BOSTON (06/12/2000) - There may be no substitute for profits, but companies have begun to measure success in other, less traditional ways.
To do so, they are turning to information technology to develop tools that can find the answers to a wide range of tough questions about their businesses: Are customers getting timely deliveries? Are employees satisfied? Do suppliers feel they're treated fairly?
This shift represents a sea change in business thinking, according to Kamal Haddad, a professor of finance at San Diego State University and a researcher on the Balanced Scorecard concept, which combines both traditional and nontraditional metrics of business success.
"In the past, companies focused only on financial measures, such as return on investment. They were backward-looking measures, but they served their purpose," Haddad says. "But with the arrival of business process re-engineering, things changed and firms needed to focus on driving future performance. The old business measures don't serve that purpose, but the Balanced Scorecard does."
The Bottom Line
In fact, say some management consultants, the Balanced Scorecard can play a big role in a firm's bottom line.
William Schiemann, chairman and CEO of management consulting firm Metrus Group Inc. in Somerville, New Jersey, andco-author of Bullseye! Hitting Your Strategic Targets Through High-Impact Measurement, says companies that use Balanced Scorecard business metrics have a better return on investment than those that rely only on the traditional financial measurements of a company's health.
What's more, he says, firms using the Balanced Scorecard have greater success in managing organizational changes such as restructuring, mergers and acquisitions, and business process re-engineering.
"The quality and accuracy of these [nontraditional] things can be measured," Schiemann says. "For instance, there are very good techniques today to measure how much a change in employee satisfaction affects changes in customer loyalty and what impact that has on the company's bottom line."
For example, at a bank, where there's typically a lotof employee-customer interaction, a 10 percent downturn in employee satisfaction might result in a 3 percent to 4 percent loss of customers, Schiemann says. The loss of that many customers could subtract about 1 percent from the bank's net earnings, he says.
Sometimes nontraditional measurements uncover hidden business problems that are based on what people believe, not necessarily on what is true, Schiemann says.
"Say your product has a defect one out of 10 times," heexplains. "If your customers think it's four out of 10, that's what drives their behavior."
Haddad says another useful metric is "citizenship," in which a company tries to measure its contributions to the community. It counts the number of employees involved in social programs and the dollar contributions the firm makes to those programs.
The Big Picture
One big IT shop that believes in the Balanced Scorecard model is Nabisco International Inc. in East Hanover, New Jersey.
In Nabisco's IT department, Donna Dietz, vice president in charge of enterprise relationship management, uses a Balanced Scorecard that measures IT's success in areas suchas supply-chain management, marketing systems, help desk, development projects, data center operations, data networking and remote connectivity. The company is also developing a measurement for salary competitiveness.
"By measuring the things we do, we think we can understand exactly what is happening in the various functional areas of IT," Dietz says.
"For example, in our marketing systems, we measure things like systems usage - how often are systems available to users, how many help desk tickets are there on these systems?" she explains. "Then we discuss that with the people in the business who are our users and ask them if that is acceptable. Then we set goals in partnership with the business customers.
"This information also will enable us to benchmark ourselves against other companies and IT departments," Dietz says. "We want to see how we compare to other food companies, other large corporations and the best-in-class companies."
While other firms might not willingly share their benchmarking information, consultants can provide that data, she says.
The fact that Nabisco has a long history of measuring its performance against that of competitors bolsters its IT effort. It gathers grocery store sales data about its own and competing products, stores the data in dedicated data warehouses and lets businesspeople use online analytical processing tools to view it. Nabisco's IT staff is considering using some third-party software to help gather information for its business metrics but hasn't made any final decisions.
How quickly can companies expect bottom-line results from the Balanced Scorecard?
The effort at Nabisco, now 6 months old, is too new to have produced results, Dietz says.
Schiemann says initial positive results can show up in as little as six months, while dramatic improvements take a full year. If there's been no change in three years, either the company has been taking the wrong measures or hasn't gotten allits employees to buy in to the process, he says.
How can you tell if you have buy-in from employees? Ask them, Schiemann says.
"If you can ask a person on the shop floor or a person programming code, and they can tell you three to four of their objectives, how those tie in to the company's performance and what the measures of achieving those objectives are, you've got it."
Alexander is a freelance writer in Minneapolis. Contact him at email@example.com.
Business metrics: A set of traditional and nontraditional business measurements that are seen as critical for improving a company's bottom line. Called the Balanced Scorecard, these wide-ranging metrics touch on subjects such as judging product and service quality, rating customer relationships and measuring employee satisfaction and commitment.