Tuesday, March 18, 2014

What The Heck is a... Balanced Scorecard?

Voted one of the most influential business ideas ever presented in the Harvard Business Review the Balanced Scorecard enjoys global popularity. There are some management tools that seem to have enduring appeal and the Balanced Scorecard, or BSC for short, is one of those. Over the past 20 years it has seen adoption rates soar. At the same time I have to say that as a tool the BSC is still widely misunderstood and misused by managers.
I have developed over 1,000 scorecards for clients from across the globe including many blue chip companies, government organisations as well as small and medium size corporations. Based on that experience I believe that the BSC is one of the most powerful management tools ever invented. However, I also think that the majority of scorecards in use today are not only useless but often dangerously counter-productive. So let’s once and for all look at what a good BSC is and the key pitfalls to avoid.
A BSC is a strategy execution tool that, at the most basic level, helps companies to:
  1. Clarify strategy - articulate and communicate their business priorities and objectives
  2. Monitor progress - measure to what extent the priorities and strategic objectives are being delivered
  3. Define and manage action plans – ensure activities and initiatives are in place to deliver the priorities and strategic objectives.
I often use a shipping analogy to explain the importance. Just think of an old fashioned Viking ship that has rowing crews along each side. The first thing we need for a successful voyage is a plan. The captain and crew would map out the sailing route detailing how they will sail from their departure port to their destination, outlining the key milestones along the journey. The second thing they need are navigation instruments that help them understand where they are on their journey. These are especially important once the ship has left the harbour and is sailing in the open ocean. Without reliable navigation they would be completely lost. Finally they need to ensure the rowing crew takes the appropriate actions to move the boat forward in a coordinated manner and adjust course when needed.
Exactly the same applies to companies. They need a map of where they want to go and how they intent to get there. They need performance indicators to understand how well they are doing against their plan. And finally they need to manage the initiatives, projects and action plans that will help them achieve their plan. The BSC has been designed by Robert Kaplan and David Norton to do exactly that and contains the following three distinctive components:
1. The first and most important component of a BSC is a so-called ‘Strategy Map’ that visually maps the key strategic objectives of a company on a single page (a bit like the sailing route in my shipping example). A Strategy Map shows the overall destination as well as they key objectives and priorities a company must deliver along the way. The strategic objectives are usually mapped along four perspectives, which support each other (see below):
  • Financial Perspective – outlining the financial objectives
  • Customer Perspective – outlining the objectives related to customers and the market
  • Internal Process Perspective – outlining the internal business process objectives
  • Learning and Growth Perspective – outlining the objectives related to employees, culture and information system
Mapping out how the objectives in each perspective support each other is one of the big benefits of a Strategy Map. Instead of listing strategic objectives in a seemingly unrelated manner, the Strategy Map depicts how each objective supports others and how they all help to reach the ultimate destination.
2. The second component of a BSC are Key Performance Indicators that allow companies to measure and monitor progress against their most important strategic objectives (outlined in their Strategy Map). Key Performance Indicators, or KPIs for short, are the vital navigation instruments for managers. Each KPI needs to be defined well and include targets or benchmarks.
3. The third component of a BSC is an Action Plan that ensures the right projects, programmes or initiatives are in place to deliver each of the strategic objectives on the Strategy Map.
If all three of these components (Strategy Map, KPIs and Action Plan) are in place then a BSC can transform an organisation. For me it is the No 1 strategy execution tool because it allows organisation to depict and communicate their strategic plan in a very simple and graphical way as well as monitor and manage the delivery of the plan.
So why are so many of the scorecards in use today not as effective as they could be? The reasons for this are that companies take short cuts or forget vital components when developing their own BSC. Here are some of the key pitfalls I see in practice:
  1. Not having buy-in and understanding of the tool across the company before you implement it.
  2. Starting the BSC development with metrics and KPIs instead of the strategy. Measures cannot be relevant if they are not firmly based on the strategic objectives. The Strategy Map is the first and most important component of any BSC, KPIs follow once the strategy is clear.
  3. Using the generic strategy map as a template you simply populate or copying a strategy map from another company. A strategy map has to be a unique representation of your company’s strategic objectives at this point in time. It has to be developed with close senior executive engagement and represent the distinctive challenges of your company.
  4. Not revising and refreshing the Strategy Map, KPIs or Action Plans. We all know that your company’s priorities shift over time and therefore the Strategy Map, KPIs and Action Plans have to reflect that.
  5. Only using oversimplified KPIs to track progress. It is important that the KPIs help to track your strategic objectives but instead of developing the most relevant KPIs companies often chose the ones that are most easy to measure or the ones everyone else seems to be tracking. More effort has to go into developing truly relevant and meaningful KPIs.
  6. Not having an Action Plan linked to the BSC. A strategy without a plan to deliver it will always remain a trip to fairly land!
As always, I am interested to hear from you and your experiences and thoughts. Do you work in a company that uses a scorecard well or are you among the many that experience the effects of sub-optimal scorecards? Is there anything you would add? Any stories to share?Please do so.

Source: Bernard Marr

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