Balancing Your Legal Scorecard
A Performance Management Tool For The Legal Department
The Balanced Scorecard Perspectives
The four perspectives of Scorecard provide a balance between short term and long-term objectives, between desired outcomes and drivers for those outcomes and between objective and subjective performance measures.
Many measurement frameworks advocate a balanced range of measures. The Balanced Scorecard is prescriptive about this range, and about how one perspective defines drivers for next.
Financial Perspective: The Balanced Scorecard encourages legal departments to identify their specific financial objectives as relates to financial objectives of entire organization. Thus, legal department embraces organizations financial strategy. As such, financial objectives serve as focus for legal department’s objectives and measures of other three perspectives.
Every measure should be part of a cause-and-effect relationship that culminates in improving long-term sustainable financial performance. The Balanced Scorecard is an illustration of strategy, starting with long-term financial objectives of organization and then linking them to other initiatives such as operational processes of legal department and its investment in employees, systems and outside resources that combine to produce desired economic performance.
Clearly it is important to get ‘right’ measures. Although it is people, decisions and actions that change performance, measures set goal, and old adage “what gets measured gets managed” is still true today.
Leading organizations are now finding new financial measures, as well as non-financial measures. Rather than simply considering obvious financial measures of revenue, profit, share value or dividend cover, consideration is being given to a recently developed measure: Economic Value Added. This expresses amount of value added by efforts of each department (the legal department for our purposes) in organization and how those efforts help overall financial objectives of organization.
The Organizational Perspective: One of key drivers for an organizations success, except in a few rare cases, is organizational efficiency and cost effectiveness. As such, how an organization performs from a bottom line point of view is clearly a top priority for management.
With that in mind, all organizations have their marquee departments, ones that deliver maximum contribution to specific type of financial measure that matters most to them. All organizations also have their average departments and departments that cost them lots of money, but that they just can’t operate without (many times legal department, which is seen as a drain on bottom line).
To maximize financial return, it is operational efficiency and cost effectiveness of ‘marquee’ department that should be addressed. Departmental measures that reflect issues that really matter to organization need to be developed. From these, key objectives and measures for how other departments (such as legal) should operate can be established.
In this way an even more powerful link can be established between organizational focused objectives and improved financial performance.
The Legal Department Perspective: Delivering added organizational satisfaction can be achieved through operational activities of legal department. Through Balanced Scorecard framework organizational focused measures can be supported by measures of legal management processes that are most critical in meeting organizations expectations. The objectives and measures for this perspective thus enable a focus on maintaining and improving performance of those processes that deliver objectives established as key to satisfying organizations financial objectives, which in turn satisfy stakeholders.
With this approach, Balanced Scorecard offers a vehicle to focus on a complete value chain of integrated business processes. It is this that represents one of major opportunities for benefits that Balanced Scorecard can provide over traditional departmental performance measurement systems.
This top-down value-chain process can reveal entirely new areas, within legal department’s business processes, where an organization can gain additional advantage.
The effect can be phenomenal; a reduction in process costs of 1% when combined with an identical reduction in wastage can typically deliver an increase in profits of over 15%.
The Innovation and Learning Perspective: The adage “our people are our greatest asset” has been honored more in breach than observance in all too many organizations. It is an issue managers cannot afford to ignore, however. The operations of organization are undertaken by people within it. The ability, flexibility and motivation of staff are foundation of most financial results, organizational objectives and departmental activities that are measured in other quadrants of scorecard.
Organizational expectations are always changing and legal departments are, as a consequence, required to make continuous improvement. This relies heavily on department’s ability to innovate, learn and improve, which collectively delivers better results for whole organization.
The idea that everything else eventually depends upon staff of an organization could suggest that ultimate single indicator of long-term sustainable success, if there were such a thing, would be speed at which organization can learn to do new things successfully. Used in this way, Balanced Scorecard framework gives consideration to importance of investing for future. Not just in traditional areas of investment such as R&D, but also in human infrastructure of organization – creating a ‘learning organization’ – if ambitious long term financial success objectives are to be achieved.