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Does Your Balanced Scorecard Need Surgery?

From time to time I get a call from a business leader who has been using the balanced scorecard in their organization but is underwhelmed with what it is doing for the company. In most of these situations, when I dig deeper into the problem, I quickly discover that, instead of a trim and focused set of indicators, the balanced scorecard in question is an unwieldy report containing 50+ indicators of all description that aren’t clearly linked to the business strategy.

 

A balanced scorecard that is weighed down by too many indicators is one of the leading problems organizations have with their scorecards today. The problem with these types of balanced scorecards is that they are very difficult to manage and use. They require a small army of people to populate the data and produce the results reports, making the balanced scorecard process an extra, rather than integral, part of doing business. More importantly, instead of providing business leaders with a quick snapshot of what is going on in the business strategically and facilitating evidence-based decision making, these balanced scorecards become just another huge report that is difficult to wade through and gain insights from.

 

A great balanced scorecard is a focused tool that lives up to its defined purpose – whether it’s to provide business leaders with the insights they for internal strategy management, to demonstrate compliance with external standards or regulations, or to help assess the contribution of employees in relation to the business strategy. Ideally, regardless of its purpose, a balanced scorecard should include 16 to 36 indicators with a good guideline being 1 or 2 indicators for each of the strategic objectives on your strategy map. While achieving this goal can be a challenge, it can be done with focus and an attention to what really matters for business success.

 

When a balanced scorecard has too many indicators it needs surgery – it’s as simple as that. However, the key to making the surgery easier is to identify and solve the root cause problem(s) driving indicator proliferation before the cutting starts. In my experience, there are four primary root cause problems that can, alone or in combination with the other problems, drive an overpopulated balanced scorecard. These include: (1) too many strategic objectives on the strategy map; (2) a lack of focus on one primary purpose for balanced scorecard use in the organization; (3) a failure to remember that the balanced scorecard is not meant to be a diagnostic tool; and (4) a lack of, or unclear, strategic objective definitions.

 

Let’s take a closer look at each of these problems and explore how to solve them.

 

1. Too many strategic objectives on the strategy map

A good balanced scorecard must be built on your strategy map. And while it is possible to create a balanced scorecard from a traditional strategic plan, it is far easier, and you reliably get a better product, when you leverage your strategy map to create your balanced scorecard indicator set. Ideally, your strategy map should include 4 to 6 objectives per strategy map perspective. Assuming that you are using the four traditional strategy map perspectives, this translates into 16 to 24 strategic objectives TOTAL on your strategy map. And, I would even say that 24 strategic objectives are too many for most organizations. Ideally, I try to help my clients keep the total number in the neighborhood of 18.

You see, the problem is that unless you can ruthlessly select just 1 indicator for each strategic objective on your strategy map, a high number of strategic objectives will quickly translate into an even higher number of balanced scorecard indicators. The key to controlling the number of strategic objectives on your strategy map is to following the guidelines provided in my last blog post: “Walking the Simplicity-Complexity Tightrope in Strategy Mapping” (click here to read).

Tip to make balanced scorecard surgery easy: Removing excess strategic objectives from your strategy map will naturally translate into the removal of the associated indicators from your balanced scorecard.  

 

2. A lack of focus on one primary purpose for balanced scorecard use in your organization

Did you realize that there are actually many different ways of using the balanced scorecard? The traditional way is to use the results to assist with internal strategy management, however, balanced scorecard indicator sets are also used for external reporting to shareholders, external stakeholders, accreditors, and external regulators. Balanced scorecard results can also be used to provide the basis of employee compensation and bonusing schemes and payouts. If you look closely at the profiles of the indicator sets used for these various purposes, you’ll notice that they are different. For example, scorecards used for internal strategy management will usually have the most diversity in indicators – a combination of outcome and process and qualitative and quantitative indicators. On the other hand, external reporting scorecards will generally be focused on outcome indicators. Indicators used for compensation are almost always objective and quantitative in nature (rather than subjective and qualitative) – making payout decisions more sound and defensible.

Problems start arising when you try to create your balanced scorecard with multiple purposes in mind. In these situations it is often necessary to include multiple indicators per objective on the same scorecard to accommodate to the different indicator profile requirements. In my experience, the resulting balanced scorecard doesn’t do a good job at serving any of the various purposes it was designed to fill - primarily due to lack of focus and measurement clarity.

The best advice is to build your balanced scorecard with one purpose in mind. This will make it easier to select a small number of indicators that are really relevant to your strategic objectives. Over time, and as your organization’s balanced scorecard capabilities grow, you may be able to create a streamlined, multi-purpose balanced scorecard if required. However, achieving this goal usually remains challenging.     

Tip to make balanced scorecard surgery easy: Determine the primary purpose of your balanced scorecard and then eliminate extra indicators that may have been selected to support an alternate purpose for balanced scorecard utilization.

 

3. A failure to remember that the balanced scorecard is not meant to be a diagnostic tool

A good balanced scorecard provides an organization with a view of the progress of the business strategy and the impact of strategy management efforts on strategy execution success. To do this, a balanced scorecard must include representative indicators that will register change, allowing the scorecard to play its role as an early warning/alert system when performance in key strategic areas is below expectations.

It is important to realize that a good balanced scorecard is not a diagnostic tool. That is, it is not meant to alert business leaders to problems AND provide data on the root cause drivers of those problems. A tool designed to play both of these roles would clearly require a very large measure set. Ideally, a balanced scorecard is composed of indicators that are sensitive to change and when they register a change, the organization goes to various other data sources to complete an analysis to identify the root cause(s) of the problem.  

Many organizations don’t realize, or forget, that the balanced scorecard is not meant to be a diagnostic tool and, as a result, they turn their balanced scorecard into a comprehensive measure set. By limiting the balanced scorecard to its real purpose, it becomes easier to keep the indicator set focused.

Tip to make balanced scorecard surgery easy: Look for diagnostic operational measures on your balanced scorecard and remove them. Limit your scorecard to indicators of the performance of your strategic objectives (i.e. ones that will effectively alert you to trouble spots) and be satisfied with going to other data sources for performance analysis information when required.

 

4. A lack of, or unclear, strategic objective definitions

Balanced scorecard indicators are meant to be representative of the strategic objectives on your strategy map. To select a focused set of indicators, it is critical to have a clear understanding of what is intended by each strategic objective. This is why strategic objective definitions, outlining what is, and isn’t, included under the strategic objective, are critical – they support strategy execution success and provide the key to making informed balanced scorecard indicator choices. Without these definitions there is little basis for indicator selection decisions usually resulting in an unfocused collection of indicators for each strategic objective.

Ideally, clear strategic objective definitions guide the balanced scorecard indicator selection process. As candidate indicators are developed, the final decisions can be made based on their relevance in relation to each strategic objective definition. A well written strategic objective definition is critical in the process of selecting the one or two best indicators to represent that strategic objective.  

Tip to make balanced scorecard surgery easy: Do each of the strategic objectives on your have definitions? If not, take the time to create them. Once they are in place, take the list of indicators for each strategic objective and test them against the definitions. Select the one or two indicators that are the most representative of each strategic objective. Discard the rest from your current balanced scorecard and/or save them for future consideration.

 

Does your balanced scorecard include too many indicators? If so, it’s time to trim. However, rather than jumping in with the cutting shears, the best approach is to first determine which of the four typical root cause problems for indicator proliferation you are facing and then take steps to eliminate them. This will usually lead to obvious and easy indicator cutting decisions - resulting in a lean and focused balanced scorecard that is easy to manage and use, and more than lives up to its value as a strategy management tool.

 

Walking the Simplicity-Complexity Tightrope in Strategy Mapping

It’s not unusual to hear people voice concerns about the complexity that seems to be associated with strategy maps – in fact, I’ve heard remarks to this effect at least three times in the past week alone. I think many organizations dismiss using the strategy map for just this reason – we have come to think of strategy maps as a complex mess of colors, bubbles (aka. strategic objectives), and arrows that go all over the place looking like spaghetti or the web of a crazed spider!

It’s too bad because organizations that don’t leverage the strategy map as a core component in their strategic plan are missing a huge opportunity. A good strategy map is a multi-purpose communication and business management tool that: draws out the business model business leaders believe will deliver the organization’s value proposition; highlights the key business drivers and priorities for the upcoming planning period; translates the business strategy into action so that staff at all levels of the organization can execute the strategy locally in a way that contributes to moving the business forward; and it provides employees with a guide for consistent, strategy-focused decision making.

It’s really a shame that such a powerful tool is dismissed by many organizations based on the misconception that strategy maps are inherently complex. The truth is that strategy maps don’t have to be an overly complex mess - it just seems to me that we have made them that way. I believe that the key to solving this problem is for organizations to balance the ying and yang of simplicity and complexity in their strategy mapping efforts rather than choosing one over the other.

How can this be done?

The key is to walk the simplicity-complexity tightrope in strategy mapping by (1) being sure that, in a drive for simplicity, you don’t reduce your strategy map’s ability to do all four of the things listed above well, and (2) ensuring that the level of complexity in your strategy map doesn’t obscure its power as a communication and management tool.

So, let’s talk about the two PRIMARY sources of complexity in strategy maps: strategic objectives and cause and effect arrows.

 

Strategic Objectives

The most obvious reason why a strategy map gets labeled as “too complex” is due to the number of strategic objectives on it.

I have met many people who believe that anything other than a streamlined strategy map is too complex. These folks dream of a strategy map with 8 or fewer strategic objectives on it. Unfortunately, unless you run a very simple business, I believe that this goal is unrealistic for most companies.  In my experience, I haven’t seen any real working strategy maps that are this streamlined – even in organizations I would call mature strategy map and balanced scorecard users.

As a rule of thumb, a manageable number of strategic objectives for a strategy map is between 12 and 20 (4 – 5 per strategy map perspective). It is quite usual for your first draft strategy map to include a very high number of strategic objectives (often more than 24). Your goal through an iterative process is to reduce this number by repeatedly asking the specific question associated with each strategy map perspective and then working hard to come up with a focused set of answers (translated into strategic objectives) that provide the most high value responses to each question.

The four questions by perspective are:

Financial: What financial results must we achieve to be successful in the eyes of our shareholders? (private sector); To achieve our mission and vision, how must we use our financial resources and how must we appear to our funders? (public sector)

Customer/Stakeholder: To achieve our financial performance results, want must we deliver to our customers? (private sector); To achieve our mission and vision, what must we do for our stakeholders? (public sector)

Internal Process: To satisfy our customers/stakeholders, what business processes must we excel at? (both sectors)

Organizational Capabilities: To deliver to customer/stakeholder expectations, what skills and capabilities, culture, tools, and technologies must we have? (both sectors)     

The goal in answering these questions isn’t to include absolutely everything your company does – this is where the road to overly complex strategy maps begins. The key is to identify the vital few elements in your business that will make a real difference in contributing to success. When answering the four questions above, it’s critical to keep your responses focused on the question and limited to the most important drivers. A precise approach will allow you to meet the goal of 4 – 5 (maximum) strategic objectives per perspective.

It’s important to mention that, over time, as you gain more experience using your strategy map and gather deeper insights into what really drives results in your business, you and your colleagues will probably be able to streamline your strategy map further. It’s important, however, to respect the inherent complexity in your business and not try to streamline it so much that you limit the ability of your strategy map to make its contribution to business success.

Another reason why I see strategy maps getting labeled complex is as a result of the wording of the strategic objectives themselves. As a general rule, the best strategic objective names are short (3 – 5 words maximum), descriptive, and begin with a verb. The shorter the name, the less real estate each strategic objective takes up on your strategy map. It’s a small thing but don’t underestimate its impact on reducing the perception of complexity for your strategy map. Also, short, snappy strategic objective names are more memorable – making it more likely that employees and stakeholders will be able to remember the key elements of your business strategy.

         

Cause and Effect Arrows

There is no doubt that cause and effect arrows are the number one contributor to the complexity stigma given to strategy maps! They can be so confusing that many organizations choose to leave the cause and effect arrows off of their strategy map. This is a short-sighted solution to the cause and effect arrow problem because mapping and testing the cause and effect relationships in your business is perhaps the most valuable contribution your strategy map will make to the current and future success of your business.

The problem is that most organizations don’t know where to draw the line when it comes to cause and effect arrows. They begin mapping out the relationships between strategic objectives and, before they know it, they have a mess of arrows on their hands.

The key to success with drawing cause and effect arrows is to map out the direct and most critical relationships ONLY. By avoiding the indirect relationships, it becomes easier to simplify your strategy map while also demonstrating the complex inter-relationships that exist in your business.

 

Unnecessary complexity is a real problem with strategy maps. The solution, however, isn’t to go overboard and over simplify your strategy map. Doing this ignores the true complexity of your business and reduces the ability of your strategy map to deliver on all its promises as a powerful communication and business management tool.

The key to success is to walk the simplicity-complexity tightrope so that your strategy map depicts the complexity of your business accurately but in a straightforward and understandable way.

This can be achieved by including a focused set of concisely named strategic objectives, and a limited number of cause and effect arrows, that is restricted to direct cause and effect relationships only, arranged in an aesthetically pleasing way on your strategy map (don’t underestimate the value of a “pretty” strategy map in reducing the perception of complexity!).

 

As a closing thought, I will mention that, even when a strategy map does a great job of balancing the simplicity-complexity tradeoff, some people may still try to label it as too complex. More specifically, you’ll hear them say that there is no way that someone looking at it on their own could understand it.

While I don’t agree that this is the case with a well done strategy map, I will concede that it could happen in a situation where someone doesn’t know how to read and use a strategy map. Either way, I strongly recommend that an employee’s or stakeholder’s first encounter with your strategy map should be a guided experience. Ideally, all employees and stakeholders should have the strategy map revealed to them as part of a communication process focused on sharing your organization’s “strategy story”. By talking through your strategy map gradually and in a logical sequence, employees and stakeholders will have no problem understanding your strategy map and, ideally, seeing how they fit into the picture.

 

Have you been hesitant to use a strategy map in your organization because you have been worried that it is a complex tool?

If you create your strategy map following these guidelines while placing an emphasis on focus while still respecting the true complexity in your business, I am confident that your strategy map will walk the simplicity-complexity tightrope effectively and successfully.