Reviewing and revising your Balanced Scorecard in light of a new strategy
Let me begin by saying that a well-executed Balanced Scorecard should never be a static business tool. Change, and the ever-increasing speed of change, is among the most oft quoted dynamics of the new economy. If we agree your business is constantly changing, then your management system had better be keeping pace or you’re falling behind; and in today’s environment probably pretty quickly! In fact, I have a simple rule with my clients: if they ever hear me utter the word “project” in the same sentence as “Balanced Scorecard” I have to pay them $5. A Balanced Scorecard should never be considered a project. Why not? Well consider the nature of a project: it has a clear beginning and end, defined scope, and clear deliverables. In other words, a finite life. Is there ever a point at which you can claim to have achieved your strategy and see nothing but clear sailing ahead? I doubt it. Your business is constantly evolving, and as such, the Scorecard should lead you on this journey. I prefer to label clients’ Balanced Scorecard efforts as their “ongoing implementation.”
While the development of a new strategy provides an excellent impetus for a fresh look at your current roster of Balanced Scorecard measures, you should build in a regular review of the Scorecard as a standard business process. I suggest clients review the core elements of their Scorecard (objectives, measures, targets, and initiatives) at least semi-annually to ensure the tool still effectively “tells the story of their strategy” as originally intended. Let’s now look specifically at how to review your Scorecard in light of a new strategy.
The Balanced Scorecard has been described as a tool for “translating” strategy. This is an apt description if you accept the commonly held definition of the word “translate” as meaning “to express more comprehensibly.” Although strategies are meant to clarify business intents, their arcane and obtuse language can often serve to confuse even those who have authored the tomes. For those expected to implement the strategy the chore can be daunting indeed.
The Balanced Scorecard can help us out of this quagmire if we follow a couple of simple steps:
- Translate the strategy into objectives on a strategy map, and
- Further translate those objectives into performance measures.
Strategy Maps:
As I write this, my wife and I are preparing for a short trip to Las Vegas. Although we’ve visited Sin City a number of times this will be our first driving adventure across the desert from our home in San Diego. I can’t imagine sitting behind the wheel of my car without a good, updated map that will get me from here to Las Vegas. Maps guide our journeys and provide landmarks that show the way from our starting point to our destination. Sounds simple enough when we’re talking about geographic destinations, right? What about strategy? Isn’t that a new destination for most organizations, one they’ve never travelled to before? Like any other traveller, businesses need a map that will guide them towards the successful implementation of their strategy, hence the “strategy map.” Your starting point with a new strategy should be the development of a map that provides landmarks in your path to the execution of that strategy. The pathways are represented by performance objectives; simple statements of what you must do well in order to achieve the strategy. Objectives are developed in each of the four perspectives of the Balanced Scorecard (financial, customer, internal processes, and employee learning and growth), and, in what truly separates the Scorecard from other measurement systems, should link together in a series of cause and effect relationships.
Look at the example Strategy Map below. Ultimately, this business would like to “grow profitably,” as would most for profit enterprises. Let’s start at the bottom of their map, in the Employee Learning, and Growth perspective, to determine how they plan to achieve that ultimate objective.
They believe that in order to succeed they must increase training to employees. If they increase training they believe employees will have a better understanding of customer needs, which is captured as an objective in the Internal Process perspective. If they’re able to better understand their customer needs they feel they’ll be able to increase customer loyalty, increase market share, and lower costs. Increasing customer loyalty, and increasing market share will contribute to increasing revenues, which in turn (in combination with lower costs) will drive the profitability they desire.
Granted, the example shown is fairly simple, however, the essence of the exercise is the same regardless of the complexity of your strategy. You must come to a consensus as a team as to what constitute the critical few objectives of your business. Equally as important is developing a hypothesis regarding the interplay or cause and effect relationships among the measures. While developing a Balanced Scorecard may not give you all the answers, I guarantee it will lead to better questions as you gather results and begin pondering the assumptions you made when developing the linkages apparent in your map. And, as Peter Drucker, perhaps the greatest management sage of the 20th century, reminds us, “among the greatest mistakes of management is the focus on finding the right answer, rather than on asking the right question”.
Performance Measures:
Once you’ve mapped your strategy, and developed performance objectives spanning the four perspectives, it’s time to develop performance measures. Measures will be used to track performance results over time, sparking debate and discussion as you learn about your strategy. Listed below are some key criteria you should consider when developing performance measures:
- Linked to strategy: This one gets the vote for most obvious, but its importance cannot be overstated. The Scorecard is a tool for translating strategy into action through the performance measures that tell the story of your strategy. Choosing performance measures that don’t have an impact on your strategy can lead to confusion and lack of clarity as employees devote precious resources to the pursuit of measures, which don’t influence the firm’s overall goals. Having said that, you might have difficulty finding a direct link from every measure to your strategy. Most businesses will have a number of what we may term “diagnostic” performance measures that are important to the day to day efficient functioning of the business but don’t seem to correspond directly to a strategy. We need to monitor these factors to ensure the organization remains “in control” and is able to respond quickly to items that require immediate attention. While these indicators are important, they are not necessarily strategic.
- Quantitative: There is often a temptation among Scorecard practitioners to include measures, which rely on subjective evaluations of performance. Rating suppliers’ performances as “good,” “fair,” or “average” for example. Of course the principal issue with this approach is that ten people rating the same supplier may come up with completely different approaches and responses. However, if the same suppliers were evaluated on a percentage of on-time deliveries the results are objective and convey the same meaning to all involved. Everyone knows what 10 percent connotes, but your definition of “average” and mine could vary significantly. If you’re creative, virtually all performance measures can be calculated mathematically. I can recall a medical services unit I worked with at a government agency. A key performance metric was the distribution of their trauma reports in a timely fashion. Their original measure was “Reports issued.” In other words a simple yes or no would suffice as the indication of performance. With a little tweaking we improved the measure by re-stating it as “The percentage of trauma report recipients receiving the document on time”.
- Accessibility: Scorecard architects Kaplan and Norton often discuss the merits of “missing measures.” Those are the performance measures you didn’t capture in the past, which came to light only as a result of the Balanced Scorecard development process. Undoubtedly, new and innovative measures are a wonderful benefit of the Scorecard, in fact missing measures may signal that entire value creating processes are not currently being managed. However, I caution you to avoid selecting “wish list” performance measures, the type that require significant investments in information technology infrastructure to collect. You’ll learn fairly quickly that you must be pragmatic when selecting performance measures. I worked with one group recently that developed a Scorecard for their business unit, which was considered by the group executive as the pride of the entire organization. But when it came time to actually report the information, it turned out the data was completely un-collectable without significant investments in technology. I’m not suggesting you avoid new and innovative measures, just be sure to calculate the costs and benefits of their collection. Data requirements are discussed further in a following section covering measure dictionaries.
- Easily understood: Your ultimate goal should be to create a Scorecard that motivates action. It’s difficult to do so when your audience doesn’t grasp the significance of the measures you’ve selected. At a glance, Scorecard readers should be able to explain both the operational and strategic significance of every measure. The desired direction of movement of the measure should also be obvious. If your employees don’t know whether a high value for the measure is good or bad then you probably need to re-think it.
- Counter-Balanced: Let’s say you owned a fast food restaurant and were interested in improving your customer satisfaction scores. As we all know, these restaurants can become pretty crowded during peak hours, so you decide to increase staff and lower prices. The increased staff should be able to handle current and future demand created by your lower prices and will drive increased satisfaction. However, what effect will lowering prices and increasing staff have on your profitability? Chances are it will plummet in a hurry since you’ve increased your cost base and lowered your revenue. Some call this effect “sub-optimization” i.e. the improvement of one or more measures at the expense of others. While your Scorecard will require that you make trade-offs and decisions regarding where to allocate resources, you don’t want to create a situation in which focusing on certain measures actually hinders your ability to compete. In the case of our fast food establishment we would want to counter-balance our satisfaction rating with a measure of “revenue per employee.” We need to ensure that despite our lower price structure, the resulting volume and efficiencies from increased staff are allowing us to maintain revenue targets.
- Common definition: Your Scorecard will likely contain a number of esoteric performance measures, and that’s perfectly appropriate since it’s your strategic story you’re telling. However, problems occur when you place measures on the Scorecard that are loosely defined or not defined at all. On-time delivery may be a crucial metric, but what does on-time mean? You must specify the precise meaning of your performance measures and ensure you have agreement from your entire team. Customer satisfaction could have a very different meaning for a team member from Marketing than it does for someone from Finance. The process of agreeing on measure definitions is yet another example of how the Scorecard building process brings seemingly disparate functions together as they work to ensure the measures capture a meaning that allows all to contribute meaningfully to success.
The list above should help you craft performance measures that are linked to your strategy, and robust enough to ensure a lively discussion at your next management meeting. I also strongly recommend you chronicle your measures on a “data dictionary,” which is shown below.
Developing measures for the Employee Learning and Growth perspective
I believe Scorecard co-developer David Norton said it best in his foreword to the book "The HR Scorecard": “The worst grades are reserved for their (companies) understanding of strategies for developing human capital…the asset that is the most important is the least understood, least prone to measurement, and, hence, least susceptible to management”. Strong words, but sadly, in my experience at least, quite accurate. It’s been estimated that in today’s knowledge economy upwards of 75 percent of the value created in a typical firm is largely intangible in nature. Employee knowledge, relationships with customer and suppliers, and cultures thriving on innovation and change are truly the zeitgeist of the new economy. While most of us recognize the tremendous value going up and down our elevators each day, developing measures to track their contribution is another thing entirely. While I don’t profess to have cracked the code on this one, I will offer some time tested guidelines to help you better address your human capital management dilemma. What follows is drawn from my latest book, “Balanced Scorecard Step by Step for Governments and Nonprofit Agencies”. However, the lessons provided will apply to any type of organization.
Measuring Human Capital
I frequently encounter strategy maps, which include objectives in the employee learning and growth perspective related to competencies. No one would argue the importance of tracking key competencies in today’s knowledge worker dominated environment. However, confusion exists over specifically what a competency entails. Is it skill, habit, or talent? The ability to distinguish between the three seems to rest on what comes naturally, and what is teachable.
Skills are attributes or behaviors that, with some practice and determination, most people can demonstrate with at least some degree of proficiency. The ability to effectively use software systems, for example, is a skill. Habits represent our natural proclivities. You may be intensely competitive, or exhibit sincere compassion, both are habits cultivated over a lifetime. With some fierce determination and a good dose of self-awareness, most people can change their habits over time. Finally, talents are recurring patterns of thought, feeling, or behavior that distinguish a person. Talents are innate and therefore, very difficult to teach. Demonstrating “calm under fire” is a talent some people are fortunate enough to possess. Those of us who can’t claim this talent could sign up for training classes on the attributes of grace under pressure, but unless you’re born with such a talent it is difficult to cultivate through practice.
When measuring human capital, skills are the easiest to identify, measure, monitor, and improve. Your task is to identify the skills you require now and in the future, catalog your current inventory of skills, determine the gap, and then put in place a plan to close the gap. Talents pose a more significant measurement challenge. If someone simply does not have a talent, which you intend to measure, all the training and motivation in the world will not change that situation. What you can do is attempt to match talented people with the right roles. Look at the roles within your organization and determine what talents, not skills, differentiate the job. You may read that and think I’m referring only to management positions, but that’s not the case. No job is too simple, or too complex to require talent. Early in my career I worked with a large bank. One person in our lending group was responsible for ensuring all the loan documentation was completed accurately, and on time to ensure smooth processing. You talk about a paper pusher! Her desk was constantly being piled with a seemingly endless flow of paper. But just as quickly as it arrived, it was gone. Not only did she have the skills necessary to complete the documents, but she was in possession of a talent for processing paperwork. For many people the job would have been overwhelming, the stress of keeping up with the demands and keeping the process flowing in a smooth and orderly fashion. I recall her proclaiming proudly to me, “The world needs paper pushers too, Paul”. Look at all your roles and give them a second look using the lens of talent. You’ll be surprised at what you discover.
Measuring Information Capital
The federal government has significantly reduced its workforce over the past several years. Less people means the government must do everything it can to enhance productivity; do more with less as they say. In keeping with that credo, the federal government has become the world’s largest consumer of information technology (IT). Estimates suggest the government spent a whopping $45 billion in 2002 alone. The problem, a significant one, is that despite this prodigious infusion of IT, there have been no measurable gains in productivity. At least part of the blame can be pinned on the tail of measurement. Agencies tend to assess the performance of their IT applications according to how well they serve the agency’s requirements, not how well they meet customer needs. Reversing this situation represents a simple, yet profoundly fundamental shift in perspective. IT serves your organization in order for you to better serve your customers better, it’s that simple. Performance measures must balance to the extent of which IT investments improve your ability to serve, and the corresponding influence on customer results.
The Bureau of the Census offers a glimpse into how technology may improve performance. The agency uses an electronic hiring system that provides managers with online access to applicant resumes. Within twenty-four hours of receipt, managers can be reviewing the latest candidate resumes. Using the new system the Census Bureau has reduced the time required to fill some positions from six months to as little as three days. The next challenge for the Bureau is developing performance measures, which track customer service or other customer-related metrics in an attempt to ensure their new found internal capabilities are boosting results for their customers.
Information is more than just the ability to log on to the latest IT applications. Access to information is every bit as critical. Employees must have the ability to access information about key customer, donors, and other stakeholders in order to make informed decisions. However, investments of this nature are considered “overhead” by many nonprofits and as a result are shunned in deference to an allocation of the same funds to direct service provision. This may prove to be a shortsighted decision. In the short-term funds will be directed towards clients and customers, but in the long run, as conditions inevitably change, if employees don’t have critical information on trends, and environmental shifts, future service delivery is placed in severe jeopardy.
Creating a Climate for Positive Action
Let’s look at three things, which many organizations will focus on when attempting to create a positive climate.
Employee Satisfaction
Possibly the single most popular metric appearing in the employee learning and growth perspective is employee satisfaction. If you’re attempting to create a climate of positive action, one that will improve your performance, and ultimately benefit customers, it’s virtually impossible without committed staff. As a result workplace surveys abound in organizations large and small, public, private, and nonprofit alike. Putting your ear to the ground and finding out what your people think is critical, but our methods for gathering that data often leave much to be desired. Survey experts suggest most organizations are applying survey design principles formulated 40 or 50 years ago. To bring your surveying techniques out of the dark ages, here are a number of recommendations:
- Ask questions related to observable behavior, not thoughts or motives –Allows respondents to draw on first hand experience, and not inference.
- Measure only those behaviors that are linked to your organization’s performance – Awareness of your new cafeteria hours may be interesting, but is it relevant to your results?
- About one-third of questions should lead to a negative response – This avoids our natural tendency to agree to things.
- Avoid questions that require rankings – We tend to remember the first and last things in a list, which may bias our answer to the question.
- Make sure the survey can be completed within 20 minutes – Recognize that everyone is busy and taking an hour to complete a 100 question survey may elicit a negative response that shows up in the respondent’s answers.
Of course surveying is one thing, taking action on the findings is another. To generate commitment from employees you must demonstrate a willingness to act on the concerns raised in the surveys. Anything less and your survey efforts will be dismissed as hollow, dust-collecting make work projects.
Communication
In a recent study, less than one-third of respondents believed their company communicates effectively with them. Shakespeare said, “If music be the food of love, play on”. Modern organizations would be well advised to say, “communication is the food of success, communicate on”. Employees are frequently drawn to careers in the public and nonprofit arenas by the allure to make a difference. That fire behind that bright-eyed idealism can be quickly extinguished without constant communication of the organization’s goals, how they fit in, and what is expected of them going forward. In my latest book, I tell the story of a BSC team that worked with the Charlotte city council in North Carolina and their journey with the Balanced Scorecard. Among their words of wisdom to Scorecard adopting organizations is communicate, communicate, communicate. They recognize the value of providing constant information to all employees, and have seen the results it can bring. Their advice could be easily expanded into communication regarding all realms of the organization.
Alignment
In my ongoing effort to try and stay in some sort of shape I recently bought a treadmill. It was with great anticipation that I plugged it in for the first time and climbed aboard. When I pressed the start button I was greeted by a horrendous and violent shrieking noise. A quick examination determined the track had been jolted out of alignment during shipping. Things just don’t work when they’re not aligned. Now, my treadmill was easily remedied, and will undoubtedly provide me with years of service, but if your employees are not aligned to your overall goals, the results can be devastating. Conflicts of interest, misallocated resources, wasted performance management efforts, and missed opportunities can all result from poor alignment. Without a workforce that understands your mission, vision, and strategy, and is aligned toward their achievement, you will never produce the results you desire.
Alignment is frequently measured anecdotally through employee surveys; “do you understand the goals of your department?” “Do you work collaboratively with other groups to achieve success”, etc. While this approach can prove effective, a simple method is assessing the degree of alignment of Balanced Scorecards in your organization. I also discuss in my latest book cascading the Scorecard – driving it to lower levels of the organization in an effort to promote goal alignment. Once you’ve cascaded, a quick alignment diagnostic can be performed by evaluating how well your Scorecards work together to tell your strategic story.
If you would like to know more about cascading your scorecard please have a look at one of my case studies on Nova Scotia Power, Inc. You will be able to link to the case study by clicking on the web link entitled: “Cascading the Balanced Scorecard: A case study on Nova Scotia Power, Inc.” under Relevant Information on the left hand side of this Byte.