Balanced Scorecard: Best Practices and 10 Most Common Mistakes
Only 10% of organizations manage to successfully execute their strategy. Learn how to implement your Balanced Scorecard according to international best practices and what mistakes to avoid, so you too can become a part of that 10%.
Correctly designing and using the Balanced Scorecard (BSC) framework can provide the necessary tools to ensure that the organization keeps its focus on value-generating (strategic) activities to generate sustainable results over time. In other words, it allows executives to make the necessary changes at the right times and manage their subsequent performance and impact on the organization.
On average, the organizations that have implemented this framework properly perform at least 50% better than their main competitors. However, not everything is smooth sailing; many organizations fail when trying to implement their BSC framework.
These are the 10 most common mistakes they make, as well as the best practices that can counter them.
1. Leaders show a lack of commitment
Any new approach to strategy or performance management within an organization requires the CEO and his executive team to exhibit a strong and active engagement and commitment in order to be successful. Their lack of participation in any of the BSC implementation phases would almost inevitably lead to failure.
As a matter of fact, if the company’s leaders are not fully convinced of the BSC and strategy management methodology, the organization should not proceed with its development and implementation altogether.
Best Practice: Ensure executive leaders are committed and convinced of the BSC framework and of the benefits it offers before starting to develop it.
2. Developing the Balanced Scorecard for reasons other than those related to improving the organization’s performance
If the organization is adopting the BSC as a fad, or just to have a variable compensation scheme or to seem innovative to an outside audience, it would be advisable to stop.
The BSC is designed to provide companies with a tool and a process to improve their practices; it is a tool that facilitates improvement efforts focused on a goal and the investment of resources and allows for an efficient development of the company’s strategy. Organizations that try to implement the BSC for reasons other than these quickly face resistance from managers and employees as they see it as a passing trend.
Best Practice: Make sure that the BSC is being implemented in your organization for the right reasons.
3. Keeping the strategy at executive levels
While this can be mitigated to some degree through communication activities, the lack of lower-level involvement in the BSC’s development can greatly contribute to the framework’s failure in an organization. Remember that the strategy has to be understood and executed most significantly by front-line employees (or those in direct contact with the client).
Best Practice: Cascade the strategy to all levels of the organization and ensure employees are involved in the BSC creation process. This will result in a much higher quality product and contribute to having your personnel more committed to the strategy’s execution.
4. Not establishing clear links between the Balanced Scorecard metrics and strategic objectives
A BSC that is not clearly linked to the strategy is only a collection of indicators that management and employees can view as unhelpful, non-informative, and ultimately irrelevant. This irrelevance translates into the Balanced Scorecard’s failure.
Best Practice: Clearly link indicators to the company’s strategic objectives to maximize the BSC’s value as a tool for managing the strategy.
5. Forgetting that the Balanced Scorecard is a tool to measure business strategy
The BSC provides feedback on business strategy performance for management, employees and shareholders. It is a tool that measures operating performance and, therefore, should not be expected to include a host of operational measures.
We recommend using one or two indicators per strategic objective. Indicators should reflect the objective’s nature and should be measured based on these. This means that indicators give us an overview of any problems within the company and, when needed, encourage a deeper search (usually using operational measures) for specific issues.
Best Practice: Select indicators that reflect the objective’s intention and help you to closely monitor its performance.
6. Not focusing on the strategy or what is really important
A good BSC comprises a set of indicators (16 to 32 at the most), as well as strategic targets associated with these. This allows leaders to focus on the most important elements of the organization’s strategy.
However, many scoreboards comprise too many indicators and no strategic objective. Although it is common that at first there is too much information, organizations must refine and revise their BSC eventually to be practical and useful. Balance Scorecards that do not focus on the vital elements are difficult to understand and use because of an information overload and the lack of association with the business strategy, ultimately leading to the BSC’s failure in the organization.
Best Practice: Keep it simple. When creating and maintaining the BSC, focus on the company’s core business and foundations.
7. Thinking that is a static process
Statistics show that at least 30% of the initial strategic indicators change during the first year of using the BSC. This is because many of the indicators that were thought to be good ideas at the time, do not actually indicate what is needed and others, that are were thought useless at first, prove to be great sources of strategic information.
The key is to test the indicators by themselves for a short period of time (usually 3-6 months) and quickly discard those that do not fit the company’s strategic needs. Keeping weak indicators in the BSC just for the sake of data development is a quick step to its failure.
Best Practice: Executives should view strategy management as continuous process to constantly test, purge and innovate the indicators.
8. Using the Balanced Scorecard results to "punish results not achieved"
Although it is tempting, those responsible for results not achieved should not be punished because of the indicator’s trend. Indicators’ negative tendencies are likely a consequence of systematic problems or organizational processes and not the result of an individual’s performance. Taking these types of retaliations can lead employees to hide negative results at all costs.
A good leader should understand that the performance indicator provides the organization with an opportunity to focus on strategically important issues that require attention and resource investment to achieve the expected results. The main concern should be not having the root cause of the problem correctly identified and analyzed or not implementing any necessary corrective actions.
Best Practice: Build a culture that focuses on sharing, discussing and resolving poor performance issues in an open and constructive way.
9. Not assigning resources for the Balanced Scorecard’s continuity
Many organizations implement the BSC methodology as a one-time project; they assign a project leader to manage the entire development process of the BSC from beginning to "end". Once the BSC is implemented, they do not formally allocate resources to support its administration.
It is very important to be aware that, in order for the BSC to work best, it should be managed like any other ongoing process within the organization. It should have an executive leader, a manager and a tool administrator, roles that should be assigned from the beginning.
Best Practice: To ensure the BSC’s continuity it is necessary to assign roles and resources from the beginning.
10. Not communicating or sharing Balanced Scorecard results to the width of the organization
The BSC should be used throughout the organization. This is the only way they facilitate an integrated and dynamic management strategy. Many organizations make the mistake of leaving the BSC at a corporate level only.
Successful organizations involve their shareholders and employees at BSC result meetings and discussion forums and communicate their BSC widely, both internally and externally. Also, these organizations permeate the BSC framework to many processes. In doing so, organizations make the BSC a central theme of their daily activities instead of a list of operational measures.
Best Practice: Instill the strategy through the BSC, as the center and head of the organization and business processes.
Implementing a strategy execution framework will inevitably improve the way the organization is managed. This, although necessary, can be a difficult process because it implies breaking with existing paradigms, which can cause disruptions, discontents and more than one headache if not done correctly. At TRISSA we can help you implement the BSC in a way that is easy, fast and complying to international best practices.
We provide our customers the insights, tools and expertise needed to help them clarify their strategy, translate it into operational terms and monitor it to ensure it is implemented effectively.
So go ahead, browse our webpage and get to know us better, or send us an e-mail; our consultants would be delighted to answer any questions you may have: email@example.com
Author: Trissa Strategy Consulting
Source: Richardson, Sandy. "The Top 10 Reasons for Balanced Scorecard Failure in Organizations." n.d. Jetrichardson.ca. December 2012.