Development of a balanced scorecard
Methodology
Document version: 3.6
Document revision: 1
Introduction 3
1. Terms, definitions and abbreviations 4
1.1. Terms and definitions 4
1.2. Abbreviations 5
2. What are the benefits of using BSC? 6
2.1. Features of using SSP 6
2.2. Benefits of using BSC 7
2.3. Difficulties in using SSP 8
3. Technology for the development and implementation of BSC 10
3.1. Basic principles of BSC 10
3.2. Stages of development and implementation of BSC 13
4. Development of the BSC and monitoring the implementation of the strategy using Business Studio 16
4.1. Data structure of SSP 16
4.2. Defining strategic goals 18
4.3. Building cause-and-effect relationships 19
4.4. Definition of indicators and target values 20
4.5. Determining the connection with business processes 29
4.6. Defining strategic activities 29
4.7. Using the cockpit when working with indicators 31
4.8. Collection, assessment and analysis of information 33
Bibliography 42
Appendix A. Example of a “Strategic Map” report 43
Appendix B. Example of a report on goal 46
Appendix B. Example of a report “Current values of goal indicators” 47
Appendix D. Example of a report “Indicator values for the period” 48
Appendix E. Example of a report “Values of indicators controlled by an official for the period” 49
Appendix E. Example of a report “Current values of indicators controlled by an official” 50
Appendix G. Sample report “Project Report” 51
Introduction
This document contains a description of the methodological principles and solutions used in building a balanced scorecard using the Business Studio software product.
The idea of using a balanced scorecard as a tool for managing the performance of a company was proposed by Robert Kaplan and David Norton. They called their development “Balanced Scorecard” (BSC) to emphasize the balance (“Balanced”) of the system, which should be measurable using a system of indicators (“Scorecard”). The main purpose of the BSC concept is to translate the vision of the company's management into reality, and also to link strategy with operational activities and cost factors.
The main feature of the balanced scorecard (hereinafter referred to as the BSC) is that it is closely related to business processes that are aimed at meeting customer needs and in which all company employees are involved. The BSC guides the company's management towards adequate strategic development, in contrast to traditional management, which, as a rule, is too focused on financial indicators.
This technique is intended for users of the Business Studio system.
The methodology was developed by the Group of Companies “Modern Management Technologies” www.businessstudio.ru.
Terms, definitions and abbreviations
Terms and Definitions
Vision is a view of the desired, practically achievable future of the organization, as well as how to achieve this future.
Time horizon determines the type of indicator (delayed or leading) and shows for what period the activity is planned.
Cascading– this is the construction of a BSC for the company’s structural divisions (in horizontal and vertical aspects). The result of this work is the creation of balanced scorecards for various organizational units and various levels of the organizational hierarchy. Vertical cascading is also called decomposition.
Prospects(components) are the most significant areas in which the company strives to achieve results. Typically, there are four perspectives: finance, customers (marketing), internal processes (production), training and development (personnel). Other perspectives may exist or be replaced depending on the specific needs of strategy developers. Perspective is a critical element of strategy, often representing the owner's category or point of view.
Index– this is a target meter. Indicators are a means of assessing progress towards the implementation of a strategic goal. However, it is also a means for assessing the effectiveness and efficiency of a business process. Indicators serve both to assess the effectiveness of processes and to assess the degree of achievement of the goal at the same time.
Leading indicator– an indicator that changes over time over a short period of time.
Delayed indicator– an indicator that speaks about the ultimate goals of corporate strategy.
Cause-and-effect relationships. Strategic goals are related to each other by cause-and-effect relationships, which are similar to “if-then” relationships. For example, if a bank reduces customer service time (Goal 1), then it will require fewer staff (Goal 2), customers will be more satisfied with the reduction in time (Goal 3) and prestige, therefore, the bank's profitability will increase (Goal 4). This is an obvious cause and effect relationship. Such connections are depicted in the strategic map of the enterprise.
Process (business process)– a sequence of actions (subprocesses) aimed at obtaining a given result that is valuable to the organization. Not only the organization’s success in the present, but also its survival in the future depends on how an organization develops and improves its business processes. The BSC identifies those business processes that are decisive for the successful implementation of the strategy.
Balanced Scorecard (BSS) is a system of strategic management of a company based on measuring and assessing its effectiveness using a set of optimally selected indicators that reflect all aspects of the organization’s activities, both financial and non-financial. The name of the system reflects the balance that is maintained between short-term and long-term goals, financial and non-financial indicators, main and auxiliary parameters, as well as external and internal factors of activity.
Strategic map is a diagram or drawing that describes a strategy in the form of a set of strategic goals and cause-and-effect relationships between them.
Strategic goal- this is the main goal, the achievement of which is most important for the survival of the organization, for its success. Strategic goals differ from operational goals in that they have a significant impact on the company’s competitiveness and are highly difficult to implement.
Strategic activities (projects) ensure the implementation of the strategy. All projects carried out in the organization must be linked to the strategy in the BSC. Projects aim to achieve set goals within a given period of time and within a specified budget.
Strategy is a plan or model for the long-term development of an organization. Strategy is a path consisting of several stages that an organization must go through from its current state to the target state that is planned and anticipated.
Target value of the indicator– this is the numerical value of the indicator to which you should strive to achieve the goal.
Target is a measurable result that is planned to be achieved. A company's system of goals shows what the company as a whole must achieve (strategic goals) and how the strategy will be implemented at the operational level (operational goals or performance goals). The system of goals in the balanced scorecard is visualized using a strategic map and serves to visually represent the chosen strategy and bring it to the level of implementers.
We know that the BSC greatly contributes to the translation and dissemination of information about strategy at all levels of your enterprise, thereby strengthening the understanding of strategy in the broadest sense of the word and developing knowledge about it in every possible way. But to truly set in motion the mechanisms that ensure individual contribution from employees at all levels of the organization, people need to be given the opportunity to demonstrate how their daily actions make a difference and contribute to the achievement of the company's strategic goals. A proven method to achieve this is BSC cascading.
Cascading is the process of developing balanced systems for each level of the organization. These systems are aligned with the scorecard for the top level of the organization by defining strategic goals and metrics that lower-level departments and teams will use to track their contribution to overall company goals. Although some of the metrics used will be the same as those used throughout the organization, most lower-level systems may contain metrics that reflect specific opportunities and challenges at their level. You know that as soon as you open the curtains in a dark room, every corner of it will be filled with sunlight. Likewise, cascading illuminates all aspects of strategy, transforming it from an obscure document imposed by senior management into a set of simple metrics and goals that explain how I, the employee, can directly contribute to the success of my organization.
In the following pages, we'll take a closer look at the beneficial effects of cascading, explore ways to cascade effectively, and what to consider when evaluating cascaded scorecards. This process can seem quite complex due to the many factors that need to be considered and the decisions that need to be made. But despite this, your efforts will pay off with interest. In fact, Kaplan and Norton found that the significant difference between BSC Hall of Fame organizations and all other companies was the ability to create unity in strategy execution. “This proves that effective organizational cohesion, although difficult to achieve, is clearly a fundamental outcome of any management practice.” It's not surprising when you think about the fact that through unity, you have the ability to leverage the greatest resources known to man: the hearts and minds of your employees.
Develop implementation principles for successful cascading
Over the years, I have learned from bitter experience that I cannot be called a master of “golden hands.” This can be confirmed, for example, by one famous episode from the life of the Niven clan, when my brother and I tried to replace the lamp in the brake light of his car and as a result, one of us (I won’t specify which one!) had to get stitches in the hospital! As far as I know, this car was subsequently sold for next to nothing with a broken brake light. If we had read the instructions then and planned our actions in advance, bloodshed could have been avoided. Before you begin any project, try to create a plan that will guide you in your work. The same advice can be given regarding cascading: first you need to plan your actions in order to then confidently follow the plan.
Chances are, your top-level BSC was created by a cross-functional team that worked together and sought to bring together different perspectives to ultimately create a product that reflects the characteristics of the entire organization. With cascading, there is little, if any, chance that the entire team will be involved in working on each cascaded system. This would be illogical and, moreover, would take too much time. A more plausible scenario is that your team's efforts will now be dispersed throughout the organization, with each team member leading cascaded scorecard development activities in their own department or group. This approach is more effective, but does not exclude the possibility that each department will use its own methods and techniques, which is completely unacceptable in the process of developing and applying the BSC. Consistency in system implementation across all levels of your organization is a must if you want to benefit from a truly unified strategic focus. If each group develops a scorecard based on its own interpretation of a given concept, it is likely that many of the systems created in this way will bear little resemblance to your top-level scorecard, leading to confusion, frustration and, most importantly, a lack of cohesion across the board. achieving common goals. To prevent this from happening, consider the following elements that you should consider when creating your BSC cascading plan.
- Components of a Balanced Scorecard. Do all groups need the four components of a balanced system: financial, customer, internal processes, training and personnel development? Or can individual groups, at their own discretion, create their own components and give them new names? Personalizing a balanced system has benefits in terms of strengthening local support and understanding. But at the same time, the variety of terms used in different departments of the company can lead to confusion.
- Number of goals and indicators. Should there be a limit on the number of goals and indicators that a group can include in its balanced system? Don't forget that when you start cascading a system, you can suddenly increase the number of performance indicators in the organization to tens or even hundreds.
- Mention of corporate goals. Should teams developing their balanced systems include specific corporate-wide goals, or should they be given free rein to develop their own specific goals to illustrate their strategies? In some organizations, business units and divisions should include in their systems (to the extent possible) the same objectives that are mentioned in the overall corporate Balance Sheet. The challenge here is to ensure coherence and consistency across the company. A likely downside to this approach is that it stifles the creativity of teams that would like to independently determine how they can have the greatest impact on achieving corporate goals and overall performance metrics. As a compromise, organizations often limit the number of goals for each group, and at the same time, interdependent groups must include common goals as well as their own in their balanced systems.
Understanding of the top-level balanced scorecard
Understanding the key elements of the top-level BSC (often called the enterprise-wide BSC) is the basis for effective cascading. Without a firm grasp of the goals and metrics that make up the strategic plan, employees will be groping in the dark to create meaningful, balanced systems that reflect their contributions to the organization's success. Imagine a meeting about cascading a balanced system. Those present sit around the table, eager to get started on developing their system, and see the goal of a company-wide balanced system as “customer satisfaction.” Without knowing in what context, why and how a given goal was developed, meeting participants will not understand what it means to them and how they can (if at all?) contribute to its achievement.
Throughout this book, I often refer to the incredible power of the BSC as a tool for disseminating information, but despite the best efforts of system architects, the knowledge hidden in this tool is not always obvious upon superficial examination. Communication and education activities are essential, such as communicating the Balanced Framework to your employees, discussing with them what certain goals and metrics mean, why they were chosen, and how they contribute to the company's strategic plans. Employees can be informed in various ways. These include press conferences with management, during which senior company officials talk about the indicator system, and videos, and pages on the local intranet dedicated to the system, as well as presentations given by representatives of the team for the development and implementation of a balanced system . How you achieve the goal is not as important as the actual task of communicating and communicating the strategy to all employees to ensure they understand the elements that make up your Balance Sheet. By understanding the fundamental aspects of the top-level system, people in the organization can translate it into their own metrics that describe their impact on the overall corporate strategy and show how their day-to-day activities contribute to the achievement of strategic goals.
Influence as the basis of cascading
The purpose of cascading is to give all groups in the organization the opportunity to demonstrate how their actions contribute to overall success. To do this, each group must ask itself how its members actually influence the achievement of the goals included in the higher-level BSC. To study this concept, we will use Fig. 6.1.
From the book by Paul R. Niven Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results(New York: John Wiley & Sons, Inc., 2002) (“The Balanced Scorecard Step by Step: Maximizing Performance and Sustaining Results”).
Rice. 6.1. Cascading process
It all starts with the highest level BSC, the so-called corporate or organization-wide scorecard. The goals and indicators contained in this system reflect what are considered the critical variables that determine the success of the organization. Consequently, any BSC subsequently created at any level of the organization must be associated with this document.
The first level of cascading is formed when business units (according to Figure 6.1, you can use your own terminology) look at the system of indicators at the highest level and ask themselves the question: “What goals can we influence to achieve?” The answers to it will form the basis of these business units’ own systems of indicators. They probably will not be able to influence all the goals present in the highest-level indicator system. After all, organizations create value by combining the diverse skills of all employees employed in functional units. Therefore, each group should focus directly on those goals and indicators that it can influence. Still, if a group cannot demonstrate a connection to any of these goals, you should seriously consider what added value (value) it creates for the organization as a whole. An entity can choose to use the terms used in the top-level BSC or create goals and metrics that more accurately reflect how the group contributes to value creation in the organization.
Once business units have developed their BSCs, groups one level below them are ready to participate in the process. Now specific departments will have to study the system of indicators of the business unit to which they are accountable and determine which of the set goals they can influence. This is an important point; divisions reporting to a specific business unit, in the process of cascading, rely on the balanced system of this particular higher-level unit, and not on the general corporate system. To achieve unity, they must focus on the strategically significant goals and indicators of the business unit to which they are directly related.
As noted, they can use the same statements of goals and indicators or develop unique names for the elements to be included in the system.
Let's look at cascading using the example of a fictitious taxi company. In Fig. 6.2. depicts excerpts from the BSC at three levels of this organization, reflecting the principles of cascading just described.
In the client component, the choice was made on the goal of ensuring safety and convenience of transportation for clients. To assess the effectiveness of achieving this goal, an indicator of an increase in the average volume of passenger traffic is used. The established norm is to increase this indicator by 10% per year.
The fleet maintenance department is one of several business units of the company. When developing their own system, the department's employees began by carefully studying the company-wide Balance Sheet to determine which of the goals specified in the system they could influence. Employees in the Fleet Maintenance Department, like other business units of the company, are eager to show how their important work is connected to the achievement of overall corporate goals. As they looked at the customer side of a city-wide balanced system, they focused on the goal of providing safe, convenient transportation for customers and realized they were having a significant impact on achieving that goal. The Fleet Maintenance Department has this same goal, and has therefore been included in the department's own scorecard. Yet the increase in passenger traffic was not relevant for the fleet maintenance department. This is a critical indicator, but it was necessary to develop an indicator that shows exactly how the fleet maintenance department influences the increase in passenger traffic. This is done by taking care on a daily basis to ensure that there are serviceable vehicles available to transport passengers. Thus, the department contributes to an increase in transportation volumes. Therefore, the indicator chosen for evaluation was the percentage of serviceable vehicles in the taxi fleet.
Rice. 6.2. Cascading BSC
(Click on the image to enlarge it)
The fleet maintenance department consists of several groups, one of which is repair. Her many responsibilities include ensuring efficient maintenance of the taxi fleet. When developing their own BSC, the staff began by studying the system of indicators of the business unit to which the repair group reports - the vehicle fleet maintenance department. As a result, the group focused on the goal of providing safe and convenient transportation and realized that they had a significant impact on achieving this goal, and therefore chose it to include in their own indicator system. By asking themselves how they affected the availability of serviceable vehicles, employees realized that if they could make repairs in a timely manner, the company would have more vehicles at its disposal and customers in need of taxi services would not have to wait too long. The repair team strives to complete at least 75% of vehicle repairs within 24 hours.
Although each of the BSCs described in this example has one common goal, the indicator selected at each level is a reflection of what a given group must do to contribute to overall success. These interconnected indicators serve as a key factor in ensuring the unity of all divisions of the company. Maintenance team employees can now clearly demonstrate how their work is connected to achieving the most important goal for the company. Moreover, senior management can be confident that the fleet service department's attention is focused on the necessary elements to create value for the company's customers.
Evaluation of Cascaded Balanced Scorecards
As with the development of the overall BSC, cascading can either be completed in a few weeks or several months, depending on the size of your organization and the scale of implementation of the balanced system. I advocate maintaining the momentum set by a rigorous, fast-paced implementation schedule because intense activities often bring people together in pursuit of a common goal. However, rapid cascading of scorecards comes with significant hidden risks. In the rush to achieve unity as quickly as possible, some organizations neglect the task of evaluating cascaded metrics and determining whether they are truly aligned with the overall strategy and moving everyone in the organization in the same direction. Neglecting such an important task often results in cascading activities that create a unique combination of BSCs scattered haphazardly throughout the company. Not only does this discourage workers from uniting their efforts toward a common strategic goal, but it can even impede joint action, jeopardize resource allocation decisions, and generally create confusion and hostility in the process.
Just as a simple consultation with a doctor can reduce the likelihood that you will experience suffering and pain later, a cascaded scorecard assessment is a diagnostic that is sure to result in benefits such as focus, cohesion, and understanding of overall corporate strategy. As a starting point for the assessment, have your BSC team review the systems developed by the relevant business units or divisions. Team members' in-depth specialist knowledge, coupled with experience with the balanced framework, enables them to provide critically informed assessments of the scorecards developed by individual teams. To help your team evaluate cascaded scorecards, consider the following elements:
- Compliance with cascading principles. The first and simplest diagnostic technique is to check the compliance of the indicator systems with the rules and principles of cascading that you have developed. For example, pay attention to the use of consistent terminology and the mandatory inclusion of specific objectives.
- Influencing goals. The main goal of cascading is to create unity, and therefore all cascaded indicator systems must contain goals and indicators that influence the indicator system of the next level. Particular caution should be exercised in any cascaded system that includes goals that are understandable only to the initiated, and indicators that have no obvious connection with the indicators of the system one level above. It is possible that some of these indicators play a decisive role in the successful performance of a given unit. But if they don't move the organization in the desired direction, what is their true strategic value?
- An acceptable number of goals and indicators. Cascading can lead to a rapid growth of the number of indicators to hundreds, and with the advent of highly complex software systems, even thousands of performance indicators, especially in large organizations. Don't forget that the essence of the BSC is to focus on the main thing. Remember the words of Charles Hendy that I quoted in the section on developing metrics: “Measuring more is easy, measuring better is difficult.” Yes, it's difficult, but it's worth the effort because a limited number of performance measures that directly follow strategy are far more valuable in setting your course than a plethora of operational measures that are of questionable relevance to strategy.
- Relevant standards. As discussed in Chapter 5, norm setting is not a core competency of most organizations. Establishing appropriate standards requires a careful assessment of environmental conditions, current performance, future projections, etc. Ensure that the standards included in the cascaded scorecards reflect the proper balance between aspirational, high-stakes objectives and realities. reality. In addition, from a mathematical point of view, it is necessary to ensure that the sum of the relevant norms is equal to the established corporate norm. For example, at the corporate level, the BSC may include a cost reduction target of $1 million per year. The amount of the relevant standards established according to cascaded systems of indicators must be at least $1 million, which makes it possible to ensure compliance with this standard throughout the entire enterprise.
- Complete coverage of all targets. An enterprise-wide scorecard contains goals and metrics that directly translate into your strategy. These are the ones that will be used to measure your success. They were chosen through heated debate and debate and represent your best judgment on certain issues. Taking into account the obvious importance of goals for the implementation of strategy, it is extremely important that cascaded indicator systems, when studied at the macro level, provide full coverage of all corporate goals. If, as a result of assessing cascaded balanced systems, you see that corporate-level goals are not reflected at lower levels, this means that representatives at lower levels do not consider these goals to be critical to success. At this point, you must either re-evaluate the need for the goal to be included in the company-wide system, or take action to provide additional training and communication to employees about the critical role of the goal in achieving the success of the enterprise.
- A combination of leading and lagging indicators. Cascaded systems of indicators should contain not only lagging or leading indicators, but be based on a reliable combination of these two types of parameters, which together contribute to achieving the goals of the business unit.
Have you ever participated in a team building event and watched as fierce competition and a real fight broke out among the participants? If so, I sincerely hope that you did not have to suffer bitter failure in this struggle and end up overboard. To come out of such a competition “dry and clean”, you need a strong “anchor”, that is, a person on whom you can rely and who will help you avoid a shameful defeat. But even a person with incredible strength will not be able to defeat a single team of people working together and in concert to pull the other end of the rope. The same can be said for cascading. Your fulcrum should be the top-level BSC, which is a complete illustration of the strategy of the enterprise as a whole. But no matter how compelling this story may be, you cannot do it without the commitment and effort of every single employee working in unison at every level of the company to achieve material success. Cascading a balanced system provides the ability to anchor, creating additional power and knowledge throughout the process, and ultimately helps unite the organization towards a common goal and unite all employees in the pursuit of effective strategy implementation.
Self-test questions
1. Before starting cascading the BSC, were we able to develop implementation principles, paying attention to:
– terminology of components;
– number of goals and indicators;
– use of general corporate purposes?
2. Have we made enough efforts to disseminate information about the content of the top-level BSC among the organization’s employees? Were they able to gain an understanding of the system before developing cascaded systems?
3. Have we developed a process for assessing cascaded balanced scorecards, taking into account the following elements: - adherence to agreed cascading principles, - the impact of goals on lower-level balanced systems, - an acceptable number of goals and indicators, - appropriate coverage of corporate-wide goals, - a combination of leading and lagging indicators indicators?
Notes
1. Paul R. Niven, Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Result s (New York, NY, John Wiley & Sons Inc., 2002).
2. David P. Norton and Randall H. Russell, Best Practices in Managing the Execution of Strategy, Balanced Scorecard Report, July-August 2004, p.3
3. Some fragments of this part are taken from: Paul R. Niven, Balanced Scorecard Step by Step for Government and Nonprofit Agencies(New York, NY, John Wiley & Sons Inc., 2003).
Basic principles of the BSC
The effectiveness of the balanced scorecard depends on the quality of its implementation. The implementation of the BSC is carried out in four stages:
preparation for the development of the BSC;
development of BSC;
BSC cascading;
control over strategy implementation.
Preparation for the development of the BSC
At the stage of preparation for building a BSC, it is necessary to develop a strategy, determine prospects and make a decision for which organizational units and levels need to develop a BSC.
It is important to always remember that the BSC is a concept for implementing existing strategies, and not for developing fundamentally new strategies. It is necessary to first complete the development of the strategy, and then begin to create a balanced scorecard.
When determining the divisions for which the BSC will be developed, the following must be taken into account: the more divisions of the enterprise are managed strategically with the help of one BSC, the better it is possible to cascade (decompose, transfer) important goals from the top level to the lower ones.
One of the important activities in preparation for the development of a BSC is the selection of prospects. Consideration of different perspectives when forming and implementing strategy is a characteristic feature of the balanced scorecard concept and its key element. The formulation of strategic goals, the selection of indicators and the development of strategic activities from several perspectives are designed to provide a comprehensive review of the company's activities.
Companies that formulate their strategy too one-sidedly do not necessarily deviate only towards finance. There are companies that are too customer-oriented and forget about their financial goals. Some companies may be overly focused on their business processes and do not pay attention to market aspects. Equal consideration of multiple perspectives avoids such imbalance.
So, the initial prerequisites for the development of the BSC are:
BSC prospects;
an informed and motivated senior management team;
a strategy that is “mature” for developing a BSC.
BSC development
At this stage, the BSC is developed for one organizational unit. This could be the company as a whole, a division or department.
In this case, the development of the BSC is carried out by performing the following steps:
specification of strategic goals;
linking strategic goals with cause-and-effect chains - building a strategic map;
selection of indicators and determination of their target values;
determining the relationship between indicators and business processes;
development of strategic activities.
Strategic goals have the status of decisive and key goals of the company. In order to plan and ensure the process of achieving goals, corresponding financial and non-financial indicators are developed for each of them, according to which, in turn, target, planned and actual values are determined. The implementation of strategic measures is intended to ensure the achievement of the developed goals. For each strategic measure, the timing of its implementation, budget and clear responsibility are determined.
The result of this stage provides a common understanding of the strategy and is the starting point for continuous monitoring of the implementation of the strategy. Only after informing the organization about the BSC, transferring goals to lower levels (cascading), creating an adequate planning and reporting system and adapting systems for leadership and motivation of employees, the BSC becomes a management concept.
At the stage of developing the BSC, it is necessary to take into account that strategic goals, and not their indicators, form the core of a balanced scorecard. The best metrics are useless if the underlying objectives do not adequately describe the strategy that leads to sustainable competitive advantage.
Cascading BSC
Cascading leads to an increase in the quality of strategic management in all organizational units involved, since goals and strategic activities from higher-level units can be consistently transferred to the BSC of lower-level organizational units - this is vertical integration of goals (see . 3). This increases the likelihood that the strategic goals of the entire enterprise or large divisions will be achieved.
When cascading, the strategy specified in the corporate BSC (Fig. 1) applies to all levels of management.
Figure 1. Example of a corporate-level strategy map
Strategic goals, indicators, targets and improvement actions are then specified and adapted across business units and departments. Those. The corporate BSC must be linked to the BSC of divisions, departments and individual work plans of employees. Based on the BSC of its division, each department develops its own BSC (Fig. 2), which must be consistent with the corporate BSC.
Figure 2. Procurement Department Strategic Map
Then, with the participation of the department head, each employee develops his own individual work plan. This plan is more focused on achieving tangible results in the workplace rather than focusing on assignments or improvement activities.
Figure 3 shows the cascading of the BSC, the implementation of which establishes a bridge between successive levels of the organizational hierarchy. At the same time, corporate strategy consistently moves downwards.
Figure 3. BSC cascading process
The level of detail in the top-down decomposition of balanced scorecards depends on the organizational structure and size of the company. Each division includes in its system of indicators only those tasks and performance indicators of the general (corporate) BSC that it influences.
Strategy execution control
You should not define too many strategic goals for the corporate level of the organization. A maximum of 25 targets will be enough. The same number of goals should be focused on when designing strategic maps for departments.
It is necessary to select the most important goals based on the following criteria:
Goals must be measurable.
You can influence the achievement of goals.
Goals are acceptable to different groups of people in the organization and are consistent with the overall purpose of the organization.
Too many goals in the scorecard indicates an organization's inability to focus on what is important, and also means that the goals formulated are not strategic for the organizational level at which the scorecard is being developed. The development of tactical and operational goals should be given attention in the indicator systems of units at lower levels of the organizational structure.
Linking strategic goals with cause-and-effect chains
Determining and documenting the cause-and-effect relationships between individual strategic goals is one of the main elements of the BSC. The established cause-and-effect relationships reflect the existence of dependencies between individual goals.
Strategic goals are not independent and isolated from each other; on the contrary, they are closely related to each other and influence each other. Achieving one goal serves to achieve another, and so on, until the main goal of the organization. The connections between different goals are clearly visible through the cause-and-effect chain. Those that do not contribute to the realization of the main goal are excluded from consideration.
The cause-and-effect chain is a convenient tool for bringing the BSC to lower organizational levels. A strategic map is used to graphically display the relationship between strategic goals and prospects.
Selection of indicators and determination of their target values
The indicator is a measure of the degree of achievement of a strategic goal. The use of indicators is intended to concretize the system of goals developed during strategic planning and make the developed goals measurable. Indicators can only be identified when there is clarity about the objectives. Selecting appropriate metrics is a secondary issue, since even the best metrics will not help a company achieve success if the goals are not formulated correctly. It is recommended to use no more than two or three indicators for each of the strategic objectives. Moreover, the total number of indicators in the BSC should be 100-200, no more. About 80% of all indicators should be non-financial.
The optimal ratio of the number of indicators for the purposes of each of the perspectives on the strategic map is the following ratio:
Finance- 4-5 indicators (22%);
Clients- 4-5 indicators (22%);
Internal business processes- 8-10 indicators (34%);
Education and development- 4-5 indicators (22%).
Without target values, indicators designed to measure strategic goals are meaningless. Determining target values of indicators causes difficulties not only when developing a BSC. The fundamental difficulty in determining the target value of a particular indicator is to find a realistically achievable level.
As a rule, the BSC is developed for a period corresponding to the long-term strategic planning period (3-5 years). In this case, target values for the long-term period are determined from deferred indicators. However, the implementation of the strategy is carried out continuously, so it is necessary to have indicators that would diagnose the tendency of movement towards the intended goal at a given specific moment - leading indicators. The introduction of intermediate indicators allows you to assess the speed of approach to the intended goal.
The content of short-term plans is detailed by periods (quarters, months, weeks, days) and expressed in the form of planned indicator values. Indicators and their target values provide management with timely signals based on deviations of the real state of affairs from the planned one, i.e. The actual quantitative results obtained are compared with the planned ones.
Determining the relationship between indicators and business processes
As mentioned above, an indicator is a meter that shows the degree to which a goal has been achieved. However, it is also a means for assessing the effectiveness and efficiency of a business process. Indicators in the BSC serve both to assess the effectiveness of business processes and to assess the degree of achievement of the goal at the same time.
Definition of strategic activities
In cases where strategic goals cannot be achieved through regular activities (within the framework of the company's business processes), the achievement of strategic goals is carried out through the implementation of relevant strategic activities. "Strategic activities" is a general term for all activities, projects, programs and initiatives that are implemented to achieve strategic goals.
Distributing a company's projects according to the goals of a balanced system creates clarity in understanding how a particular project contributes to achieving strategic goals. If projects do not make a significant contribution to achieving the strategic objectives, they should be reviewed to see how they contribute to the achievement of the underlying objectives. If a particular strategic measure does not make a significant contribution to achieving basic goals, then the need for its implementation is extremely doubtful.
Collection, assessment and analysis of information on the implementation of the strategy
Implementation of a BSC is a process that requires significant time, part of which is spent on debugging the system and its support. To improve the BSC, top management and those in charge must constantly analyze and evaluate the organization's activities.
Strategic objectives are characterized by a high degree of relevance to the company, and this relevance should be assessed at least annually. In this case, it is necessary to evaluate:
Are the selected indicators suitable for assessing the degree of achievement of the developed goals?
How easy is it to calculate indicator values?
Have the structural units achieved the target values of the developed indicators?
Have the target values of corporate goals been achieved?
What contribution does the structural unit in question make to achieving the goals of the upper levels?
The assessment of indicators consists, first of all, in understanding the possibility of calculating the actual value of the indicator based on the data of the reporting period. In addition, it is necessary to carry out plan-actual comparisons based on the values of the developed indicators with clarification of the reasons for deviations. Such an analysis is accompanied by either an adjustment to the target value of the indicator, or the development of corrective measures aimed at achieving the previously established target value.
The lower-level BSC should always be assessed to help achieve the higher-level goals.
In addition, it is advisable to predict target values of indicators for a long period of time.
Activities must also be analyzed, namely, it is necessary to evaluate:
Were all activities implemented according to the approved plan?
Were the time budget and financial resources respected?
Did the implementation of activities affect the achievement of goals?
If previously developed activities have not yet been completed, they should be completed. If necessary, new measures should be developed.
Many authors write about the miraculous concept of BSC, but few pay attention to the problems and difficulties that arise in connection with their implementation. Organizations embarking on Balanced Scorecard implementation must be aware of the many pitfalls that are encountered in projects of this size and have the tools to overcome these challenges. Quite serious problems can arise at any stage of the project. It is important to be able to identify them and know how they are resolved. This is the only way a company can avoid disappointment in BSC technologies and take full advantage of its capabilities. Let's look at some examples of similar problems that arise at various stages of the project.
The main list of problems is presented below that need to be taken into account when implementing the BSC:
- Lack of convincing arguments for company employees why it is necessary to implement a BSC in the company. It is necessary to explain to the staff what is required of them. Since resistance to change is a very important obstacle in any endeavor and new idea.
- Lack of connection between the company's strategic goals and the performance indicator system.
- Imbalance of indicators and concentration only on the financial aspect of the company’s activities
- Imbalance of long-term and short-term goals
- Insufficient awareness of employees about the goals of project implementation and the principles of the BSC
- Perceiving the project as not important enough and turning the BSC into a ritual of low significance
- Insufficient support from management
- Weak connection with the operational control system
- Source:
Book “Implementation of a balanced scorecard: assessing the company’s performance”
Authors: Nemirovsky I., Starozhukova I.
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Lack of motivation
The most common cause of failure is not poor design, but poor implementation. There are at least seven reasons that create this problem:
- Lack of interest from top management
- Too few project participants
- Only top managers participate in the development of the BSC
- Development process is too long; BSC is not a one-time event
- Vision of the BSC as a system project
- Services of unqualified consultants
- Introduction of the BSC only for material compensation
- Lack of organizational and functional structure
Lack of interest from top management
Perhaps the greatest risk of failure exists if the project is entrusted to a mid-level team. A clear symptom is observed when it begins to be viewed as a project to develop operational performance measures. Often middle managers take part in long-term business process improvement programs, for example, an integrated quality management program, and the BSC is considered their logical continuation. Although the BSC is compatible with total quality management, putting it on the same level as a quality improvement project means missing out on the enormous opportunities inherent in it. These are not just operational improvements, but the potential for strategic focus and alignment. Quality improvement programs help you do the right thing. Strategy also helps you take the right actions. Middle managers can help a company improve existing operational processes. But restructuring and bringing the entire organization into strategic alignment is the task of top managers.
The interest and commitment of senior managers is necessary for many reasons.
They are required to formulate the organization's strategy. Typically, few senior managers fully understand the company's strategy. Consequently, they are unable to reflect it in the BSC. Only top managers have the authority to make decisions and compromises for the sake of effective strategy. They are unlikely to delegate to their subordinates the responsibilities associated with selecting customers and target market segments, as well as defining a customer value proposition that will attract, retain and grow the customer base. Without appropriate knowledge or decision-making power, middle managers are unable to develop a BSC that reflects the company's strategy. Leadership from senior managers is needed precisely when there are major disagreements about strategy. In this situation, the business unit director will have to make quick decisions as negotiations on strategic goals and objectives reach an impasse.
But during the period of drawing up an effective BSC, the manager is required to have knowledge and authority, as well as interest and commitment to the project. Top managers must invest their time in the project - part of it is spent on personal meetings with members of the development team, and part of it - more important - on holding meetings with senior management, where strategic goals are discussed, their indicators and cause-and-effect relationships are identified. It is at these meetings that a sense of commitment to strategy and the management process through which a strategy-oriented organization is built occurs.
Too few project participants
In some companies, the top manager himself draws up the BSC. Instead of being the project leader, he does the work of the whole team based on two assumptions.
First, the senior management team is already too busy studying the flow of initiatives coming from employees and performing current duties.
Secondly, having analytical skills and deep knowledge of strategy, he will undoubtedly be able to independently develop a BSC.
Of course, he copes with the task brilliantly. Its BSC reflects the strategy and maintains a balance of results and factors for achieving them.
However, it was later discovered that nothing had changed in the company. Because commitment to strategy and its implementation requires the active participation of all members of the top management team in the process of defining goals and indicators of the BSC. Otherwise, their attitude and behavior will not change. If people say they have to attend too many meetings, then the project leader should use each one to discuss the BSC. It is those organizations that hold too many meetings that need a BSC!!
At the same time, it is important to determine the optimal number of participants in which a constructive discussion and achievement of agreement are possible.
Only top managers participate in the development of the BSC
Another common mistake is to involve only the company’s management in the development of the BSC. In order for the BSC to be effective, all employees of the company must know and understand it.
When the BSC is disseminated among employees, there are opportunities for initiatives to promote knowledge sharing and training in key business processes. If a company does not pay attention to BSC communication, it will fail to make strategy part of everyone's daily work.
Development process is too long; view of the BSC as a one-time event
The most successful BSCs were implemented without some indicators. Sometimes up to a third of the parameters may be missing from the system during the first few months. But the document lives and develops, and the missing criteria are also gradually formulated and introduced into the BSC. Learning from experience is a powerful tool. BSC is not a one-time phenomenon, but a continuous management process. Goals, objectives, indicators, databases are constantly changing and modified.
View of BSC as a system project
The most costly failure can be considered the situation when a company implements a BSC as a systemic rather than a management project. This occurs when a consulting company convinces its client to hire its consultants to develop and install a management system based on the BSC. The next 12-18 months are spent automating the data collection and installing the interface so that managers can have a huge database on their desk. The system allows you to receive and sort huge flows of information in a variety of ways. As a result, no manager uses this. Automatic access to information is not exactly what they had in mind when creating the BSC.
Automated access to hundreds of thousands of facts or figures is no substitute for a properly compiled strategy map with identified cause-and-effect relationships between 20-30 critical variables.
An organization hiring a third party to develop a BSC is unlikely to count on the participation of top managers in this process. Therefore, not only will they not use the new information system, but they will also not change their leadership style just because they now have direct access to it.
The development of the BSC begins with a direct discussion of the strategy at the highest level of the company. IT cannot be shared with the IT team or third party. This is not a systemic process, but a management process. Information systems and technologies are effective only after the development of goals, objectives, indicators and initiatives, as well as BSC at all levels and in all business units, has been completed.
Services of unqualified consultants
You should not hire consultants who do not have experience in developing a BSC. Even if you get everything right with your BSC, you will still fail by hiring unqualified consultants.
Introduction of the BSC only for material compensation
Some companies “jump” over the stage of translating strategy into BSC parameters and introduce new non-financial indicators only to determine the amount of bonus payments. And systems that are used only to introduce non-financial indicators into the material compensation plan do not identify the connection between them and the improvement of indicators of other components. Material incentives cause improved financial results only when they are based on strategic BSCs, and not on a system of key performance indicators.
Lack of organizational and financial structure
The absence of an organizational and financial structure of the company will not allow efficient and effective management of the activities of any company.