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The Balanced Scorecard: An Approach for Linking Strategy to Action

…or is it?^©

by

Arthur M. Schneiderman

An edited version of this essay appears at Optima Media Group's Scorecard strategy website

Introduction

Visit most any mid- to large-size organization and they will proudly describe their balanced scorecard (BSC). Ask them what they use it for and you will get a response (uncomfortably reminiscent of the drone from brainwashed characters in the 1950s movie The Manchurian Candidate): "We use it to link strategy to action."

Dig a little deeper and they will tell you that they read a business article, attended a conference, or hired a consultant and that’s where they learned about this great new business tool.

But don’t stop there. Ask them how they went about creating that scorecard and how they use it in their day-to-day management and the picture will start to become fuzzy. Probe even further and ask to see their BSC process flow diagram and you’re likely to get nothing more than a blank stare.

The Scorecard Creation Process

What does ‘process’ have to do with a BSC? you might ask. Well I believe that the BSC falls into a class of activities where how you develop it is at least as important as the final result. Other members of this class include product development and strategic planning. In fact, I would like to assert that how you go about developing a BSC will determine its ultimate utility.

Utility? Yes, why go through all of the trouble and cost of developing a BSC if it’s not to serve some useful end? "Isn’t that to link strategy to action?" Yes, but only if the process employed is capable of producing that result. If it is incapable of that, it will produce a different output that may or may not be useful. If that’s too confusing, let me digress.

Process Determines Outcome

Any cook knows that the results of their effort depends on the quality of the ingredients and the recipe that they follow. The recipe that is followed in creating a BSC is called a "process," and it is usually described by a flowchart showing the sequence of steps, who does them, and the resulting output. The ingredients are the inputs to that process and the one-page list of measures and progress goals, the actual BSC document, is one of its principal outputs.

Here’s a typical process:

1. Assemble a group of available staff support people.

2. Give them a template that groups measures into prescribed categories.

3. Have them select measures for each category chosen from:

4. Make sure that each measure has a cause and effect link to the strategy.

5. Negotiate targets for each measure.

6. Publish the measures frequently and review the scorecard annually to make sure that no important measures have been omitted.

This process is the one most frequently used in practice based on my experience. Will it yield a scorecard containing the most leveraged set of actionable metrics for advancing the organization’s strategy? Perhaps it will, but only by accident.

More likely it will it will produce a scorecard that does not attract executive attention, drive strategically critical improvements, or focus the organization on the vital few things that it needs to do in order to achieve its strategic objectives. On an employee enthusiasm meter it will barely budge the needle.

But on the good side, it will get people thinking about the non-financial leading indicators of future performance. So this process produces an output that is "useful" but not in the way intended by its promoters.

Contrast that to the process shown below taken from my article "How to Build a BSC".

This process usually starts with the organization’s strategy (but since it’s closed-loop, it can start anywhere) and maps it into the specific requirements of its strategically targeted stakeholder segments.

Next, a gap analysis is performed to identify those improvement opportunities that will have the greatest impact on improving stakeholder satisfaction. A parallel activity identifies the internal processes used to create the output that is valued by the various targeted stakeholder groups and the impact that improvements in these processes have on the identified performance gaps. The result at this point is the selection of a set of internal processes whose improvement will have the greatest impact on achievement of the organization’s strategy.

Notice that steps 1-7 are all planning steps (the P in the Deming/Shewhart PDCA or Plan-Do-Check-Act cycle). Step 8 is the "Do" step and Step 9 combines the "Check" and "Act" steps. The key to a successful strategy execution process is thorough, yet flexible planning.

Once these leveraged process improvements are determined, measures of the drivers of these improvements (independent variables) are identified and along with a limited set of results measures are used to populate the BSC.

How many metrics result? That depends on the organization’s available capacity to achieve strategically significant improvements in those measures. Given the need to do their daily jobs (generate revenue), this is usually limited to no more than 3-5 metrics per scorecard.

Note the different logic flows in these two processes. The first relates measures to strategy while the second does the reverse. This is an important difference since virtually all performance measures bare some relation to strategy, while only a few, highly leveraged metrics emerge from the reverse flow.

My experience shows that this process is capable of producing a set of measures and milestone goals that unambiguously links an organization’s strategy to the day-by-day activities needed to make that strategy happen.

Different Scorecards Have Different Uses

Over the past several years I’ve had the opportunity to visit many organizations identified as best practice BSC companies. I’ve visited many of these companies with groups from companies participating in BSC benchmarking studies.

At first, the wide range of reactions by the participants to what they saw confused me. Since my experience has been in the development and refinement of BSCs that link strategy to action, I was usually the strongest critic, yet others viewed them more positively, as did the companies that were visited. I then began to realize that both the ‘best practice’ companies and the benchmarking visitors were in fact using their BSC for different purposes, even though they all professed the same dogmatic use: to link strategy to action. They therefore interpreted what they saw through very different lenses.

The following summarizes my classification of the actual BSC uses that I’ve observed.

1. A project management tool for assuring accountability for initiative progress against plan.

2. A training tool to educate employees on the use of non-financial measures.

3. A communications tool to translate strategy into terms that employees can more easily understand.

4. A tool to monitor key process control measures.

5. A tool to manage unwanted tradeoffs.

6. A goals deployment approach for cascading and aligning execution tactics down through the organization.

7. A management system for focusing scarce resources on the most strategically leveraged improvements needed for successful strategy execution.

Let’s now consider each in more detail.

1. A project management tool for assuring accountability for initiative progress against plan.

A Level 1 scorecard is created by selecting funded projects and choosing measures that evidence their successful progress and/or completion.

Often Level 1 scorecards align to major budgeting functions (IS, Engineering, Production, etc.). For example, if an automation project has been justified based on projected yield improvement, then yield is the chosen metric and the value used in the justification is set as the goal.

2. A training tool to educate employees on the use of non-financial measures.

A Level 2 scorecard is populated by non-financial measures chosen on the basis of general interest. Most often, groups are asked to select their own measures. The goal for each measure represents only slight improvement from its historic value and is relatively easy to achieve. Its principal purpose is to break the historic focus on financial results by introducing people to the use of non-financial measures.

3. A communications tool to translate strategy into terms that employees can more easily understand.

Organization’s strategies are usually expressed in abstract terms that individuals have difficulty internalizing. ‘Achieve market leadership …’ ‘Become the supplier of choice …’ or ‘Be the best …’ are the ubiquitous terms often seen in strategy statements. By finding measures that are surrogates for strategic initiatives the strategy is made more tangible to them.

"Organization’s strategies are usually expressed in abstract terms that individuals have difficulty internalizing."

These measures are then used on a Level 3 scorecard. For example, strategic success often depends on improving relative (to competitors) customer satisfaction. A call center group better understands what that means when it is translated into ‘answer the phone in three or fewer rings’ or ‘connect the customer to the right person on the first transfer.’ These measures may not be the most strategically leveraged ones but they help this group understand what is meant by customer satisfaction in their own language.

4. A tool to monitor key process control measures.

Among Total Quality Management (TQM) practitioners there is a well-recognized distinction between process control and process improvement … TQM’s two principal components.

A process is in control when its critical measures are stable over time. This implies, among other things, that the average and standard deviation of measures of its important outputs are constant. When a pattern develops that makes it probable that the process is no longer stable, it is said to be out-of-control and corrective action is required to bring it back to its historic levels. Many organizations, particularly ones that are regulated, identify key control measures and use them to form a Level 4 scorecard.

Examples of Level 4 scorecard metrics include infection rates in hospitals and time to recover from an outage for electrical utilities. When the goals for these measures are their historic value, the scorecard use is process control.

5. A tool to manage unwanted tradeoffs.

A Level 5 scorecard is used to highlight undesirable tradeoffs by using measures from both sides of the needed balance. For example, over recent years health care has ridden the pendulum swings between a focus on quality of care and cost reduction. Therefore a Level 5 scorecard might include both % patients readmitted and average days hospital stay. This assures that stays are not shortened (for the sake of cost reduction) at the expense or quality of care as evidenced by increased readmissions.

Other potential tradeoff pairs made visible in a Level 5 scorecard include delivery performance and quoted lead-time as well as number of rings before call is answered and hold time. A Level 5 scorecard is the only one that has an inherent need for a balanced set of measures, but one not forced by any arbitrary framework.

6. A goals deployment approach for cascading and aligning execution tactics down through the organization.

Hoshin Kanri is a goals and means deployment process developed in Japan and formalized there in the mid-1980s. It represents the integration of top-down goal deployment with bottoms-up identification of the resources required to achieve those goals. The goals and means are balanced through a process called ‘catch-ball.’

When Hoshin-Kanri is supplemented with an aligned performance measurement system, the result is a Level 6 BSC. The combination identifies a top-level objective, the actions required to achieve that objective, associated measures and numerical goals with time-based milestones. Each identified action then becomes the objective for a subordinate who in turn develops his/her own group’s scorecard.

This process is deployed throughout the organization to involve every individual whose contribution is needed for the achievement of the top-level objective. Hoshin-Kanri was the conceptual driving force behind the ‘First balanced scorecard’ that is described on this website.

7. A management system for focusing scarce resources on the most strategically leveraged improvements needed for successful strategy execution.

When the top-level objectives are the most leveraged improvements needed for the achievement of an organization’s strategy, a Level 6 scorecard becomes a Level 7 BSC. It explicitly links the organization’s strategy to measures and time-based goals deployed throughout the organization to teams and individuals who must make it happen.

A Level 7 scorecard requires a front-end to a Level 6 scorecard to identify the vital few strategically leveraged improvements that produce a manageable set of objectives that can then be deployed through a Hoshin Kanri-like process.

I have chosen the word ‘Level’ in this classification system not as a measure of goodness but more as a characterization of the amount of challenge that is involved. There is nothing ‘wrong’ with a Level 1 scorecard. It is nothing to be ashamed of. It is a great tool for promoting accountability: "You said you would do X, now let’s look at the evidence that you did it." But it is not a tool for linking strategy to action and should not be mistaken for one.

It can be argued that you can’t effectively implement a higher-level scorecard until you have mastered the objectives of those at lower levels. It does seem to make sense that members of an organization must have personal accountability, understand the importance of management by non-financial measures, acknowledge their role in achieving high-level objectives, run stable processes, recognize and manage tradeoffs, and understand and provide what it will take to achieve significant goals in order to successfully execute a challenging strategy. After all, if ‘doing what you did will get you what you want’ you probably don’t need a BSC.

Required Rigor depends on Intended Use

In my view the most critical differentiation between the various scorecard levels lies in the part of the process used in selecting the scorecard measures themselves. For a Level 7 scorecard, I use Steps 1-7 in figure 1. Along with a Level 4 scorecard, they place the greatest demands on getting the right measures onto the scorecard.

Understanding the most important independent drivers is usually difficult since they hide in the clouds of complexity that surround both strategy and process control. There are both good science and pragmatic tools for identifying what are called ‘critical nodes’ for process control. Unfortunately, there is no similar knowledge base for strategy selection and execution.

Illuminating the tradeoffs inherent in a Level 5 scorecard can also be challenging. I consider this to be 1 step below that of Level 7 and Level 6 scorecards. For the remaining uses, the results are significantly more robust to the choice of specific metrics.

Conclusion

The BSC has been with us for 15 years … some would say much longer if you go back to the Tableau de Bord. Although the original BSC (known then as the Corporate Scorecard) was part of a system for linking strategy to action) it took more than a decade for its subsequent promoters to get the message.

In the meantime, many different scorecard uses emerged under the umbrella of the BSC brand name. That evolution has never been documented with the result that then BSC moniker has been applied to a myriad of different instruments. If you think that a BSC can help your organization on its journey to greatness, make sure that you understand exactly how it can help and use a process to create and maintain it that is capable of achieving that desired outcome.

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©1999-2006, Arthur M. Schneiderman  All Rights Reserved

Last modified: August 13, 2006