Blog

In a Successful Balanced Scorecard, Indicator Relevancy Includes a Reality Check

A golden rule for selecting powerful Balanced Scorecard indicators is to focus on the attribute of relevancy. That is, any given indicator must be a good representative of the thing you are trying to measure. Without indicator relevancy, any Balanced Scorecard quickly loses its power and credibility as a strategy management tool.

The best way I’ve found to ensure indicator relevancy is to begin with a good strategic objective definition. A solid strategic objective definition lays out the playing field and provides a little more detail as to what’s included under the strategic objective. Equally important, a strategic objective definition outlines the boundaries of the strategic objective. Essentially, a well written strategic objective definition gives an organization and its employees guidelines on what’s in and what’s out when it comes to executing the strategic objective. This component of a strategic objective definition also plays an important role in helping organizations identify which business processes have the highest potential as measurement sources.

Another important part of a good strategic objective definition is a statement of the importance of the strategic objective. When written to convey the benefits and/or customer/stakeholder value resulting from the execution of the strategic objective, this part of the strategic objective definition can point us in the direction of candidate outcome and impact indicators.

When you write strategic objective definitions that include these important elements it’s easy to see how they offer a gateway to selecting highly relevant indicators.

However, it’s important to remember that, when an organization is using their Balanced Scorecard as part of their internal strategy management system, relevancy has an additional component. In these situations, a relevant indicator must also be reflective of where an organization is in its business and strategy execution life cycles.

When organizations search for candidate indicators for a strategic objective the most logical place to look is at the business processes associated with that strategic objective. Why? Since the execution of strategy, and the majority of the work done in a business, is largely achieved through the completion of critical (i.e. strategic) business processes, business processes naturally act as a great reservoir for finding relevant indicators.

However, sometimes organizations find that they have an orphan strategic objective on their hands – that is, one with no associated/supporting business processes.  While this might seem improbable, it happens more frequently than you might imagine. For example, when a company is just starting out or when an existing organization is doing a business pivot or launching out into a new strategic direction, it’s not unusual to find that the business process infrastructure necessary to support strategy execution is missing.

Without supporting business processes your measurement options are limited. However, let me show you how organizations can deal productively with this scenario.

When you have a strategy execution gap (i.e. no supporting business process infrastructure), the usual solution for shoring up the gap is to launch a project designed to create, launch, and entrench the required (new) business process within the business. Sometimes these projects can be completed quickly but, in my experience, they often take some time to run their course. Rather than wait several months or quarters for a project to conclude and the new business process to be available for measurement purposes, organizations will often include a project-based indicator on their Balanced Scorecard. While the process-based indicator may be the ultimate objective for any given strategic objective, it’s perfectly fine to leverage a project-based indicator in the interim.

While taking this approach may not seem very strategic it is in fact the right thing to do over the short-term if you (1) want to move your organization to a place where it’s able to execute your strategy efficiently (i.e. have the necessary business process(es) in place to support the execution of any given strategic objective), (2) you want to manage that forward progress, and (3) you want to have an indicator on your Balanced Scorecard that is relevant to the strategic objective AND the current state of reality within your organization. However, once the project has concluded and the business process is in place and functional, it’s time to replace your project-based Balanced Scorecard indicator with a relevant process-based one.

Making the move to process-based indicators, and then keeping an eye on the evolution of the type and mix of the process-based indicators you select (i.e. input, in process, output, or outcome), are all part of ensuring that your indicators reflect the reality of your organization’s current state of maturity at all times (key if your Balanced Scorecard is going to remain relevant for internal strategy management purposes).

Many organizations I work with are uncomfortable with this dual approach to indicator relevancy. They don’t like the idea of including project-based indicators on their Balanced Scorecard because it feels too transactional and operational. The biggest complaint I hear is that project-based indicators are measures of activity and not impact. In fact, I also hear similar complaints when we include process-based indicators other than output or outcome indicators on an organization’s Balanced Scorecard. Mostly, these organizations don’t like the idea of evolving and changing their Balanced Scorecard indicators.

I usually find that these complaints are a sign that an organization is not keeping the more comprehensive definition of relevancy in mind. Often these organizations end up delaying the deployment of their Balanced Scorecard until their organization is in a strategically mature state – which is too bad because waiting represents an opportunity lost.

And more often than not that ideal state never arrives.

Ensuring indicator relevancy is a critical tenet for creating a solid Balanced Scorecard but it’s important to expand your definition of relevancy if you want to use your Balanced Scorecard as a powerful tool for internal strategy management. Remaining open to selecting representative indicators that are also reflective of where your organization is in its business and strategy execution life cycles means that you don’t have to wait until your organization is in a fully mature state to adopt a Balanced Scorecard approach to business performance measurement and management.

Using your Balanced Scorecard in this way means that you have a method for assessing and managing your organization as it progresses successfully from crawling to walking and eventually running from a strategy execution perspective. Taking the opportunity to manage your organization through each stage of the journey via the Balanced Scorecard translates into more efficient progress through these stages – accelerating the achievement of your strategic objectives, mission, and, ultimately, the impact on your customers, stakeholders, and business results.

1 Comment

  1. Mihai Ionescu
    May 26, 2016

    That’s why it becomes essential to build the Strategic Objectives as actionable aggregators of several closely-related Strategic Gaps and then identify the Lag KPI Measures that are relevant for the Strategic Gaps of their Strategic Objectives (measuring how much of each gap has been closed).

    Of course, it is assumed that you have available a clear process for identifying the Strategic Gaps (positioning and coherence), on the Strategy Formulation side.

    For the Lead KPI Measures, the situation is more complex, as you often use more than one Strategic Initiative to accomplish a Strategic Objective, with specific timelines, for each of the initiatives.

    People have to understand that a Scorecard is not frozen along the planning/execution cycle and that its model has to be review several times and updates have to be issued, as required, for keeping all its components and correlations as relevant as possible for the changes that take place during that period or stage of the cycle.
    .