Selecting exceptional balanced scorecard indicators is part art and part science. The key to success in both is to start with a good definition of the strategic objective you are trying to measure.
A good strategic objective definition describes what the strategic objective looks like in action including what is and isn’t included. It also outlines why the strategic objective is important including the value it contributes to your organization and delivers to your stakeholders, and how it enables the achievement of desired business and customer or stakeholder outcomes, your mission, and your vision.
In addition, clear strategic objective definitions provide a critical guide for your employees as they focus on executing your strategy, and, important for this discussion, they provide a touchstone for determining your balanced scorecard indicators.
With this in mind, let’s first discuss the science side of balanced scorecard indicator selection.
As it is in most things in business, a well thought out set of criteria is the foundation for producing good results – the same applies when selecting BSC indicators. I like to use SMART criteria as the technical basis for selecting indicators but I define the elements of SMART differently than you typically would for personal goal setting. When it comes to SMART and BSC indicators:
S stands for specific and simple: First of all, the indicators you select for any given strategic objective should relate closely to/be representative of the strategic objective based on its definition. This helps ensure that the indicators you use are relevant and effective for strategy management. Simple indicators are easy to calculate, understand, and analyze. Because most people find it hard to respond to indicators with multiple components and complex calculations when results are performing below expectations, simple is always the best route.
M stands for measureable. Most organizations measure lots of things so it is rare that you need to invest in creating new indicators. Look at what you are already measuring today and consider elevating the good candidates to indicator status. Another option is to take two measures that you currently use and combine them in a different way to create a completely new indicator for your balanced scorecard.
A stands for available. A strong candidate indicator provides results within 3 – 5 days after the close of your measurement period. Having to wait weeks for results means that you will be managing your strategy with old information and, in these days of rapid change, stale results do you no favors.
R stands for reliable. When you are measuring the vital signs of your company, you want to use indicators that will pick up changes as soon as they happen. While you may choose not to respond to a change immediately, good indicators let you know that a change has in fact occurred, giving you the option to respond based on your assessment of the nature of the change.
T stands for timely. Good indicators give you information to look at on a regular basis – usually monthly or quarterly. The ideal measurement/reporting frequency will depend on what you are measuring, why you are measuring it, and the amount of time required to see the impact of corrective action on results. The goal is to select a measurement frequency that maximizes your ability to manage your strategy effectively.
Many organizations add additional criteria to their list (e.g. validity, data quality, etc.). While the list above is a solid set of criteria, there is nothing to stop your organization from adding more items to your list.
I generally suggest that you apply these technical criteria (the "science") first to assemble your list of 1 or 2 candidate indicators for each strategic objective on your strategy map.
The next step is the art part of selecting your balanced scorecard indicators. The real art comes in answering three questions that form the critical test you must apply to determine whether a candidate indicator should “make the cut” onto your balanced scorecard.
The first question to ask is: “What behavior will this indicator drive?” Recall that each strategic objective definition outlines what the strategic objective looks like in action. Putting a strategic objective into action requires specific organizational behaviors. By selecting indicators that drive the behaviors necessary to execute the strategic objective as it's defined AND provide insight into strategic objective health, you will ensure that your strategy is moving forward in the right direction. Sometimes you will be surprised by the behavior an indicator produces! So, when considering a candidate indicator, think through what employee, customer, and/or stakeholder behavior this measurement might drive and consider whether that behavior will move the strategic objective forward in the desired way. If the answers to these questions aren’t as positive as you would like, I would recommend looking for another indicator.
Next, ask “What conversations will this indicator enable?” The key to effective strategy management is organizational conversations - your balanced scorecard results, including the data and commentary provided for each indicator, should set the scene for meaningful conversations about the health and progress of your strategic objectives and, ultimately, your entire strategy. A strong indicator helps people across your organization have solid discussions about what is and isn’t working in your organization, the inter-relationships and impacts across your organization and within your value chain, and whether your business strategy is doing what you expect and need it to do. Be sure to select indicators that will elevate the quality of the strategy conversations at all levels of your organization.
Finally, be sure to ask “Will this indicator drive action if required?” Strategy, and its execution, is usually achieved through organizational change. Because achieving your mission is a never ending goal, you will always be striving to do something more/different/better to get where you ultimately want to go. Your balanced scorecard is a key feedback mechanism that tells you how well you are progressing and sometimes things don’t progress as planned. When this happens, indicator performance results will give you an early warning sign. Now, we all know that indicators are not diagnostic – you need to do more investigation to identify and understand the root cause problem. The key to turning indicator and strategy underperformance around is resolving root cause issues. A high value indicator will enable you to do your root cause detective work effectively and then take appropriate action to eliminate critical issues that are negatively impacting the health of the strategic objective. Indicators that do not help you take action that produces meaningful organizational change should be left off of your balanced scorecard.
Crafting a robust balanced scorecard is BOTH an art and a science. The science part relies on a solid set of selection criteria which helps ensure that you identify quality candidate indicators. Applying the art side of the indicator selection process by asking the three critical questions outlined above ensures that only high value indicators appear on your final balanced scorecard.
Remember: While a quality indicator set is a good goal to have for your balanced scorecard, resist the temptation to stop there because a high value indicator set is the real key to making sure that your balanced scorecard is the powerful strategy management tool it can, and should, be for your organization.