How is it that many great companies leverage information to perfect their operating processes, improve relations with both customers and employees, differentiate themselves from competitors, rapidly implement new strategies, and shift stubborn paradigms? One way is by putting “scorecards” into action. Scorecards are collections of critical performance metrics that guide the actions and behaviors of individuals according to strategic and operational objectives.

Today’s multidimensional data tools—the ones you would use to build data marts and warehouses—provide solid support for scorecard initiatives. Using these tools, you can quickly implement a scorecard system. Implementing an effective system, on the other hand, is a difficult and tricky business. In this article, I’ll detail four critical areas you’ll want to keep in mind to deploy effective scorecard systems.

Focus on the critical few, not the trivial many
Most experts agree that you can run your business well on a surprisingly small number of critical measures. One area in which the CIO may play a key role is in identifying what’s truly critical at various organizational levels. Sights should be set on identifying measures directly affecting strategic and operational objectives. True, it’s difficult to determine what’s critical and what’s not, and convincing people that 15 or 20 critical measures can replace the monthly 3-inch-thick report binder will really test your skills of persuasion. It’s like explaining to a child that the smaller dime is worth more than the larger nickel—the trick is not to confuse quantity with quality.

How might you test a measure for criticality? Try to rationalize each measure verbally. Seek to explain how each measure benefits the organization and how it links to operational or strategic objectives.

To assuage detail-oriented end users, you might choose to combine many measures into asingle index value. The government’s Index of Leading Economic Indicators is an example of how a single number may be synthesized from many complex measures. Don’t go overboard with this method (it’s not a good idea to run your entire business on the value of a single index), but indexes do have their place.

For end users concerned that such a number might conceal an imminent crisis, consider employing exception-reporting techniques. Like “idiot lights” on your car’s dashboard, exception reports are designed to alert the user if (and only if) any of the index’s constituent measures fall out of line.

Beware of measures driving damaging behavior
Sometimes well-intentioned measures end up working against you and doing damage. Frequently, this occurs when a measure emphasizes quantity over quality. You know the story: The worker paid by the piece turns out vast quantities of lower-quality product. The poor sales manager, who emphasizes only the number of calls made, discovers too late that quality sales calls are needed to close deals. Counting productivity is important but make certain you have appropriate quality measures in place at the same time.

Strive for a balanced “family” of measures
In many organizations, there remains a stubborn tradition that financial measures alone are all that’s required to run a business. The fact is, financial measures are only part of the picture—generally, lastmonth’s picture. Successful scorecards combine a balanced view—a family of measures, some financial and some not. For example, many organizations measure absenteeism or customer complaints, neither of which is financial. Include measures critical to your organization’s operations and strategies—e.g., how well you’re responding to customer and employee requirements and how your mission-critical internal processes are maintained or improved over time.

Create displays that communicate at a glance
There’s a whole cognitive science devoted to the appropriate display of information—whether on paper or on the computer screen—so that complex and important information is communicated at a glance.

In many ways, good displays are analogous to your car’s dashboard, where individual gauges and warning lights convey critical information quickly. Superfluous information doesn’t clutter the display. Gauges often have intuitive meaning—e.g., while you may not know numerically exactly what your car’s oil pressure should measure, you know that all is OK so long as the needle is in the “green” zone rather than in the “red.”

Finally, know that sometimes, the best way to display information is not to display it at all. Again, consider using exception-reporting techniques. There’s great value in knowing you’ll be notified in sufficient time—if and only if something exceptional occurs.

Scorecards yield fast results
Simply stated, scorecards guide the actions and behaviors of individuals according to strategic and operational objectives. To be effective, however, scorecards must be carefully planned. A poorly conceived scorecard may not only fail to meet objectives, it may actually do damage. When well-implemented, however, a scorecard can yield fast payback from time saved, increased operational efficiency, and strategic differentiation.

There is ample case evidence that scorecards work, because they serve as a structure against which efforts and actions may be compared. There’s also something about “bettering the score” that challenges the human spirit. A well-executed scorecard not only streamlines reporting and decision making in the enterprise, it also provides guidance and motivation for individual performance in the specific areas that matter most to the strategic vision of your enterprise.

How do you keep score?

Do you use scorecards to track critical indicators? Or do you have another system for measuring key performance markers? Share your insights on performance monitoring by posting a comment below.