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The Art of Setting Balanced Scorecard Performance Targets

You’re the Operations Manager in a local brewery and your organization produced 10,000 hectalitres of beer this week. Should I congratulate you or ask you what happened with production? It’s simply impossible to know without a target.

It may sound funny but you might be surprised to know that many organizations measure, report, and review actual results ONLY. However, without a comparator or target, actual performance results are missing a critical factor – context. Giving context to actual results by adding the comparison to a performance standard is the first step in transforming raw data into usable information. The great thing about context is that it allows you to: assess performance; evaluate strategic progress; make better decisions for action; and learn, improve, and grow.

Essentially, performance results without a comparator or target are useless.

I have always found target-setting to be more art than science. There is a very important relationship between targets (or more specifically the perceived ease of target achievement) and organizational/employee motivation for goal achievement that makes the job of setting good performance targets much more than a mechanical exercise. In my experience, this relationship is that old inverted U curve. That is, if you set targets too low, they are too easy to obtain and employee motivation to perform is low (why get excited by something that has no challenge in it?). Targets that are too high/are too much of a stretch result in low employee motivation as well (usually due to a sense of defeat and hopelessness before one even gets started).

The key is to find the “sweet spot” where targets are such that they result in optimal levels of employee motivation to try to achieve them. Essentially, what you need are targets that have some level of stretch but still feel realistic to those who are doing the work that produces the results being measured. In the ideal situation, employees feel confident that they can produce the desired business performance results but with some element of hard work, uncertainty, and risk involved.

So, what are the approaches associated with the art of target setting? Let’s take a look.

Adopt Budget Targets

Ideally, the creation of your strategic plan leads to the creation of a strategy-focused budget. A good budget usually includes both financial and non-financial line items and targets (e.g. sales and profit; training and development investments; FTE’s). When your balanced scorecard includes indicators that appear as line items in your budget, it only makes good sense to apply the budget targets for the indicators on your balanced scorecard. Doing this supports optimal organizational consistency and alignment. Don’t be surprised, however, if you can’t use the budget target approach with all of your balanced scorecard indicators. In many cases, your balanced scorecard indicators will not appear in your budget – when this happens, you will have to take a different approach to setting indicator targets.

Collect Data and Set Incremental Improvement Targets

One of the most typical approaches I see organizations taking is collecting historical performance data and then setting targets that represent a small to moderate level of improvement in results. The value of this approach is that it drives a moderate level of change/improvement in business performance while leveraging existing employee knowledge and skill levels. Taking this approach gives you a good chance of landing in the target sweet spot – it requires hard work to achieve improved performance levels but the risk is manageable because employees can leverage their existing capabilities to get there. This approach to target setting may be for your organization if your goal is incremental change and gradual progress towards mission and vision achievement. However, if your objective is organizational transformation, you will have to consider an alternate approach.

Adopt “Pre-Determined” Performance Targets

Sometimes your organization might be required to adopt performance targets that are pre-determined or have been prescribed to you, usually by an outside source. Examples include situations where you must meet obligations, contractual agreements, and/or regulatory standards, and/or to achieve performance that meets stakeholder expectations. In these cases, your organization has no choice but to adopt these performance targets. When this happens, it is important to know where these targets fall on your target-employee motivation inverted U curve. If these targets are on the low end of the curve when you look at historical performance levels, you may want to think about setting even higher performance targets to counter the employee de-motivation effect. However, before going this route, you should consider the value of striving for higher levels of performance – sometimes performing above expectations provides no added value/benefit. When there is no added value in achieving performance that is above standards or expectations, the burning platform of ALWAYS having to deliver performance to standards or expectations (or your company receives certain consequences such as regulatory penalties or losses in client loyalty) may be sufficient to put some risk into the target and raise employee motivation levels.

When targets based on standards or stakeholder expectations represent stretch targets (targets that are much higher than historical performance levels and will require extraordinary effort to achieve them), it is important to realize that it will likely take organizational investments to bridge the gap between today’s performance levels and the targeted levels of performance. Investments include resources/more people; tools and technology; training; and employee skills and capabilities development. Making these investments serves to move the target closer to the sweet spot in the inverted U curve because they close the employee skill and performance gaps, effectively equipping employees to do the hard work and reducing the risk of target non-achievement (but not eliminating it!).

Adopt “Gold Standard” and/or Competitive Performance Targets

In a situation similar to the one mentioned above, sometimes an organization may elect to adopt best practice or benchmarked targets (either within their industry or sector or based on a model company) or the performance levels of a direct competitor. Usually this is done to maintain position, or take the lead in, a competitive marketplace. The same comments apply as above to determine where these types of targets fall on the inverted U curve and how to approach them for success within your organization.

Collect Data and Set Stretch Targets 

This approach is the most likely choice for companies striving for significant change and strategic transformation. Business transformation often requires an organization to focus on new strategies and directions. In addition, enhanced levels of performance are generally required when the goal is to achieve transformational results in a short amount of time. In most business transformation scenarios, stretch targets are set for balanced scorecard indicators. The same comments apply as above for dealing successfully with the challenge of managing stretch performance targets.

These are the typical approaches I have used in my work setting balanced scorecard indicator targets. In reality, I tend to find that a blend of approaches is required with one of them playing a lead role or setting a primary target setting theme for your indicators. Regardless of the approach you take, it is critical to remember that the best results are achieved when your targets are in the sweet spot of the inverted U curve. However, over and over again I see businesses setting targets that require organizational investment to get to them into the sweet spot and then ignoring the need for those investments. More often than not, the result is performance sub-optimization, frustrated employees, and missed performance targets.

In the end, the key to target setting success is to (1) know where your proposed targets fall on the curve for any given indicator and then (2) have a viable plan of attack to get the target into the sweet spot.

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1 Comment

  1. Mihai Ionescu
    Apr 22, 2016

    Art is always part of any Strategy process. So is Science. In the case of annual targets setting for the KPIs, it’s mostly Science. And good knowledge about how to use the Strategic Gaps’ quantification (where possible) and the Targets Tree. The same gores for breaking down KPIs’ annual targets into monthly/quarterly targets.