How to Assess a Balanced Scorecard Implementation

Assessing a Balanced Scorecard (BSC) implementation can reveal many pitfalls and opportunities to drive corporate performance. BSC is a management technique allowing management to harmonize and balance multiple functions and operations of the organization to increase results and corporate performance. The technique was introduced in 1992 by Robert Kaplan and David Norton and published in the Harvard Business Review.

Often challenges occur in the development and execution of BSC practices, but there are way to remedy short-comings in the program structure and the impacts on business operations. I will show you a few areas to focus where you can increase corporate performance of your organization by assessing your BSC implementation.

Step 1: Review the BSC Design

First review the BSC design. The basic BSC design according to Kaplan and Norton considers four key domains of the organization. Each domain must relate directly to business targets and outcomes desired by the organization–this design is critical. Generally these focus on strategic goals set forth by management which are interconnected across domains. The four domains are:

1. Financial (relating to revenue, profit, earnings, and investor performance)
2. Customer (relating to sales, cost of sales, market share, and customer service)
3. Process (relating to functions, operations, and common execution)
4. People (relating to training, education, learning, individual performance, community)

Management will approach the BSC technique differently depending upon the strategic direction of the organization and each individual frame of reference. However the construct of the BSC technique must show dependencies from each successive domain, moving from the lower layers (people) to the top layer (financial). This design element is critical and must be in place to communicate the “balance” desired by the organization.

Sometimes management will express the BSC in an inverted fashion (consistent with the management philosophy of the inverted pyramid, a stewardship model whereby people are at the top of the organization). While this approach is acceptable the BSC design must be consistent when “reverted” in original form.

It’s okay to adapt terminology of the BSC design and structure (for example, one professional services company used the word “potential” rather than “people” since it made better sense to their global service industry). However the basic design structures must be accounted for.

Step 2: Confirm and Validate KPIs

Once management validates the basic design of the BSC, the next step is to confirm that the key performance indicators (KPIs) are defined in a consistent and relevant manner. KPIs must pass several litmus tests in the areas of relevance and consistency. Relevance considers a number of attributes including the following:

a. Does each KPI consider one and only one strategic goal?
b. Are the strategic goals considered timely within the operating fiscal year?
c. Are their individual performance as well as company performance expectations?

The latter point is critical, if there are no individual ownership consequences for executive in the attainment of KPIs then the likelihood of meeting corresponding strategic goals can be left to chance.

Consistency considers a number of attributes including the following:

a. Are the corresponding data used to create KPIs (e.g. metrics) identifiable?
b. Are the corresponding data (e.g. metrics) stable from one gathering point to the next?
c. Is there clear understanding around who is responsible for owning and gathering the data (including system ownership roles)?

One common pitfall in the structure of KPIs is the lack of system and data ownership. Management may agree on the KPIs and their relationship to strategic goals, but then fall short on how to collect, structure, and monitor the source data which shapes the KPI.

Since the BSC technique mandates that the domains are interconnected, so must the definitions of KPIs likewise exhibit the same logical connectivity. Lacking this consistency may doom the BSC to demonstrate to management a view of corporate performance which may be either incomplete, or not focused in the same strategic direction as the mission and vision of the organization.

Step 3: Account for Risk

Third, check to make sure considerations for risk have been made. In the aftermath of the Economic Crisis of 2008-9, most large global organizations consider Key Risk Indicators (KRIs) in concert with KPIs to provide a “risk adjusted strategy” to management. This may be helpful to assess BSC implementation based on several factors:

a. the viewpoint of each manager’s particular role in the organization
b. the perceived risk of an event occurring and its impact
c. past experiences, histories, and personal agendas of each manager

Enterprise risk management (ERM) is a domain of management which considers these and other management elements of risk. Using KRIs to serve to define triggers, priorities, and impact probabilities to attainment of strategic goals and KPI levels provides another level of sophistication to the BSC technique.

Step 4: Address the Governance Model

Finally, ensure there is a governance model in place for the BSC. Governance and the processes the organization will use to own, report and monitor KPIs, KRIs and strategic goals using the BSC technique are important to the success or failure of BSC implementations. Often the management team will meet and define a BSC design with consistent and relevant KPIs and even risk factors associated with the various domains. However if there is no agreement to the process by which management will be held accountable for reporting and acting upon the information developed using the BSC technique, the organization fails quickly after implementation. Governance defines how and when the BSC technique will be used in decision making.

Critical success factors which can help define governance for BSC efforts include:

a. Roles and responsibilities for each key stakeholder
b. Basic reporting process for each KPI and KRI (time intervals and approvals)
c. Issue management process in the event there is disagreement or conflict
d. Ownership and accountability of all participants to the BSC implementation

The last item is key, and often individual performance management is employed to ensure that management and employees take the BSC implementation seriously.

Reference

  • # Kaplan R S and Norton D P (1992) “The balanced scorecard: measures that drive performance”, Harvard Business Review Jan – Feb. [www.hbr.org]
  • # Kaplan R S and Norton D P (1996) “Using the balanced scorecard as a strategic management system”, Harvard Business Review Jan – Feb. [www.hbr.org]
  • Newman, William D., Understanding SAP BusinessObjects Enterprise Performance Management. 2010 ISBN 978-1-59229-348-3 [www.sap-press.com]

Resource

William Newman is the author of the forthcoming title, “Understanding SAP BusinessObjects Enterprise Performance Management” on sale now from #SAP Press.  He consults, writes and speaks on sustainability, governance, strategy, and compliance topics.  Twitter william_newman.

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Filed under Audit and Oversight, Enterprise Performance Management, Risk Management, Strategy

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