Balanced Scorecard vs. KPI

Balanced Scorecard concept reefers to the theory of metrics linked by the specific rules, where the total value is calculated using specific formulas. Balanced Scorecard is talked a lot about, but there are some applications of Balanced Scorecard concept which are sometime overlooked.

For instance, combination of metrics, used in Balanced Scorecard can be easily used for benchmarking, e.g. comparing your product or service against competitors. What metrics should be used to compare your product to your rival's solution? There are many opinions, but the most reasonable answer sounds as: "Why should I reinvent something new, I can use the same metrics as I use for my business".

Actually, there is no need to create a specific metrics for benchmarking, when you already have some ready-to-use metrics. The metrics for benchmarking and metrics for evaluating the performance of your business should be the same.

A note about terminology: what we call Balanced Scorecard is also called "kpi". KPI is for "Key Performance Indicators". What is the difference between KPI and Balanced Scorecard? Actually there is no much difference. What we call "Indicator" is equal to what we call "Metric". What metrics does Balanced Scorecard include? The most important one - the "key" metrics. And finally, the goal of Balanced Scorecard is to measure, yes, the performance of your business, focusing on some specific aspects.

It's a time now to think about scorecards and kpi as a set of key metrics, which help you to measure the performance of your business. When we talk about benchmarking, we actually talk about comparing products' or businesses' performance, so benchmarking is also based on key metrics and their comparison.

How to use Balanced Scorecard concept to measure a business performance? It's actually easy. You will need to pass tree simple steps.

First, you will need to design a set of proper metrics, which will describe your business well. It is very important step, as it will affect all your future estimations, so be carefully and as some expert to help you or consider purchasing ready-to-use metrics.

Second, the metrics should be grouped. There should not be too many metrics and groups of metrics. It would be great if you will have four or five metric groups and about 3-5 metrics in each group. You will need to set the importance values for every metrics, you will need to describe the way, how do you measure the metric value, you will need to set a target values for metrics.

The final step is calculating the performance, using your estimation of metric values, their weights and weights of their groups. The total values will tell you how the business is performing within the certain viewpoint.

It's important to understand benefits and limitations of estimating business performance in this way. The main limitation is that your metrics will never describe all your business, so what you can see in numbers is some kind of abstraction. The main benefit, is having performance described in numeric values. If you have these values you will be able to record performance, to benchmark your performance and to control your business.

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