Recommendations For A Refreshed Approach To The Balanced Scorecard

The upcoming blog series will include step by step suggestions for BSC development, implementation, and execution taken from the whitepaper, “The Balanced Scorecard Refresh – Lessons from 25+ Years in the Field,” authored by Mario Bognanno, Ryan Englund, and Randy Russell.  This blog series will culminate in the release of the whitepaper and live webinar: What I Wish I knew Before I Started My Balanced Scorecard Program. 

A traditional Balanced Scorecard approach can be achieved while staying true to the tried and tested Kaplan and Norton methodology.  In making these recommendations, a set of design principles informs the approach.  These design principles are:

Strategy is a hypothesis.  A future-oriented plan (based on a quantified strategic vision) must be reviewed (and revised if necessary) once per quarter to achieve competitive advantage. 

Strategy formulation is top-down but strategy implementation is bottoms-up.  The workforce provides the human resources needed to execute the strategy.

Strategy is a learning process based on analysis and problem solving.  Ownership and accountability are key ingredients to drive success.

1. Strategic Destination: The Balanced Scorecard refresh begins with the strategic result in mind. Define a strategic destination before developing a plan to get there. Optimally, the strategic destination is captured with a single measurable strategic objective. It is often derived from the organization’s vision statement; it constitutes the quantification of the vision. It should reflect the time horizon that the plan is addressing (typically a three-to-five-year time frame).

It should include a defining statement also derived from the strategic vision and should include a strategic measure that defines successful performance. Organizations in the private sector often use a financial objective to measure strategic success. Public sector and not-for-profit organizations typically focus on a measure of the mission objective.

Two examples are helpful in fleshing out this idea:

Private Sector “In three years we will be the premier online banking service and grow profit from $450 million to $800 million.”

Public/Not for Profit Sector “In three years, the Chamber economic development efforts will support regional economic prosperity as measured by a 10% increase in regional job growth over the national average.

2. The Financial Perspective: The next step in the process is to focus on the organization’s financial model. Simplicity is equally beneficial here. The financial model typically includes three measurable objectives focusing on a return objective (e.g. profit or earnings per share) supported by a revenue objective and a cost objective. In the private sector the strategic destination (defined in step 1 above) is typically used as the return objective.

In the public and not-for-profit sectors, the financial model includes identification of the amount of available funding along with identification of associated costs and some translation of the return objective (often defined as net assets, retained earnings or remaining fund balance).

Three measurable objectives should be used to define the financial model for any organization regardless of what sector it is in.

Simplifying the financial model does not discount other important financial objectives and measures. Additional objectives and measures can be accommodated in the subsequent cascading process. Different subordinate units may make distinct contributions to the strategic financial objectives. These can be characterized as driver objectives and measures because of the role they play in driving outcomes within the financial model. Further, the finance function will want to have other financial measures to analyze financial health and meet other regulatory requirements.

3. The Customer Perspective: Important to any strategy is the recognition of strategic customer segments and a differentiated value proposition for each segment. It is important to define customers (clients, constituents, service recipients, etc.) as those who will be incorporated in future strategy plans. This may or may not include all members of your current customer base.

Organizations may serve more than one customer segment. At the highest organizational level, it is useful to define future customers and focus on a shared value proposition that shows how the strategy creates a bridge from today to the future. In other words, find a value proposition that is shared by different segments of your customer set. You can then address the different customer segments through the cascading process where more specificity can be introduced and managed by different parts of the organization.

Design within the customer-focused perspective of the scorecard generally results in one strategic objective with one or two strategic measures. For example, customer objective “Enhance Customer Loyalty” can be measured using a “net promoter score” (to measure intent) and could be coupled with a measure such “key customer retention” (to measure customer behavior).

Having identified the strategic destination along with the financial model and the customer segmentation and value proposition, the measurement targets needed to achieve the strategy are thereby established. The desired outcomes of strategy are now known. These components of the strategy can be articulated with as few as four objectives and not more than five measures. Having identified the strategic outcomes, the input requirements necessary to drive these outcomes can now be addressed. The internal process perspective and the talent and technology requirements are to be identified next.

4. The Internal Process Perspective: The role of this perspective has evolved considerably over the 25+ years of implementation and is the perspective were our recommendation for a refreshed approach is most evident. Optimally, three or four measurable objectives are recommended to identify the few (but essential) things the organization must do well at a high level to produce the desired actions that may, or may not, pay off in terms of strategic impact.

As with the recommendation for the customer perspective (above) there are certainly going to be driver objectives and driver measures that will be needed to move the strategy forward. These supporting elements are important but they are even more relevant closer to where the strategic work takes place; at the unit and/or department outputs needed to achieve the customer objectives, financial objectives, and to ultimately arrive at the chosen strategic destination. This is where a focus on the critical few objectives and measures is important. Historically, the largest number of measurable objectives is typically associated within the process perspective. Such a detailed focus on processes results in much activity. But when the true interactions between processes and desired outcomes are not yet known, such an emphasis on detail can set the stage for potential conflict and confusion. It’s as if there are too many choices for operational levels in the organization. Therefore, the cascading process should be relied on to account for these strategic drivers. Getting too deep into the details at the enterprise level can interfere with achieving successful alignment later in the process. Social technology can speed up this process, allowing organizations (if they listen) to adapt their operations and strategy based on real-time customer needs.

5. Talent and Technology: Next, the input required to achieve the strategic vision must be defined in terms of the people and tools required to produce the desired outcomes. In the Talent and Technology Perspective it is important to link these strategic enablers to the internal process objectives.

In this context talent is defined as the skills within the workforce that are required to achieve process objectives and, ultimately, to improve strategic performance. These enablers include both human talent and technology (information management tools) used to improve performance and drive performance outcomes. The organizational environment—the culture and climate within the organization—should also be considered within this perspective. These enablers must be specific and focused on the work processes objectives required for the strategy.

And, even though each of these categories (talent, technology, and culture/climate) are broad, it is recommended that each one be described with a single strategic objective and with a single strategic measure. This recommendation forces decision makers to challenge each other to simplify their proposed approach and select the single most important objective(s) to pursue within the high-level summary (enterprise) scorecard. Again, additional detail can be added through the cascade process and during future iterations of implementation. The key recommendation is to keep it as simple as possible.

6. To ensure that the strategy is accomplished and the objectives are met, it is important that the organization allocate time and resources to accomplish its goals. Once the summary (high level) scorecard has been designed it’s time to identify the resources that are needed to make the strategy come alive. To achieve new and strategically important outcomes, it may be that new approaches be undertaken. Strategically relevant projects (what are typically referred to as strategic initiatives) enter the picture here. By initially funding and staffing a handful (three to five) strategic projects the leadership team shows it has embraced the strategy and is prepared to pursue the strategic outcomes that have been identified. It is putting its money where its mouth is.

A strategic initiative is a project or program that is designed to address the performance gaps identified in the internal and talent and technology perspectives. The performance gap is the difference between today’s performance level and the level it needs to achieve for strategic success to be realized. Strategic initiatives are assigned to the internal process, and talent and technology perspectives, because these are the perspectives used to produce new or stepwise outcomes. New or improved inputs yield new outputs and outcomes! The outcome perspectives—customer and financial—are a consequence of the internal work performed.

Using standard accepted project management practices, a strategic initiative should have a project sponsor, a project leader and, if needed, a project team. It should also have a written and approved project plan with a business case. And it should be assessed regularly to ensure it is on track. Finally, a post project audit should be used to calculate the return from the project compared to what was proposed in the initial business case.

Because the strategic initiative is directly linked to a strategic objective found in either the internal, or talent and technology perspectives, there should be no more than five (+/- two) strategic initiatives for any single scorecard. Although this is a common practice, it is not required that all strategic objectives be supported with a strategic initiative. A rule of thumb is that, if the performance level required by the strategy cannot be achieved by working smarter and harder, then that objective probably needs a strategic initiative to do the work differently or to simply do different work.

To illustrate, a third-generation strategy map and scorecard (shown in Figure 2) developed at the highest organizational level (the enterprise), would include 10 but not more than 11 strategic objectives with no more than 12 strategic measures and no more than seven strategic initiatives. Contrast the refreshed approach in figure 2 to the example of an earlier generation example.

In Figure 1 we show a strategy map with over 25 strategic objectives and over 30 measures. The result of the earlier approach may satisfy those who built it because each major component of the organization has a home in the strategy map and scorecard. But we have found that it’s better to start with a narrower description of the strategy in the interest of making the new approach easier to implement.

This improves the chance the new approach will survive any organizational resistance and sets the stage for future elaboration as the organization becomes better able to manage with this new approach. It is also based on the general assumption that, for most organizations, the successful execution of strategy does not typically require wholesale transformation of the entire organization especially as its first step. Even when the strategy does require significant transformation of the entire organization, this is more successfully accomplished when implemented in stage.

In addition to the six recommendations for refreshing the Balanced Scorecard approach, there are two additional recommendations that we consider important in enabling this updated approach. The first of these enabling recommendations emphasizes the importance of cascading the strategy map and Balanced Scorecard to other levels of the organization. The cascading process allows the strategy to be communicated to other levels and it encourages local translation of the strategy so that each of cascaded level of the organization can interpret the meaning of the strategy into local actions that must be taken to produce the desired strategic outcomes.

The second enabling recommendation describes the important role of the strategy review meeting and the importance of data and analysis in managing the strategy execution process. The success of your strategy implementation efforts must be evaluated using new data. Thus, it is important to install new reporting and review processes in your organization to take advantage of these new sources of information. These data—the measurement results—are used to guide the way forward and to modify your organization’s approach based on feedback. The strategy review meeting provides a home for the new information and a platform for making decisions based on the evidence.