising if the underlying systems had different ways of representing products entering and leaving the phases of the life cycle. For example, one system might break our phase 1 — design and develop product — into two subphases, a “design” phase and a “develop” phase, while another system might consider this a single phase in the product development life cycle. To ensure data out of the systems was comparable, we would have to consider the start of the “design” phase in the first system as equivalent to the start of “design and develop” in the second system, and the conclusion of the “develop” phase in the first system to be equivalent to the end of “design and develop” in the second system. The initial and recurring costs of accessing the underlying systems that contain this information, then collecting, processing, and delivering the information, should all be factored into the cost of adding this measure to the company's balanced scorecards.

Clearly, if a company needs to purchase business intelligence software to report on a specific metric, the purchase will add to the cost of making the metric part of the organizational scorecard. But as they work through the measure-selection process, businesses should keep in mind that manual approaches are often untenable in managing the data that populates a balanced scorecard's nonfinancial perspectives. In many cases, implementing a BI solution is more cost-effective than error-prone and labor-intensive manual efforts would be. One client that we are working with has estimated that the cost of manually collecting and integrating data to derive its Balanced Scorecard measures exceeds $2 million per year. This client has also concluded that the quality and reliability of the performance data produced by its manual collection processes are poor.

As they weigh costs and benefits, companies should also be aware that BI software's capabilities extend beyond conventional query and reporting. Business intelligence tools can provide trend analysis, predictive analytics, integrated customer views, scorecards and dashboards, and data mining. In our example, in addition to tracking new products' movement through the development life cycle, managers could use a BI solution for activities like analyzing new-product revenue projections. BI software could tell the company whether the products that make it through to commercialization have high revenue potential based on test-market results. It could project performance for products in the development pipeline based on total expected future demand and on pricing assumptions that factor in expected competition. And it could help managers figure out how to adjust their new-product revenue forecasts based on this analysis.

Contributing to the value of a BI solution, managers in our example could also use a business intelligence solution to analyze new-product target marketing; BI software could help them determine whether the products that the company has successfully test-marketed are attracting the target market that they're trying to reach. They could use the BI solution to plan and analyze new product commercialization, examining where certain products have done well in test-marketing and where they have not done well, then adjusting product rollout distribution plans accordingly. And they could analyze new-product marketing and sales-force targeting, using the BI software to determine how best to target sales and marketing efforts to ensure optimal sales results. After a company selects the metrics it believes will provide the most value in gauging its performance, and as it evaluates the costs of collecting data on those measures, it will usually undertake a 10- to 12-week-long planning project to identify software that could further support its performance management objectives. It will first identify and prioritize the types of BI applications it would like to use to support the Balanced Scorecard metrics it has chosen. Then it will assess whether the information needed to build the desired BI application is currently available, at an acceptable level of quality, in any corporate software systems. Additionally, it will determine how much technical complexity would be involved in building a BI application to pull together all the data necessary for the nonfinancial Balanced Scorecard measures and for the other analyses that the company deems valuable. Through this planning project, the company can determine the trade-offs between business value, on the one hand, and the combination of technical difficulty and costs associated with each prospective metric and BI-analysis capability, on the other.

Note that some organizations may already have focused BI capabilities within their supply chain management (SCM) or customer relationship management (CRM) software. Although these applications may not provide the full set of desired BI capabilities, or the level of required information integration, they should be leveraged where possible to contribute to the overall BI solution.

A good starting point in evaluating how much your metrics of choice would benefit from a supporting BI effort is to ask the following questions: Are we currently getting the information we need to both measure and manage our achievement of performance management goals? To what degree is our performance management system compromised due to the complexity of data integration and our reliance on manual approaches? Is business performance management information consistent and trusted throughout the organization? Has the cost of data collection become prohibitive? And, most important, will a BI software solution allow us to collect and analyze the data we need to track our performance along the nonfinancial measures we have chosen?

To date, very few organizations have recognized and leveraged the potential that BI offers in supporting the Balanced Scorecard methodology. Those that have, however, are leaders in their industries. These companies recognize the value of strategic alignment as first envisioned by the Balanced Scorecard. They bring this alignment to life by using information to optimal strategic advantage, while their competitors struggle to determine (and then support with the right data) the optimal measures for business performance management. Most organizations have not yet begun to tap into the full potential of information-based competition.

Bob Paladino is president of Bob Paladino & Associates. He is the author of the best-selling book "Five Key Principles of CPM."

Nancy Williams is the vice president of DecisionPath Consulting and co-author of “The Profit Impact of Business Intelligence.” You can reach her at nancy.williams@decisionpath.com.