As you know, I strongly believe that balanced scorecard (BSC) technology is a must to ensure that you achieve your balanced scorecard objectives (including measuring your progress with strategy execution; learning more about how your business works to produce results; managing and improving your business strategy in “real time”; transforming the way people and the elements of the business work together to deliver exceptional business results; and building a strategy-focused organization). In addition, a great BSC application helps streamline your BSC data and commentary collection processes while integrating strategy-critical information in one location, in a way that is visually appealing (don’t discount the importance of this attribute to long-term BSC success!), and is easy to navigate, consume, and interact with. All of these features make your balanced scorecard a resource that is highly valued by everyone in your organization. In my experience, this is the ultimate test your BSC must pass if it is going to achieve the longevity you want for your balanced scorecard.
Even though technology plays a critical role in the success of your BSC, it is important to realize that your balanced scorecard isn’t a technology project. This may sound obvious but you might be surprised to know that, quite often, the implementation and use of an organization’s balanced scorecard becomes more about the BSC application and less about the business reasons for using the BSC in the first place. In the worst case scenarios, organizations select their balanced scorecard indicators to fit with the capabilities of their selected BSC application. When this happens, you can be sure that your BSC has strayed into technology project territory!
As pointed out by some of the readers of my last blog post, a sub-par set of balanced scorecard indicators cannot be saved by even the best BSC application. So, before you even think about selecting and implementing a BSC application, it is critical to be sure that you have selected a great set of indicators that will help you: measure and manage your organization’s success with strategy execution; and allow everyone to learn about your business strategy itself.
Selecting good BSC indicators is both an art and a science and shouldn’t be taken on lightly. However, there are three key criteria that, when followed, almost always lead to the selection of a high quality balanced scorecard indicator set.
(1) The first key to achieving BSC indicator selection success is involving a cross-functional, multi-level group of passionate and knowledgeable business people in the indicator selection process. While it is important to include your data management/decision support people in the indicator selection process, I urge you not to stop there. People all across your organization (from the front line to middle management and above) really know: about your business; what is/isn’t currently measured; what data problems exist; and how data is used in the business areas to make decisions and take action. In addition, these people are in a great position to assess: the relevance of possible BSC indicators; how well they will be understood by employees; and what action different performance results will drive (or not drive) within your organization. Taking this employee team approach to BSC indicator selection is strongly recommended because it will ensure that organizational wisdom, and indicator quality and validity are built into your balanced scorecard right from the start.
(2) The next important key to BSC indicator selection success is strong strategic objective definitions. Assuming that you are building your balanced scorecard on the foundation of your strategy map (doing this will really make your BSC indicator selection process much easier – to learn more, read my blog post on this topic: http://sfo-blog.typepad.com/sfo-blog/2010/05/can-you-have-a-meaningful-balanced-scorecard-without-a-strategy-map.html), you should have robust definitions in place for each strategic objective. It is important to use these definitions when selecting balanced scorecard indicators. Each indicator should relate very closely to the definition of the strategic objective it represents. When available, indicators with a direct relationship to the definition are best, however, in some cases, a proxy indicator (one with an indirect relationship to the strategic objective) is the closest you can get. Basing indicator selection closely on strategic objective definitions is the only way to build a BSC that is fully aligned with your business strategy and that will actually give you and your employees the information necessary to manage strategy execution successfully. Knowing this, it is easy to see why good strategic objective definitions are important.
(3) The final key to BSC indicator selection success is using a process that helps you identify both predictive and outcome indicators. In my experience, most balanced scorecards are heavily populated with output measures. Did you realize that you actually have four different measure source options for indicator selection purposes? They include process input measures, in process measures, process output measures, and outcome measures. Process input and in process measures give you information that helps you predict the future results of certain business activities. Using predictive indicators on your BSC gives you the opportunity to take action, if required, to produce a better, more desirable business result in the future. Output and outcome indicators, on the other hand, are measures of results that have already been achieved. In addition, these types of indicators often give you less insight into the cause of poor performance. Measures of outcomes are, however, valuable as indicators because they allow you to assess the impact of actions on your business and the value of certain activities in moving your organization and business strategy forward. Outcomes are often hard to measure and assess because their impact can be intangible or hard to capture. As a result, it is important to assess their real value as an information source before adopting them as BSC indicators. By combining predictive and outcome indicators on your balanced scorecard, you optimize its power to provide the information you and your employees need to manage your strategy execution efforts effectively and make decisions that will drive your business strategy forward efficiently.
While technology is required to achieve balanced scorecard success, don’t make the mistake of thinking about or making your BSC a technology project. It is important to note that, in fact, your balanced scorecard isn’t a project at all. The balanced scorecard is an important tool and process that is part of a bigger, ongoing organizational transformation process designed to integrate a new way of working into the way your company operates and does business.
In the end, to successfully play its part in this powerful transformation, your balanced scorecard must, first and foremost, be about the indicators – most importantly, their quality, validity, and relevance as a strategy management information source.