Senior management teams are prone to focus excessively on short-term financial results – information reported after the damage is done, for better or worse. This is why the balanced scorecard lives up to its name.
It gives management a broader, more balanced view of the organisation by incorporating non-financial operational measures – metrics that are related to customers; internal processes; and employee innovation, learning and growth. These influential non-financial measures are reported during the period when adjustments can be made and small problems can be addressed before they become big ones. These actions in turn lead to better financial outcomes.
But there’s inconsistency in how many companies apply the balanced scorecard. Indeed, some methods don’t do enough to satisfy the intended purpose of a balanced scorecard. That purpose is to improve the implementation of the executive team’s formulated strategy.
Some organisations, for instance, wrongly believe they have developed a balanced scorecard if they have successfully transferred their traditional table-based columnar management reports into visual dashboards with flashing red and green lights and directional arrows. Others may think that they should simply put their old measures on a diet by compressing them to a more manageable number of more relevant measures.
How does anyone know if the key performance indicators (KPIs) from those two methods support the strategic intent of the executive team? Are the KPIs the right measures? Or are they what can be measured rather than what should be measured? And is the purpose of the balanced scorecard only to better monitor the dials rather than facilitate the employee actions and decisions needed to move the dials?
Organisations need to think more deeply about what measures drive value and reflect achieving the direction-setting strategic objectives of their executive team.
The construction of a strategy map
Many organisations are familiar with the balanced scorecard, but fewer seem to be familiar with the term strategy map. The strategy map is perhaps more important than the balanced scorecard, which is merely a feedback mechanism. So it would behove executives to use a balanced scorecard in conjunction with a strategy map.
The executive team’s primary job is setting strategic direction. The strategy map, which is used to visually display the strategy’s causally linked strategic objectives, and its subsequent companion balanced scorecard help answer a different question: “How will we get there?” Their purpose, together, is to successfully implement the strategy.
Most executive teams are reasonably competent at defining a strategy, but many feel frustrated with coming up short in fully implementing their strategy. That is where the strategy map and its derived balanced scorecard fit in. Their combination is a navigational tool to guide the organisation to execute the strategy formulated by the executive team.
A strategy map is typically constructed with a set of 15 to 25 causally linked strategic objectives. Each strategic objective will contain associated projects to complete and processes or competencies to excel at. It will also include its appropriate KPI measures and targets, and it will take into account key risk indicators. For the purposes of this article, the focus is on KPI measures, which should be tailored to an organisation’s unique needs.
The strategic objectives are often organised from bottom to top in four sections from the strategy map:
- Learning, growth and innovation.
- Process improvement.
- Customer satisfaction and loyalty.
- Revenue growth and cost management financial goals.
There are dependency linkages in a strategy map with an upward direction of accumulating effects of contributions to achieve the strategic objectives. The KPIs are not reported in isolation but rather have context to achieve the mission and vision. The strategy map is like a force field in physics, as with magnetism, where the energy, priorities and actions of people are mobilised, aligned and focused. One can say that maximising shareholder wealth, which is what the executives seek, is displayed at the top of the strategy map. In this, it is not really a goal – it is a result.
An essential step in creating a balanced scorecard is to identify the mission-essential projects and initiatives that will achieve the strategic objectives. The presence of enabling projects and initiatives goes to the heart of distinguishing a strategic objective from just performing better at what you have already been doing.
Selecting and measuring KPIs are critical. You get what you measure, and strategy maps and scorecards serve a greater social purpose than a technical one (although information technology and software are essential enablers).
Performance measures motivate people and focus them on what matters most. They align employees’ priorities and work activities with strategic objectives. Performance measures enable every employee, from front-line workers up to the executive team, to ask and answer every day: How am I performing on the important objectives? How am I doing on what is important?
Note that the first half of this question can be easily displayed on a dial with a target; it is reported in a scorecard or dashboard. But it is the second half of the question that is critical – “on the important objectives” – and that is derived from the strategy map.
How are balanced scorecards and dashboards different?
There can be confusion about what the difference is between a balanced scorecard and a dashboard. They have a tendency to confuse people and get used interchangeably. Each brings a different set of capabilities.
There is similar confusion differentiating strategic KPIs from normal and routine measures that can be referred to as just operational performance indicators (PIs). KPIs ultimately are decomposed into the PIs that employees can relate to and directly influence and affect. The adjective “key” of a KPI is the operative term here. When an organisation proudly proclaims it has 300 or more KPIs, one must ask: “How can they all be key?”
To use a radio analogy, KPIs are what distinguish the signal from the noise – the measures of progress towards executing the strategy.
The difference between scorecards and dashboards comes from the context in how they are applied. Scorecards and dashboards are not contradictory. They both display measurements, but they serve different purposes. Scorecards are intended to be strategic. Dashboards are intended to be operational. KPIs should be displayed in a balanced scorecard, and PIs should be reported in dashboards.
A limitation with dashboards is that they do not communicate why something matters, why someone should care about the reported measure or what the impact may be if an undesirable declining measure continues. In short, dashboards report what can be measured. In contrast, a balanced scorecard provides the information lacking in dashboards. Scorecards do not start with the existing data, but rather they begin with identifying what strategic projects to complete and core processes to improve and excel in.
Here are some guidelines for understanding the differences between scorecards and dashboards:
Scorecards monitor the progress toward accomplishing strategic objectives. A scorecard displays periodic snapshots of performance associated with an organisation’s strategic objectives and plans. Directionally upward from the employee-centric innovation, learning and growth perspectives, KPIs should reveal the cumulative build of potential to realised economic value. There are two key distinctions of scorecards: First, each KPI must require a predefined target measure. Second, KPIs should include both project-based KPIs such as milestones, progress percentage of completion and degree of planned versus accomplished outcome, as well as process-based KPIs such as customer satisfaction and per cent on-time delivery against customer promise dates. Process improvement is important, but innovation and change is even more important. Strategy is all about change and not just doing the same things better.
Dashboards monitor and measure processes and outputs. A dashboard is operational and reports information typically more frequently than scorecards. The organisation’s traction and torque are reflected in the dashboard’s PI measures. PIs serve more to monitor trends across time or results against upper- or lower-threshold boundary limits. As PIs are monitored and responded to, the corrective actions contribute to achieving the KPI target levels with actual results. However, each dashboard measure is reported with little regard to its relationship to other dashboard measures. Dashboard measures do not directly reflect the context of strategic objectives. Dashboard information can be more real-time in nature, like an automobile dashboard that lets drivers check their current speed, fuel level and engine temperature at a glance. It follows that a dashboard should ideally be linked directly to systems that capture events as they happen, and it should warn users through alerts or exception notifications when performance against any number of metrics deviates from the norm or what is expected.
Strategy is more than performing better: It involves doing different things
A strategy is dynamic, never static, as executives appropriately shift directions based on their new insights and observations. The purpose of the strategic objectives in a strategy map is to re-direct the organisation from the tyranny of maintaining the status quo – doing the same things a bit better. Strategy is about constant change. If an organisation does not constantly change, then it is exposed to its competitors converging to offer similar products, services and processes. In short, strategic objectives define the changes an organisation should make to maintain a competitive edge.
As with any managerial improvement method, experience through use refines the method’s effectiveness and impact. The plan-do-check-act (PDCA) cycle is a great practice for organisations. With improvement methods, it is difficult to get it perfect the first time. There will always be a learning curve. Many organisations over-plan and under-execute. With regard to KPI and PI selection, first learn the principles, and then apply them through selecting, monitoring and refining the KPIs. Strategy maps and balanced scorecards are a craft, not a science.
—Gary Cokins (firstname.lastname@example.org) is the author of the CGMA book Strategic Business Management: From Planning to Performance and founder of Analytics-Based Performance Management, an advisory firm in Cary, North Carolina. He was a consultant with Deloitte and KPMG and is the former head of the National Cost Management Consulting Services for Electronic Data Systems (EDS). He also worked in business development with SAS, a leading provider of enterprise performance management and business analytics and intelligence software. He is scheduled to present at the AICPA Financial Planning & Analysis Conference in Las Vegas, Nevada, on July 22nd and 23rd.