Typical Balanced Scorecard Pitfalls and How to Avoid Them

There are a number of typical problems that a company’s strategist faces when implementing the Balanced Scorecard framework. Those pitfalls were widely discussed on LinkedIn and it seems that everyone agrees on why those are problems and how to avoid them. But when it comes to identifying and fixing those issues in our own business then it appears to be a tough task. With this article I’d like to start a systematic discussion of typical problems, the ways to diagnose them, and of course, the ways to solve them. I’m sure you have something to add, so feel free to share your thoughts in the comments.
Typical pitfalls of the Balanced Scorecard and instructions to diagnose and avoid them

The article is divided into several parts:

Executive summary of 4 typical pitfalls

Find below the analysis of the 4 typical Balanced Scorecard pitfalls, how to diagnose, and fix them.

Pitfall 1. One doesn’t understand the difference between “Strategy” and “KPI” scorecard

This mistake is a good starting point for this discussion. We often hear from users of BSC Designer software something like that:

  • “We’ve created a Balanced Scorecard, but it doesn’t work as promoted by various institutions!”
  • “We did a scorecard, but it seems that performance management doesn’t work for our company!”
  • “Scorecard is good to track KPIs, but it helps only a little with strategy execution”

After a short review it is easy to find out that they have a “KPI” scorecard, not a “Strategy” (Balanced) scorecard. The difference is that the first is a pure measurement tool and the second is a management tool.

  • A KPI scorecard might be or might not be aligned with proper objectives and actions.
  • In  contrast, Balanced Scorecard is about alignment between business goals, actions, and measures.

Similar mistakes

  • Having too many KPIs. Most likely they are not KPIs, but simple metrics (learn the difference).
  • Having KPIs that are aligned with neither strategy nor action. Here are some best practices.
  • Believing in KPIs too much and losing the big picture of what’s actually going on. Here is a good example.
  • Having only lagging indicators. You need to have leading indicators as well.
  • Having financial KPIs only.
  • Not using strategy map with cause-and-effect connected objectives.

Diagnosis of the mistake:

  • Review the “Similar mistakes” section to find out if something can be applied to your scorecard.
  • If your business scorecard consists of KPIs only, then you have KPI scorecard, not a Balanced Scorecard.

Solution to the mistake:

  • You need to shift from measuring to managing. Think about  how your strategic goals are linked to specific objectives. What are you going to do to achieve them (you action plan)? How are you going to measure the process and the results (KPIs)?
  • Read “The Strategy Focused Organization” [1] to learn the benefits of a strategy scorecard compared to a KPI scorecard.

Pitfall 2. Promoting silo thinking

Ideally, strategy should be everyone’s job in the company. In  practice we see that many promote “silo thinking.” Instead of discussing strategy and finding the best way to execute it and track the execution progress, top managers tend to isolate strategies from each other and from their employees. They want people to see only their part of the job, and as a result, it is not a surprise that strategy is not executed properly.

Similar mistakes

  • A Balanced Scorecard that you have is used exclusively by top managers
  • The Balanced Scorecard was prepared exclusively by top managers without working with those who will execute this strategy
  • Poor vertical alignment; according to the recent research, 54% of interviewed executives mentioned this problem.

Diagnosis of the problem:

  • Randomly select some employees in your company and ask them about the relationship between their job and the company’s objectives. Ask how they cooperate with other departments to achieve those objectives. If they know only their part of the job well and have only a rough idea about the answers to the other questions, then you are facing silo thinking problem.
  • A key test: was your excellent strategy executed properly? If not, then your strategy discussion process need to be updated.

Solution to the mistake:

  • When describing a strategy, involve not only top managers, but also those who will execute this strategy. Try adopting Catchball approach from Hoshin Kanri.
  • Make strategy everyone’s job. Translate the scorecard idea to the lower organizational levels.
  • When two departments collaborate, don’t use just a format SLA agreement. Try to align it with your strategy. For example, in the way it was described here.

Pitfall 3. Description of the bad strategy

Balanced Scorecard is not a strategy definition framework (although it provides some generic strategies); it is strategy description framework. It means that it will certainly help you to understand and describe your strategy better, but it is not a magic pill. If you have no strategy or you have a bad one, then you will just formalize your bad strategy.

Diagnosis of the problem:

  • Have a look at your strategy-related documents. Do you have a description of business challenges that you’ve been facing? Do you have an analysis of possible alternatives to address these challenges? Are these alternatives reflected on your strategy map, in your action plans, and in KPIs? If you are not sure about your answers, then it is a good idea to get back to the strategy itself.

Solution to the problem:

  • First learn to recognize “bad” strategy; Richard Rumelt’s book [2] is an excellent guide.
  • Start from scratch: what problems do you face; how do you think you might fix it; what you need to do; how you are going to track your progress. Learn from this case study.

Pitfall 4. Lack of buy-in

You have a world-class Balanced Scorecard, but the only active user is you. People tend to ignore new technologies and tools that they don’t understand. If you don’t have a buy-in from top managers and line-level employees, your Balanced Scorecard won’t work.

Similar problems

  • Low interest from top management and/or line-level employees
  • Participation of top managers only

Diagnosis of the problem:

  • Is the data in scorecard KPIs updated on time? Are business goals actualized?
  • Do employees use your strategy map when discussing some aspects of strategy?

Solution to the problem:

  • An actual solution depends on the implementation stage. If you are just in the beginning and you need to convince top managers, then show these statistics figures, as they look impressive.
  • Update your strategy discussion process as suggested in “Pitfall 2”; small discussion teams and catchball process will help to generate more meaningful ideas. The rest (the formal description of the strategy) will be much easier.
  • Solve the problem in Pitfall 3; before you can convince others, you need to have a clear understanding of the current strategy.

Why most companies still fail to implement business scorecards

Back in 2013, Intrafocus, a corporate performance management software reseller and consultancy, published “Annual Business/Balanced Scorecard Survey – 2013” where 154 senior executives answered 12 questions about their experience with business scorecards. The results of the survey show a general tendency confirmed by other sources, including what we have seen during our work with Balanced Scorecard clients at BSC Designer.

Survey results: most companies still fail to implement business scorecards

Companies are not satisfied with business scorecards and KPIs because … they use spreadsheets

This is not what  a survey reports, but one can easily draw this conclusion. Let’s have a look at question 12 “How satisfied are you with the way you measure your organization?” According to the survey 37% of respondents told that they are not satisfied. I’m curious, why this might happen? In the question 10 respondents share information about the tools that they use to manage scorecards. 67% of respondents use spreadsheets and only 19.5% use specialized performance management software.

I’m sure that in most cases this choice is actually the source of frustrations. As we discussed before, spreadsheets in MS Excel is good tool for a prototyping of the Balanced Scorecard, when it comes to bigger projects that involve more business objectives and cascading, scorecard project is getting too hard to manage. Companies made a right choice using spreadsheets for an initial phase of the scorecard project, but have not implemented adequate strategy for a project’s growth.

These who use performance management software make better strategic decisions

It might be a coincidence, but numbers demonstrate another interesting fact. As was mentioned above, 19.5% of respondents use specialized performance management software. In the question 11 authors of survey asked top managers to rate their business scorecard. According those answers, exactly the same number of respondents – 19.5% – answered that their business scorecard provides the right level of information to make strategic decisions. Other neutral and negative answers correspond in some way with the percentage of companies that use spreadsheets.

Companies overload scorecard with KPIs

Question 9 asks about how many KPIs a company has in its scorecard. 31.2% have 11-20 KPIs on their scorecards and 37.7% have 1-10 KPIs. I think the answer options for this question were not formulated well enough. There is a huge difference between a company that have just 2 KPIs and a company that have 8 KPIs. Anyway, this data gives us an idea that most companies use an adequate number of KPIs, while about 20% of respondents use more than 30 KPIs on their scorecard.

This data might be confusing because of two reasons:

  1. Companies mixed up dashboard and scorecard (learn the difference). It makes sense to have more KPIs on a dashboard to monitor the performance of key processes in the company, but it doesn’t make sense to have so many KPIs on the scorecard.
  2. Companies overloaded their scorecard with KPIs. If all the KPIs are aligned with a strategic objective, then companies are doing a great job. If there are KPIs that are not aligned or there are business objectives that are measured with several KPIs, then probably a strategy map of such a company needs to be redesigned. More about KPI best practices.

Another typical issue is that a person responsible for a scorecard just finds and copy KPIs from various sources on the Internet. This approach doesn’t work as KPIs track the progress towards business objectives. It doesn’t make sense to copy them unless the whole strategy is copied.

Balanced Scorecard is still a management tool for top managers only

We were talking a lot about how important is to involve employees in scorecard design. We were talking about the benefits of cascading of the Balanced Scorecard to lower levels of the company. In this way a company can make a management process more transparent and involve employees in actual strategy execution.

According to the question 6 of the survey, most respondents use BSC for executive reporting and strategic planning only. Fewer respondents (only 21) used scorecard in sales, and ever fewer (13) in marketing. Companies declare that their scorecard will be used across the company, but actually they face an implementation challenge and the scorecard is used by top managers only.

The same can be confirmed by answers for the question 5. Where 40.3% of respondents confirmed that scorecard has a commitment from executive management, only 18.8% responded that there is a commitment from departments, but only on the level of KPIs recording.

Scorecard is still measurement, not management tool

Answers to the question 4 reveal that for 44.2% of participants a business scorecard is still a measurement, not management tool. I was writing about this problem and how to overcome it in the article for Business2community. Again, these numbers don’t look surprisingly as long as people continue using spreadsheets as their scorecard tool. Spreadsheets don’t have many “management” parts of the scorecard, such as strategy map with connected business objectives.

Positive tendencies in the usage of business scorecard

Following my comments above it might seems that all the tendencies about the usage of business scorecards are negative and most companies still fail to implement a business scorecard and use it properly. That’s not exactly as it seems to be. Although the interpretation of survey results might not be an optimistic one, the general tendencies are positive.

Authors of the survey compared the results with results for the previous year; the usage of specialized scorecard software is growing as well as focus of companies on the usage of scorecard for progress tracking rather than just for performance monitoring.

Finally, at least 20% of companies successfully implemented performance management software products and reported a positive influence of their scorecards on the ultimate business performance.

Main take-aways and recommendations

  • Have a scorecard growth strategy. Most companies start their first business scorecard in MS Excel. It’s fine for a prototype stage, projects of a bigger scale need to be migrated to a professional performance management software like BSC Designer.
  • Know the difference between your dashboard and business scorecard. They are used for different tasks. A dashboard helps to monitor the performance of the key processes; a business scorecard helps to plan and executive business strategy.
  • Do not overload your scorecard with KPIs. A winning KPI must be in a proper business context, aligned with business objectives and action plan. Don’t copy KPIs from others unless you want to copy their strategy.

General pitfalls of strategy execution

Back in 2014 Palladium Group published their “Global State of Strategy and Leadership Survey Report” [3]. The report is based on the research conducted within 1,266 organizations worldwide. The results give an idea about the general strategy execution climate today and how executives perceive current market changes. Here are some of the key findings and short comments from me.

Top 3 strategy execution problems

1. Business model needs to be updated

  • In 72% of the surveys executives answered that their business model “will be under threat in the next five years.”

As a response to these changes it is important to understand current and new business challenges, as well as a company’s strengths and weaknesses. I’m not talking only about SWOT analysis, but about mobilizing the skills and experience of your team to map out the current situation and problems that your company deals with. It might be a top-view strategy map detailed down to the specific business objectives.

2. There is a problem with vertical alignment

Another interesting fact:

  • “54% of respondents reported poor vertical alignment.”

In other words, the translation of the strategy from the top level down to the department level is not working well enough. Besides  using the Balanced Scorecard framework, I’d recommend to have a look at the “Catchball” process from Hoshin Kanri, as properly implemented, it will reduce vertical alignment problems.

3. Choose a business tool for a strategy review

Balanced Scorecard as a strategy description and management tool is doing well. In November, 2013 I was writing about Executive’s toolkit based on the “Management Tools & Trends 2013″ report published by Bain & Company. Fresh data provided in the Palladium’s report confirms that Balanced Scorecard is in the list of the most used tools for strategy description. Here is what executives use:

  • 61% SWOT
  • 55% Financial Modeling
  • 49% Balanced Scorecard

I guess these numbers might be tricky, as people tend to call Balanced Scorecard any KPI scorecard they have, but it is clear that it is on the executives’ radars. As for the subjective perception of the Balanced Scorecard, it is scored high:

  • 72% of the users of Strategy Map and Balanced Scorecard believe that the overall quality of their strategy is strong.

Companies with Balanced Scorecard are doing much better

According to the report the Balanced Scorecard is used by:

  • 55% of high performers, and
  • 7% of low performers.

Authors of the report conclude that “organizations using the Balanced Scorecard are 7.5 times more likely to be high performing.” As I commented to Palladium’s announce on LinkedIn, the cause-and-effect connection is not clear here. The Balanced Scorecard is used by these 55% high performers, but is not necessarily the reason for their high performance. Also, as it was told above, sometimes executives tend to call any scorecard a Balanced Scorecard, including ones that are focused on KPIs only.

Still, it is clear that those high performance care a lot about following a certain strategy execution scheme and that the Balanced Scorecard plays a significant role in this. I believe some part of their success can certainly be contributed to the proper usage of the Balanced Scorecard.

Recommendations for BSC Designer users

As far as I see it from the projects that our customers send to us, they are doing well. I saw projects with well developed KPIs and good strategy maps. Two recommendations that I’d like to give are:

  • Don’t limit your strategy maps to the top level views only. It is necessary to add some meaningful description in the form of “two or three-page Word document” as strategy execution expert Jeroen De Flander suggests [4] or in the form of more detailed sub-maps, or both. With the recent update of the BSC Designer drawing and sharing process maps is now much easier.
  • Connect your strategies and scorecards even more. Make sure all of the departments know your strategic priorities, know how to achieve them and how to measure their success (see the “Catchball” paragraph in [5] for specific recommendations). Technically BSC Designer supports this alignment, but there should be a shift in how executives deal with their strategies.

Users of BSC Designer software shared some other interesting insights about managing performance with Balanced Scorecard in the case studies section.

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What do you think about these pitfalls? Have you faced any of them? How did you solve those problems? Would you like to add something to the list? Please share your thoughts in the comments.

References

  1. ^ The Strategy Focused Organization, Robert S. Kaplan, David P. Norton, Harvard Business School Press, 2001
  2. ^ Richard Rumelt “Good Strategy. Bad Strategy. The difference and Why it Matters”, 2012, Profile Books LTD
  3. ^ “2014 Global State of Strategy and Leadership Survey Report”, http://event.thepalladiumgroup.com/about/thoughtleadership/Pages/WhitePapers.aspx Palladium Group, Inc.
  4. ^ Balanced Scorecard Guide, Jeroen De Flander, 2014, http://jeroen-de-flander.com/balanced-scorecard
  5. ^ “3 ideas western executives can learn from Hoshin Kanri” Aleksey Savkin, 2014, http://www.bscdesigner.com/3-ideas-from-hoshin-kanri.htm

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Strategy and KPIs Scorecard Expert | Speaker | CEO. Aleksey Savkin (LinkedIn, @bscdesigner) is helping companies to better formulate their strategies and make the process of strategy execution more tangible with KPIs. His areas of expertise are Balanced Scorecard, Key Performance Indicators, business performance management. Aleksey is a frequent speaker at conferences; the author of a number of articles and books on Balanced Scorecard. New book by Aleksey: 10 Step KPI System

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