How is the process approach useful for using the balanced scorecard?

Domestic companies use the BSC (balanced scorecard) approach to specify strategic goals, taking advantage of the method to clearly show the logic of connections between goals in the company’s strategic map (easy-to-read strategy maps). At the same time, there are many problems in using the BSC approach in practice, and these problems are usually the same in different companies and can be classified, “put on shelves”. The article will consider some of the typical problems of using the BSC, the impact of which can be leveled by using the process approach in management practice:

1. Incorrect formulation of goals in perspectives 3 and 4 of the strategic map (processes, training and development)
2. Incorrect indicators (including incorrect algorithms for calculating the fact) in the 3rd and 4th perspectives of the strategic map (processes, training and development)
3. Incorrect reasons for including goals and indicators in the prospects of the strategic map
4. Options for understanding balance

Typical problems of applying the BSC in practice

1. Incorrect formulation of goals in perspectives 3 and 4 of the strategic map (processes, training and development)

Of course, this problem manifests itself for various reasons in all perspectives of the strategic map, not only in 3 and 4. The reasons may be that:

• there is no understanding of how to formulate goals; for example, the rules (requirements) for how to formulate a goal are not fixed;
• or, on the contrary, the question “how to formulate goals?” seems so trivial that it is not worth wasting effort on such a simple question.

But most often, it is in the 3rd and 4th perspectives of the strategy map (processes, training and development) that incorrect goal setting is allowed. As a result, if the requirements for the quality of goal formulation are not fixed, all variants of “goals” are reflected in the company’s strategic map (examples taken from practice):

One of the reasons for incorrectness is that the company does not know its processes, or does not use the process approach, but at the same time implements the goal-setting approach based on the BSC. In this case, the “failure” occurs precisely in the 3rd and 4th perspectives of the strategic map.

The goals were “inserted” into the company’s strategic map, but things didn’t go any further, as problem No. 2 began to operate.

2. Incorrect indicators, incorrect algorithms for calculating the fact

Accepting a goal with an unclear formulation starts a chain reaction: the more “cloudy” the goal is formulated, the more “cloudy” the indicators are selected. The more “cloudy” the indicators, the more “cloudy” the algorithm for calculating the actual values ​​of the indicator and calculating the % of achievement of the target value is determined. As a result, a system of goals and indicators built in this way causes disappointment and other negative emotions.

A typical problem is that they accept an indicator that looks like it is “calculable” and informative for decision-making. But in practice, “suddenly” it turns out that the algorithm for calculating the fact of the indicator contains subjective evaluation criteria, the subtleties of definitions are not taken into account, and exceptions are not taken into account. If there are no agreed evaluation criteria, the algorithm for calculating the fact of the indicator will rather hide problems and make a pretty picture than talk about deviations that can be responded to.

For example, if there are no criteria defining what is considered a customer complaint, then the calculation of such a simple indicator as “number of customer complaints” will be performed with variations from period to period, and will depend on the interpretations of the responsible person, depending on the weight of the indicator in the motivation map.

Let’s consider another example. If the criteria and standards for delivery by order types and customers are not defined, then the question of which orders are considered to be delivered late will also be carried out with variations, since the head of the logistics department, as an option, can “renegotiate” the delivery time of the order to the client. In this case, what time will the head of the logistics department consider planned, what deviations to measure, if this indicator affects the bonus payment?

Also, a situation often occurs when an indicator is accepted for work (the indicator is included in the business plan, in the employee’s KPI card), but there is no approved algorithm for calculating the fact and the task is set – to develop an algorithm within a certain period. More often than not, nothing good comes of this. Indicators with missing or unclearly defined calculation algorithms are removed from the KPI system, as a rule, at the end of the reporting period, preferably without negatively affecting the variable part, and another attempt is made to invent a calculation algorithm for the next reporting period.

3. Incorrect grounds for including goals and indicators in the prospects of the strategic map

The question, “In which perspective of the strategic map should this or that goal, measured by such and such an indicator, be included?” can turn into a battle of tastes and opinions between the heads of different departments if the company has not clarified its own rules for working with the strategic map.

The structure of the content of the strategy map (Figure 2. The structure of the content of the strategy map (Norton, Kaplan)) gives a general idea of ​​what goes where, but it is difficult to follow these general recommendations in practice.

In the life of companies, there are “simple” solutions to this issue, when the decision is left to the discretion of the relevant functional managers based on the functional similarity of the perspective of the strategic map and the position:

• the “finance” perspective – the financial director decides which goals and indicators to include in it,
• the “clients” perspective – decided by the marketing director, commercial director,
• the perspective of “business processes” is decided by the IT director,
• The perspective of “training and development” is decided by the HR director.

It is difficult not to slide into a functional distribution of work according to the company’s strategic map if a separate coordination center in the form of strategic development or organizational development is not allocated.

Let’s look at examples of problematic issues from practice, when it is not always possible to find the correct solution.

“Finance” or “Results” Perspective

In the perspective “finance, results” do we include goals measured only by financial indicators? Or by non-financial indicators as well, characterizing the result of the company’s activities, for example, “market share” (in value terms)? Or, since the indicator “market share” is measured by means of marketing analytical tools in the marketing department, should it be reflected in the perspective “clients”?

The “customers” perspective, sometimes called “marketing”:

Let’s take an example with the indicator “% of assortment renewal” and the variants of goals, the achievement of which can be measured by this indicator. Since the assortment is one of the “P” areas – product, the indicator is directly related to the goals in the “marketing mix” area (as an option, the traditional “4P” – product, place, price, promotion). Accordingly, the goal “to improve the assortment” with the indicator “% of assortment renewal”, we include in the perspective “customers”?

Or would another solution be optimal – to formulate the goal of “increasing the efficiency of assortment management” and, together with the “% of assortment renewal” indicator, to include it in the “processes” perspective?

The “processes” or “internal business processes” perspective:

At least for the reason that the client is neither cold nor hot, from what % of the assortment the company decided to update, the above-considered indicator “% of assortment update” can be attributed to the goal of the perspective “processes”, “increase the efficiency of assortment management”. The goal will be aimed at improving the assortment management process.

The learning and development perspective, or “potential”:

In this perspective, in practice we most often reflect goals and indicators related to the field of personnel management (recruitment, training, motivation):

• goals: to increase the level of competence, improve motivation and staff satisfaction;
• indicators: turnover, % staffing, level of competence, level of motivation, staff satisfaction;

The indicator “personnel productivity (revenue/average headcount)” – do we attribute it to the perspective “training and development” (since we attribute the goals in the field of hiring and planning the number of personnel to this perspective)? Or to the perspective “finance”, since we use the company’s revenue to calculate this indicator? Or depending on the goal (strategy)? If the goal is “to increase business efficiency”, then to the perspective “finance”, and this indicator can be pulled up to it. And if the goal is “to increase the efficiency of personnel management” – then to the perspective “training and development”? or to the perspective “processes”, since personnel management is also a group of business processes?

4. Options for understanding balance

Balance is the central concept of the BSC methodology. The 4 perspectives in the strategic map are selected and arranged in such a way that at the upper “qualitative” level they already balance the company’s strategic goals among themselves according to the “bottom-up” perspectives:

• achieving the goals in the perspective of “training and development” should ensure the achievement of the goals in the perspective of “processes”,
• achieving business process goals should ensure achieving the goals of the “clients” perspective,
• similarly, achieving the goals of the “clients” perspective should ensure achieving the goals of the topmost “finance” perspective

For business development, it is important that the goals and indicators of both the company and the managers of all departments are aligned with each other.

The topic of balance in the article will be revealed through questions, the answers to which are the topic of a separate article or a separate project.

The alignment of goals at the top level of the company, on the strategic map, is visualized by arrows “bottom-up” – will this visualization method solve the problem of balancing indicators? Calling arrows between goals a reflection of cause-and-effect relationships (in practice, this is too loud a statement, rather these are probabilistic assumptions about achieving goals according to the “if, then” principle.

How does the balance of goals in a strategy map relate to the balance of budgets (income and expenditure budget, cash flow budget, balance sheet, including budgets for investment projects, stratex)? What if at the initial planning stage the goals are “balanced” with each other by arrows, and the budgets at subsequent balancing stages are cut so that the goals are at risk of not being achieved due to a lack of resources?

What will we get from the correlation of the statistics of the actual values ​​of the “staff satisfaction” indicator with the statistics of the actual values ​​of the “customer service quality” indicator? And further, the correlation of the statistics of the actual values ​​of the “customer service quality” indicator with the statistics of the actual values ​​of the “customer satisfaction” indicator? And is it necessary to correlate non-financial indicators with each other, invest money, resources, computing power to find an answer to this question?

Is there a connection between the balance of indicators in the BSC approach and the balance of indicators through the process approach, according to the inputs and outputs of processes?

BSC approach and process approach

The BSC methodology does not “hang in the air” in isolation from other management technologies and methodologies, and a greater effect can be obtained from the systematic planned development of several mutually supporting management technologies. The process approach is recommended to be coordinated with the BSC approach through the main groups of process indicators, which we will consider below in the article. Using the process approach will help solve a number of problems in the application of the BSC:

1. Defining correct goals and indicators in the strategic map, especially in the “processes” perspective (for the most important business processes for the company’s competitiveness);
2. Conducting a correct decomposition of company-level indicators down the organizational structure into divisions, taking into account the decomposition of processes into subprocesses, the owners of which will be the heads of divisions.
3. Coordination of indicators of departments with each other on inputs and outputs of processes and relationships between departments as “internal client – ​​internal supplier”;

Any of our activities in the company can be attributed to either processes or projects; other forms of activity are not observed. Initially, at the basic level, indicators are divided into two groups – process or project. The authors of the BSC approach do not reflect projects (initiatives) in the strategic map, but put them separately in the “goals x projects” matrix, which is formed to analyze support for achieving goals and indicators through the implementation of projects (initiatives). All goals and indicators reflected in the prospects of the strategic map are quite process-based in nature. To explain the idea, it is necessary to take a closer look at the main components of the business process.

Process Indicator Groups

We define groups of process indicators based on a fundamental understanding of how a business process is structured (Figure 3. Business process management diagram – the process management diagram was taken and modified from the book by V.V. Repin “Business Processes. Modeling”).

In accordance with the constituent elements of the business process, we define the following groups of process indicators:

• Group 1 – process result indicators (outputs),
• Group 2 – indicators of customer satisfaction with the quality of the process result,
• Group 3 – process input indicators
• Group 4 – process resource indicators (process infrastructure)
• Group 5 – process implementation indicators

Working with all the main groups of process indicators will provide us with a complete process analysis, help us conduct an analysis from all sides, and systematically approach the task of developing process indicators.

Examples of indicators by process groups:

Alignment with BSC Strategic Map perspectives

If we compare the groups of process indicators highlighted in the process diagram (Figure 2. Basic diagram of the business process (V. Repin)), with the perspectives of the strategic map, we can determine the correspondence between them as follows:

The established correspondence of prospects to process indicators can be used in different ways in practice, when forming a strategic map at 2 levels:

1. at the company level,
2. at the department level

At the company level, the strategic map reflects the most important goals, indicators, and processes from the point of view of strategy implementation. Correspondence of prospects to groups of process indicators is possible within the framework of a “theme”, a group of goals united in a vertical chain. Let us consider an example of goals and indicators for the company level :

The infrastructure of the customer service process, in turn, is the result of the personnel training process (Figure 3. Business process management diagram). Thus, it is possible to build a logical chain of indicators and goals based on a certain category of processes (Norton and Kaplan designate these logical vertical chains as “themes”).

Sometimes in practice it is necessary to solve the problems of forming strategic maps for organizational units. In this case, it is also possible to develop process criteria for grouping goals and indicators by the prospects of strategic maps at the unit level. In this case, an analysis of process indicators is carried out for those processes whose owner is the head of the unit.

How can developing your own rules within a company to establish a correspondence between groups of process indicators and the prospects of the strategic map be useful?

1. Understanding the rules and sources for selecting indicators. Instead of inventing indicators or mechanically transferring other companies’ “best practices” from available KPI databases, it is recommended to develop the company’s own critical processes in more depth. This will allow for the formation of higher-quality strategic maps, especially in terms of selecting indicators for the goals of the “processes” and “training and development/potential” perspectives.
2. Formation of decomposition of indicators from the company level down to the level of department heads. Since in practice it is not always possible to maintain the correspondence between the zones of authority of employees and the indicators that they actually influence during decomposition. Very often in practice a “pseudo-decomposition” is performed, when indicators from the company level are simply duplicated at lower levels, despite the fact that the level of authority is already completely different, significantly less than the level of authority of top management. The optimal way to decompose company-level indicators down the organizational structure is to decompose processes into subprocesses, analyze the indicators of subprocesses, and then select the corresponding indicators of subprocesses in the KPI cards of middle management employees.

It is important to consider the work on the formation of strategic maps, indicator maps, and process maps of the company as the accumulation of the company’s own knowledge in an ongoing cycle of annual revisions, updates, and actualizations. The desire to get an ideal result from the first attempt at using any management tool is an illusion. But investing in personnel competencies and knowledge management will allow you to find the optimal solution. KPI system management tools, as well as process model management tools for the company, and regulatory and methodological documentation for the company, allow you to form corporate knowledge management centers. And the better the processes and process indicators are developed, the greater the chances of forming correct strategic maps, goals, and indicators.

Resume

1. Each company interested in improving corporate management technologies is recommended to develop its own goal-setting rules (based on the BSC or KPI): how to formulate a goal, how to select indicators measuring the achievement of a goal, how to develop an algorithm for calculating the fact of an indicator, etc.
2. To select indicators that measure the achievement of goals in the strategy map, it is important to analyze significant processes and use appropriate process indicators.
3. To balance the indicators of departments, it is recommended to use the coordination of process indicators for the inputs and outputs of processes of related departments.
4. It is recommended to use automation systems for process management and management according to BSC, KPI as knowledge management centers of the company.