What challenges arise when assembling a Balanced Scorecard for a business?

(See Kaplan, R. and Norton, D. 1996. The Balanced Scorecard, Harvard Business School Press, Boston, MA. See also www.balancedscorecard.org.) It offers important advances over traditional reporting approaches, both in recognizing the interconnectedness within the business and the importance of measuring and managing soft issues. Increased training of support staff about a company’s products, for example, will improve sales effectiveness, which will, in turn, improve sales and margins. Yet a particular challenge arises in assembling a balanced scorecard for a business choosing exactly which factors are important in each of four domains – financial, customer, processes, and learning – and what measures to use to monitor and control them.

The figure below shows a strategic architecture for a consulting firm – another generic structure, as discussed in briefing 22. (It makes a big simplification in treating all professional staff as a single resource, rather than the several distinct levels of experience and seniority that exist in reality. We will deal with this in a future briefing). If this architecture included time-chart data, as it should, it would provide the rigorous, integrated numerical measures that a sound balanced scorecard needs. Measures for the financial domain of the scorecard can clearly be extracted from the revenue, cost and profit region of the architecture, and several more financial measures would be tracked than are shown in this limited picture. The customer domain can extract data and movements in customer-related measures from the top section of the architecture, safe in the knowledge that those measures are entirely coherent in their causal relationships.

Extracting balanced scorecard measures for a consulting firm

The architecture needs expanding somewhat to properly populate the scorecard domain concerned with internal processes, but the figure illustrates how processes concerned with service development, hiring and the management of staff pressure can be extracted from separate locations in the architecture. Finally, learning and growth measures should track the training and coaching inputs to staff expertise, as well as the experience gained from staff involvement in current projects (not shown). Note also the need to track factors that may be undermining expertise, such as staff losses—a mechanism of “organizational forgetting” as opposed to the more common focus on organizational learning.

An architecture highlights and quantifies interdependence and may even call into question the wisdom of certain targets. In the table below, the firm is has exceeded its target for winning new clients, but its staff are overloaded and risk delivering poor work, so was it wise to set this client acquisition target in the first place? Another difficulty with the balanced scorecard is how to deal with lead times. For example, if the hiring target had been met, would it have alleviated pressure? Possibly not, because having new staff actually diverts established staff from their current workload. It might take a quarter or two for new hires to contribute more than they subtract from the organization’s capacity to deal with client projects. Yet, taking a longer term perspective, this hiring cannot be slowed for many quarters or the organization will in five years’ time find itself with a shortfall in the availability of staff with five years’ experience.

Quarterly balanced scorecards report for a consulting firm

Quarterly balanced scorecards report for a consulting firm.

Issues of concern.

One last observation on balanced scorecards — at least as often implemented — is that they pay too little attention to external factors. Merely adding market share to the customer domain in this example is quite inadequate, for reasons explained in earlier briefings. Most companies should be tracking the availability of potential customers and their success in both winning and retaining those customers, relative to competitors. This is not always easy, although in many industries relative competitive performance on various measures is available. Even where it is not, a marketing function doing its job should know the competitive make-up of its market, and sales people are often quite well aware of customers they and their competitors are winning and losing. If this is not the case, the question arises as to how they know where to direct their efforts.

Until next time…

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Strategy Maps

The balanced scorecard led to development of ‘Strategy Maps’ (Kaplan, R. and Norton, D. 2004. Strategy Maps, Harvard Business School Press, Boston, MA.), which add a sense of causality to the four domains listed here. A simple consumer insurance company, for example, may have various opportunities to improve performance. It might aim to improve the speed of customer response and quality of service by enhancing its claims processing systems and instilling a new customer-oriented culture among its staff. It may wish to reduce errors in claims processing by improved training and staff retention. Or it may try to reduce the rate of nonrenewal by policyholders by adding customer retention to the responsibilities of its sales force, maintaining the view that time spent on customer retention is more effective than the same time spent on customer acquisition. A strategy map shows how such efforts are connected, starting with the investment to be made in organizational learning, then looking at improvements and changes to its processes, and estimating how these will improve things for customers and thus deliver better financial results.

A strategic architecture adds important value to a strategy map, including the ability to locate exactly where in the business system each initiative will act (reduced errors in claims handling will reduce the policyholder outflow, for example), and quantify the probable impact – both scale and timing. This means we can see how quickly revenues and profits will change, not just a crude before-versus-after comparison. Furthermore, the rigorous numerical causality of the strategic architecture ensures that any interactions among the initiatives are captured and quantified, ensuring that benefits are not double counted, e.g. the impact of both reduced errors and sales force effort on reducing customer losses.

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• Whilst the causal logic behind the 4 dimensions of a BSC or strategy map are plausible enough, there’s no mechanism to ensure that they are valid or that the chosen items and mechanisms are indeed the most important. So – like many other issues – what gets on the page relies too much on judgement. 
• Given this lack of rigour, the metrics chosen to track performance can also be ill-chosen.
• There is no recognition of internal conflicts between different functions – it’s easy for the sales function to hit Green on its aims, whilst actually causing Red in service or profitability.
• There is no protection against setting up objectives with unintended consequences or boom-and-bust outcomes … pushing up growth in revenues and profits, for example, whilst creating problems that make it impossible to continue doing so in the longer term.
• There is nothing in the typical BSC about competitors, market conditions or other critical external factors.

Though BSCs may, with suitable care, be OK in their place – strategic management isn’t that place.

As usually implemented  …
- there is no coverage of competitive conditions or competitor behaviour – nor can I find any suggestion in the BSC or Strategy Maps books that they should do so.
- there is no coverage of overall supply/demand conditions – and again, no suggestion they should do so.
- there is no attention to prospective performance – i.e. how we are likely to perform on key indicators in coming periods [as distinct from our performance targets].
More seriously, although the causal logic generally seems to make sense to executives [Learning/Growth >> Internal Processes >> Customer Consequences >> Financial Outcomes] there is no rigorous, formal, verifiable structure to that logic – i.e. no solid ‘theory’ – that might ensure the strategy map is robust. Consequently, BSCs seem to reflect what teams think, or would like, some of the causal relationships to be – which may be entirely different from what another team might come up with. [I address this issue and suggest the basics of a more rigorous approach in chapter 4 of my book .. see www.strategydynamics.com/c4 ]
As a result, I can’t as yet see how a company’s BSC could have led them to anticipate the current crisis, to plan for it, or to work out what to do to survive and escape from it. It would be extremely valuable for many of us to hear of cases where BSC has been helpful in coping with current difficulties, and how that has happened.
Kim