from November 24, 2009
Ideally, organizations use the balanced scorecard to create a strategy focused organization - one that uses indicator results to monitor strategic objective health, to make required adjustments in business strategy based on the insights they have gained using the balanced scorecard, and to manage successful strategy execution.
However, this is often not the case.
Instead, many companies end up creating a metrics-focused organization through their use of the balanced scorecard - one that is narrowly focused on reviewing the performance of their balanced scorecard metrics, changing "red" indicator performance (usually performance that is below target) to green (usually indicating performance that is on or above target), and is completely divorced from strategy management.
How does this happen?
The first way occurs when organizations create their balanced scorecard through a process that is not integrated with their strategic planning process. In the most extreme cases, a company decides to begin using the balanced scorecard and simply adopts a “best practice” measure set without considering its relationship to the organization’s business strategy and unique value proposition. More often than I care to admit I see organizations being tempted by the promise of a ready-made balanced scorecard (hey - why go through the trouble and hard work of creating your own indicators anyway?).
The thinking in these situations tends to go like this: (1) We’ve heard that the balanced scorecard is useful and many of our peers use one so we should too; (2) We don’t know how to (or we don’t want to take the time to) create our own balanced scorecard but we need to come up with something fast; and then (3) ABC Company uses the balanced scorecard and they are successful - let’s just use the same measures/balanced scorecard as they do! And off they go, adopting the same indicators as ABC Company uses.
When organizations go this route they often experience huge resistance to, and a lack of interest in, the balanced scorecard, and the nagging feeling that their new balanced scorecard measures aren’t exactly the right ones. For the poor person assigned to managing the successful implementation of the balanced scorecard, working in this environment feels like pushing spaghetti up a hill (messy and not very fun!). Whether the organization realizes it or not (most of the time they don’t!), the fundamental reasons for their balance scorecard difficulties are: (usually) a lack of alignment between the business strategy and the balanced scorecard measures; and (almost always) no visible, collaborative process where the balanced scorecard measures flow out of the business strategy.
Ideally, an organization’s balanced scorecard is created as a key step in the strategic planning process. That is, once the strategy and strategic objectives have been defined, work is done by a representative group of employees to identify balanced scorecard indicators that relate closely to the definition of each strategic objective. Then, once the balanced scorecard has been implemented, indicators are adjusted and changed as required, however, replacement indicators are always selected with the strength of their relationship to the strategic objective in mind.
Success Factor 1: Ensuring tight alignment of all balanced scorecard indicators with business strategy/strategic objectives is the best way to make sure that your balanced scorecard helps you create a strategy focused organization rather than a metrics-focused one.
However, organizations can still get into trouble even when their balanced scorecard indicators have cascaded from the business strategy and strategic objectives. The first mistake they make is not including their strategic objectives and indicators in their balanced scorecard. When strategic objectives are not visible on the balanced scorecard, it is very hard for balanced scorecard users to remember how the indicators relate to the elements of the business strategy.
Another critical mistake organizations make is to let balanced scorecard results review meetings become exercises in discussing indicator performance and plans for improvement in the case of underperformance. That is they never use balanced scorecard results to monitor strategic objective health, to manage the progress of strategy execution, and to stimulate discussions about the business strategy. Typical discussion revolves around the following questions: How are our BSC indicators and strategic initiatives performing versus targets?; What is our root cause analysis telling us about critical issues?; and What corrective actions are planned? They never progress to asking the following additional questions: What have our balanced scorecard results been telling us about the health of our strategic objectives?; How have our strategic objectives been performing over the past quarter?; What are the implications for strategy execution - Are we moving forward?; What are our key strategic issues?; and Are any changes (i.e. objectives, relationships, strategy) in direction required?
Sounds like the perfect metrics-focused situation to me! However, building strategic objectives into your balanced scorecard and re-focusing the nature of the discussions at your balanced scorecard meetings goes a long way to reversing this situation.
Success Factor 2: Build your business strategy (in the form of strategic objectives) into your balanced scorecard and include a combination of indicator performance and strategic objective health discussions in your balanced scorecard review process.
Many organizations are disappointed with the results they achieve through their use of the balanced scorecard. They expect it to facilitate a transformational change in their company and the level at which they perform - but this is often not the case.
In most of these situations, the root cause problem is that these balanced scorecards have been used to perpetuate an existing situation within the organization - tactically oriented and metrics-focused. Smart organizations use the introduction of the balanced scorecard as an opportunity to implement, along with a balanced scorecard that combines indicators with strategic objectives, new business processes, such as strategy alignment, balanced scorecard and strategy governance, and strategy management processes.
Taking these critical steps will effectively ensure that your balanced scorecard facilitates the creation of a strategy focused organization rather than a metrics-focused one in your company!
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