I was recently teaching a class of Master’s students about the fundamentals of the balanced scorecard and the essentials of indicator selection when I was asked a great question: “Why do we seem to focus on output measures when we are measuring things in business?”
Before exploring this question, let’s take a quick look at the nature of, and options in, performance measurement.
Remember the good old days when we talked about leading and lagging indicators? We’ve come a long way since then and, while many people still talk about leading and lagging indicators, the thinking about this concept has changed a bit. Today, the concept of leading and lagging refers to the performance associated with a specific strategic objective itself rather than in relation to other strategic objectives on the strategy map or indicators on the balanced scorecard. As a result of this change in thinking, I actually prefer to characterize indicators as either predictors of future performance and results or indicators of past performance (often in the form of output and outcome measures).
The key is to remember that, for most strategic objectives on your strategy map, performance (and improvement) is generated through the execution of business processes. And while some strategic objectives may be achieved by completing strategic projects, most of the work that moves your business forward strategically over the long term is completed through the execution of business processes.
Looking at your business in these terms and linking business processes with strategic objectives allows you to make an interesting shift in thinking about alternatives for measurement when considering possible indicators for a strategic objective and your balanced scorecard.
Any business process owner you meet will tell you that there are actually four measurement opportunities when working with and managing business process performance: inputs, in-process, outputs, and outcomes.
Inputs are the things that trigger or start a business process moving. In-process measures are measures of things you observe while a business process is running. Outputs are the things produced immediately after a business process has been completed. And outcomes are the results achieved through, or impacts of, running a business process.
Here’s an example in action – let’s take a business process we can all relate to: Employee Recruitment
What triggers the recruitment process (input)? A vacancy or new position.
What do we see while the recruitment process is running (in-process)? Job postings, application and resume submissions, and candidate interviews.
What is the result of recruitment process (output)? A new, qualified employee in place in the open position quickly.
What is the impact of running the recruitment process (outcome)? Expanded organizational capability and capacity.
These are just some examples of the range of measurement opportunities/measures that could become indicators for a strategic objective such as “Attract Qualified Employees with Strategic Skill Sets”.
Generally, input and in-process measures translate into indicators that are predictive of future performance while outputs and outcomes are measures of completed activities and past performance. While you can’t change past results, predictive measures give you feedback early in a process and offer you the opportunity to take action, if indicated, to produce a better result by the time that process has finished running.
It turns out that if you look at most of the measures used in business, they tend to be of the output variety. Some people believe that we tend to measure outcomes but that usually isn’t the case at all. This is largely because outcomes can be very difficult to measure. For example, measuring the outcome of employee development activities requires assessing the acquisition of knowledge and skills, and the application of these new learnings in the work place. This often involves measuring knowledge and application gap closure and assessing the value realized by the business through the acquisition and application of this new knowledge (something close to an ROI measure that can be notoriously difficult to measure when we are talking about the intangible aspects of the business). Measuring an outcome such as this, while critically important, can be difficult (often due to the complexity associated with the time lag and other factors that can come into play between the time of output and outcome measurement) and very costly.
While measuring outcomes is often considered the “gold standard” in results measurement, most organizations seem to settle for measuring outputs like % attendance at, or completion of, scheduled training programs (in the case of an employee training and development strategic objective) because they are readily available.
So, with all this in mind, let’s go back to our original question: “Why do we seem to focus on output measures when we are measuring things in business?”
I believe that the primary reasons are because they are usually readily available, are easy to get, are recognized as evidence of the success of our business processes, and are generally accepted as the best measures of performance in business today. And while we would like to measure the impact of and/or the value of our business processes in moving our business forward, outcome measures can be difficult and expensive to get.
In a nutshell, output measures are usually cheap and easy.
Now, don’t get me wrong, if an existing output measure is the best indicator to select based on the definition of a strategic objective, by all means, use it on your balanced scorecard. However, be sure to remember that a balanced scorecard is not balanced unless it includes some combination of predictive indicators and indicators of past performance. This imperative often means exploring and adding some predictive input and in-process measures to your balanced scorecard indicator set.
I think that the real reason why we tend to focus on output indictors is because they are our best, most direct evidence of what has been produced by a process. That is, we ran XYZ process and output A was the result. Often, it feels like a huge leap of faith to measure an input or in-process measure in lieu of an output measure. Many people wonder “How can we be sure that this input measure is a good predictor of a future result (an output or outcome)?” I understand that concern because the answer is you don’t really know for sure without some experience and lots of data – data that most organizations just don’t have the time and resources to collect. And, without those causal relationships quantified, many organizations are afraid to replace output indicators with the predictive ones.
A practical way of adopting predictive indicators in your balanced scorecard is to create an index that includes a predictive indicator and an indicator of past performance that are both relevant to the strategic objective in question. Taking this approach allows you to (1) see whether there really is a relationship between your selected indicators (sometimes you think that there will be a relationship and it turns out that this just isn’t the case), and (2) build an understanding of the nature and strength of that relationship. In the best case scenarios, taking action on an underperforming predictive indicator and then seeing that you were able to prevent significant underperformance on the associated indicator of past performance can give you good insight into the practical value of a selected predictive indicator. Once you have developed this confidence, choosing to include predictive indicators, in lieu of output indicators, on your balanced scorecard doesn’t feel like such a gamble.
Output indicators are often the default and/or preferred type of measure for many balanced scorecards. Unfortunately, a focus on output measures alone severely limits your ability to leverage the balanced scorecard the way it was meant to be leveraged.
Is your balanced scorecard currently populated with output indicators? If it is, you aren’t alone.
Take the time to restore the “balance” in your balanced scorecard and increase its power. Simply look at the business processes that support each strategic objective on your strategy map, identify candidate input and in-process measures, and consider replacing some output indicators with predictive ones. Making this move will allow your balanced scorecard indicator set to help you produce even better business performance results and move your strategy forward more quickly and effectively.