The Divide between Strategy Formulation & Strategy Execution
The vast majority of the world’s businesses fail to fully execute what they claim to be their most important strategic objectives. It’s not for lack of planning most spend large amounts of time developing new strategies, tweaking mission statements, and crafting top-level goals. The challenges emerge when these organizations attempt to enact these strategies, particularly when they must be executed across diverse business units, with the cooperation of cross-functional areas, and with the participation of geographically-dispersed personnel.
With the development and implementation of a comprehensive Balanced Scorecard framework, effective execution of strategic goals becomes much more attainable.
Balanced Scorecards Can Address the Divide
Need proof? Recent research suggests that world-class companies are 159% more likely to have Balanced Scorecards in place.
So what exactly is a Balanced Scorecard? It’s a framework that helps organizations first clarify their strategy and then make it actionable to create measurable results. It can be implemented across organizations of any size, whether they are Fortune 100 companies, not-for-profit organizations, health systems, governmental organizations, or start-ups.
Perspectives Promote Balance
As the name suggests, the Balanced Scorecard provides a more holistic view of performance by helping organizations develop and review strategic objectives within a balanced set of key focus areas. These focus areas called perspectives often include Financial, Customers, Internal Processes, and Learning and Growth. These four perspectives should be adjusted if they do not present a balanced view of your organization’s key stakeholders. For example, healthcare organizations building a Balanced Scorecard often feel that including a perspective called Patient Care or Clinical Outcomes better represents their organization and strategy.
In contrast to the broad view provided by the Balanced Scorecard with its range of perspectives, most organizations that rely on more traditional reports to manage performance tend to focus too heavily on just one area, most often Financial. This hinders them from seeing the impact that other areas, such as Customer Retention, have in driving the most important outcomes, such as Financial Health.
y linking the causes to the effects, Balanced Scorecards have proven to be revealing tools, which can help all employees see how their work impacts strategy and ultimately align your organization’s different operating areas in pursuit of the most critical goals.
Focus on What’s Critical, Rather Than What’s Easy
Another benefit of a well-crafted Balanced Scorecard is focus. Scorecards with no more than 9-12 objectives are the ones that drive results. Objectives are brief, verb-noun statements, such as “improve customer satisfaction,” pulled directly from the strategic plan and grouped under the appropriate Balanced Scorecard perspective. Without a Balanced Scorecard forcing this type of focus on the critical few objectives, most organizations try to do too much, so efforts become fragmented and ineffective. When given too many areas of emphasis, employees work only on the “low hanging fruit” or the easiest projects, rather than digging into areas that are more tightly aligned to the strategic goals or have the largest performance gaps.
Ready to Build a Balanced Scorecard?
With the above fundamental principles understood, many organizations wonder how to move from strategy to a deployed Balanced Scorecard. Before such action can take place, organizations must understand what Balanced Scorecards are not.
Too often, a Balanced Scorecard is seen as just another static report only reviewed by executives, when it can actually become a powerful ongoing management framework, capable of both aligning everyone in the organization to the top-level strategy and providing the ideal review mechanism for achievement of this strategy.
Balanced Scorecards are also not generic tools that fit all organizations the same way. In other words, Balanced Scorecards should be unique to each organization, its strategy, and market position. Balanced Scorecards within an organization should also be quite different; they should be “cascaded” or translated, so that the specific objectives and measurements or metrics are appropriate for each organizational area.
As with many other tools, a Balanced Scorecard should not be viewed as an end-all, be-all solution. Rather, they are just a part of a broader focus of Enterprise Strategy Execution, which should also include such areas as strategy mapping, structured business reviews, aligned performance improvement, process management, and employee goal alignment. Tackling all of these areas simultaneously, however, is a recipe for failure. Starting with a solid strategic plan and a well-developed Balanced Scorecard is the ideal foundation upon which to build a more comprehensive performance management and Strategy Execution focus.
First, Ensure Alignment to Strategy
So how should an organization begin building this strategically-aligned Balanced Scorecard foundation? First, conduct a thorough SWOT Analysis, which helps identify key Strengths, Weaknesses, Opportunities and Threats. The high-level organizational SWOT Analysis should incorporate departmental, business unit, and functional area SWOT Analyses. It should also build upon other strategic planning inputs, such as market analyses, customer needs analyses, and performance gap analyses. Doing so will allow your organization to discover where it stands in relation to competition, market conditions, and other factors, and should identify the key candidates for your top-level Strategy Map a simple, visual depiction of the key components of your strategic plan, which places a high emphasis on the cause and effect relationships of objectives.
To build your Strategy Map, place your organization’s perspective names down the left side of a page, with the most important outcome area at the top. Then below it, place the perspective representing the most important driver or contributing area for the top-level outcome, and so on down to the last perspective. For example, for-profit companies typically place the Financial perspective at the top of the map, with the Customer Perspective underneath (because customers drive financial success), then Internal Processes (those ways that you provide products and services to customers), and finally Learning and Growth (which represents the skills of your employees and their ability to keep the processes working).
Next, within the perspectives, place the most critical strategic objectives derived from the SWOT Analysis, which will most likely come from the Weaknesses, Opportunities, and Threats. You’ll need to narrow them down to the critical strategic few (no more than 9-12 objectives) to ensure focus. In addition to grouping objectives within the appropriate perspectives, it is helpful to draw arrows between the objectives to further emphasize the causal relationships and show how each contributes toward the strategic outcomes at the top.
Next, Build Your Top-Level Balanced Scorecard
Once created, the Strategy Map becomes the foundational piece for building a top-level Balanced Scorecard. Begin building your Scorecard by copying the perspectives and objectives from the Strategy Map. From here, your organization should identify measures (also known as Key Performance Indicators/KPIs or metrics) to determine if you are on track to achieve each objective. No more than three measures should be developed as indicators of achievement for each Scorecard objective. Targets or goals for each measure should also be determined and placed on the Scorecard to gauge performance of each measure. Most scorecards also include a red, yellow, or green “stoplight indicator” next to each measure or objective, which provides an at-a-glance view of its performance compared to target.
Finally, you should begin to identify improvement initiatives, which are time-bound projects that will address critical areas where performance is falling short of target. These initiatives should be aligned to the underperforming scorecard measure and reviewed to ensure that progress is indeed improving the metric.
Now, On to Cascading
Aligning improvement initiatives is the final step in building a top-level Balanced Scorecard. But this single scorecard is really just the first step in building an actionable management framework. To make the tool really drive the results you desire and help you execute your strategy, you need to cascade the objectives and metrics down and across the organization, creating linked, aligned, and related but not identical Scorecards for each strategically-important area. This leverages the cause and effect nature of the Balanced Scorecard tool by tying the lower-level and cross-functional drivers of performance to the top-level outcomes that ultimately determine your success. By reviewing and improving these lower-level measures, which will now have a “line of sight” view of their relationship to top-level measures, you drive real, predictable results that can be sustained for long-term Strategy Execution.
Whew! Now take a deep breath. As you can see, building Balanced Scorecards requires hard-work, patience, and often some consultative help to get you moving in the right direction.
Five Tips for Scorecarding Success:
Don’t expect to build a complete framework overnight.
Instead, focus on building a solid top-level Scorecard. It doesn’t have to be perfect aim for 80% and start cascading, assuming you’ll improve Scorecards as you work with them.
Cascade Scorecards to one or two strategically-critical organizational areas first, focusing on building the cause and effect relationships between the high-level objectives and their key drivers.
Begin reviewing these Scorecards right away! When an organization actively reviews Balanced Scorecards, focuses on areas with performance gaps (measures with red or yellow stoplight indicators), and follows up on the aligned improvement initiatives, performance improves.
Once you have about 3-5 Scorecards, it’s time to think about Balanced Scorecard Software. These applications greatly improve visibility into the causal relationships of the scorecards, help drive timely action, ensure that everyone is reviewing the same information (by providing a “single version of the truth” that spreadsheets and paper reports simply can’t), and facilitate better Scorecard business reviews.