Balanced Scorecard and Strategy Maps - an analysis

 
Comments requested on this provisional analysis of the Balanced Scorecard/Strategy Map approach

[This is one in a planned series of analyzes of particular types of outcomes systems using insights from outcomes theory - this is a provisional analysis only and comments on its usefulness and accuracy are welcome so that it can be improved - please feel free to post any comments at the bottom of this page].

Introduction

The Balanced Scorecard system is a widely used system initially developed for the private sector by Kaplan and Norton which encourages the identification of a list of indicators for a business or organization under four headings (see Wikipedia article). The four headings are: a financial perspective; a customer perspective; an internal process perspective; and an innovation and learning perspective. The advantage of this approach is that it provides a much richer picture of the health of a business rather than just looking at the single measure of short-term profit. For instance, if a business is not maintaining or building its internal capability, the mere fact that it is making a profit in any one year may not provide a true picture of its viability. A later development of the Balanced Scorecard has been to present these indicator lists in a visual format as a 'Strategy Map'.  Not-for-profit organizations sometimes use a version of the Balanced Scorecard approach which has been modified from the version used in the private sector.

Outcomes theory analysis of the approach

The Balanced Scorecard/Strategy Map approach can be analyzed using generic concepts from outcomes theory and particularly the five building-blocks which underpin any outcomes system. Such an analysis identifies the following:

1. The Balanced Scorecard/Strategy Map approach can be seen as a type of outcomes system as defined in outcomes theory. An outcomes system, within outcomes theory, is any system which attempts in part, or whole, to deal with specifying, measuring, attributing and holding players to account for changes in outcomes of any type. Such systems go by a variety of names, including: monitoring, results management, performance management, performance measurement and strategic planning systems. It is useful to analyze them as types of outcomes systems so that their advantages and disadvantages can be examined and compared, drawing on the underlying principles for building such systems identified in outcomes theory. In particular see five building-blocks which underpin any outcomes system.

2. The list of indicators developed within the Balanced Scorecard approach can be seen as a structured indicator set as defined in outcomes theory. A structured indicator set is a list of indicators which is divided into discrete sections in order to encourage a comprehensive coverage of the possible indicators which could be measured regarding an organization, program or intervention. The headings in such a set provide prompts for whoever is developing the indicator set so that they will look for particular types of indicators (e.g. in the case of the Balanced Scorecard approach, for instance 'innovation and learning perspective' indicators as one of the four types of indicators which are identified within the approach). Such structure in an indicator set also allows those who are assessing the indicator set for its comprehensiveness to quickly identify whether it includes indicators from key domains (i.e. in this case each of the four domains identified in the Balanced Scorecard).

3. An important distinction which is made within some outcomes systems and identified in outcomes theory is the distinction between two types of indicators - not-necessarily demonstrably attributable indicators and demonstrably attributable indicators. Demonstrably attributable indicators are ones where it can be easily proved that improvements in such indicators have been caused by a particular organization, program or intervention. This distinction is particularly important in the case of not-for profit organizations where decisions have to be made about the level at which the organization should be held accountable for the achievement of improvements in indicators. The not-for-profit sector lacks the overall common metric of success which, from an outcomes theory point of view, is so useful in the private sector - maximizing long-term long-term profit. For more on the distinction between these two types of indicators see the article on the five building-blocks which underpin any outcomes system. It is not clear that this distinction is an inherent component of the Balanced Scorecard approach, although some using the system may make this distinction in some way. Making this distinction is more important in not-for-profit settings than in for-profit settings (the way the distinction is used in discussed in detail in Contracting for outcomes). [If any reader has any examples or experience with the Balanced Scorecard approach attempting to deal with this issue, please post a comment below].

4. The visualized Strategy Map within the Balanced Scorecard/Strategy Map approach can be seen as a type of outcomes model as defined in outcomes theory. An outcomes model is a visual representation that sets out all of the steps which need to occur in order for higher-level outcomes to be achieved by an organization, program or intervention. When used within an outcomes theory approach, it is important that visual outcomes models are not drawn with conventions which constrain their ability to provide the best possible model of the real world in which an organization, program or intervention is operating. A set of standards for drawing such models to maximize their ability to model the external world is available here. One of the important issues identified within outcomes theory is being able to model outcomes which do not yet have any measurements (in outcomes theory this is described as a step or outcome without an indicator). See Indicators - why they should be mapped against a visual outcomes model. When presenting Balanced Scorecard information in a indicator list format, as with other indicator-list based approaches, the fact that some important steps and outcomes are currently not being measured will not usually be obviously from just looking at the list. Some strategy maps the author has seen list steps or outcomes and then their measurement in a separate list. However, he has not seen cases where unmeasured step or outcomes are allowed to appear in a Strategy Map. [If readers have seen such instances, please comment below]. As discussed later in this article, generic outcomes modeling as done within outcomes theory and its applied version Easy Outcomes allows all of the elements identified within a Strategy Map to be modeled, plus any important steps or outcomes which are currently not being measured.

4. Strategy Maps seem to be limited to a single page diagram within the Balanced Scorecard/Strategy Map approach. In fact, the key text on Strategy Maps states: 'It [a Strategy Map] provides a single-page view of how objectives in the four perspectives integrate and combine to describe the strategy" (Kaplan and Norton 2004, p. 54) [1]. [If readers have seen, or use larger Strategy Maps please post a comment below].

Advantages of the approach

The advantages of the Balanced Scorecard/Strategy Map approach are:

1. Having a comprehensive set of indicators and not just relying on a single outcome (e.g. short-term profit).

2. Structuring the indicator set into a series of discrete sections so as to encourage comprehensive coverage of possible indicators from a range of domains. This also lets those reading such a set of indicators, or the visualized Strategy Map developed from such indicators, quickly see which indicator domains have been covered.

3. Creating a visualization of the indicator set in the form of a Strategy Map. A visualized representation is the preferred mode of working with an outcomes model within outcomes theory).

Areas where outcomes theory would suggest technical improvements could be made to the approach

1. While the headings used in the Balanced Scorecard are useful as prompts - outcomes theory would suggest that users could consider including other steps which they think are relevant to the achievement of higher-level outcomes even if they do not fit under one of the given four headings. Using this outcomes theory approach the four headings would be used as prompts to provide suggestions for possible steps and outcomes. This is particularly important in the case of not-for-profit settings because the original structure of the Balanced Scorecard approach was focused on for-profit organizations. Standards for building more generalized and flexible outcomes models are available and examples of such outcomes models are available.

2. At least in not-for-profit settings, it is useful to make a distinction in outcomes systems (of which the Balanced Scorecard/Strategy Map system is one example) between demonstrably attributable indicators and not-necessarily demonstrably attributable indicators. Making this distinction is very important for contracting in not-for profit situations (see Contracting for outcomes) to encourage coherent discussions regarding what a provider is, and is not, going to be held to accountable for. It is also relevant for sub-contracting and delegation within large private sector organizations. The Balanced Scorecard/Strategy Map approach does not seem to emphasize making this distinction in the indicator list format or the visual Strategy Map format.

3. There is no reason for outcomes models to be limited to single page diagrams. There seems to be such a limitation in the case of many Strategy Maps. This is a wide-spread tendency in many outcomes systems which steps from seeing the primary 'technology of representation' for an outcomes model as being a single printed page. This is discussed in Conventions for visualizing outcomes models.

4. The visualized outcomes model does not need to be limited just to measurable steps and outcomes [as seems to be the case in regard to Strategy Maps]. See the features of steps and outcomes within outcomes models for further information. While measurement is essential as one aspect of any outcomes system, it is a wide-spread technical mistake in such systems to allow measurement to determine the process of selecting the outcomes one wants to achieve and the steps which one is planning to take in order to achieve those outcomes. If it is the case [as the author currently believes - but he is open to being informed otherwise] that most (if not all) Strategy Maps are limited to only including measurable elements, this may be occurring because the Strategy Map is seen as secondary visualization of the Balanced Scorecard indicator list. By its nature as an indicator list, the Balanced Scorecard list will be viewed as being made up of only measurable elements. When working in a way informed by outcomes theory, the first step to be undertaken is to develop a comprehensive outcomes model of outcomes and all of the steps which one thinks are necessary to achieve higher-level outcomes. At this initial stage, what goes into this model does not have to be limited to just the measurable (Standards for developing such models are available).

Once this visualization has been produced (i.e. an outcomes model) one then turns to the question of which of the steps and outcomes within the model are measurable and which are not. Indicators (which measure the steps and outcomes in the model) are then visually mapped back onto the steps and outcomes within the visual model (for a discussion of this see Mapping indicators onto a visual outcomes model). This immediately shows which steps and outcomes are measurable and which are not currently being measured. This is strategically important so that one can assess the extent to which one is just doing the measurable rather than also attempting to do the strategically important. This is often captured in the saying 'what gets measured is what gets done'. Given this statement, it is essential that an outcomes system provides clear information on which steps and outcomes are currently being measured and which are not. Once one has this information about what is, and is not being measured, one can then, for instance, decide to develop new indicators in areas that are currently not being measured.

In addition, it is good practice to continue working with the visual outcomes model which has indicators visualized onto it as one makes strategic decisions and monitors progress towards outcomes (this visual outcomes model may contain steps or outcomes which do not currently have an indicator). Working with an outcomes model which is limited to only the measurable (as would seem to be the case in regard to most, if not all, Strategy Maps) opens the user to the risk that they will forget about the fact that there may be important strategic steps and outcomes which they are seeking but which they are currently not measuring. Working with a visual model which continues to make clear those steps and outcomes that are currently being measured and those that are not, helps decision-makers understand the level of uncertainty they are facing in regard to what they can, and cannot, currently measure. This level of uncertainty (which is a reflection of the level of risk carried by decision-makers regarding their strategic direction) is masked in systems which are limited to just a list of measurable indicators (as is the case in a traditional Balanced Scorecard approach) or which require that those elements which appear within a visualization (such as a Strategy Map) to be limited just to the measurable.

Within outcomes theory the way of working with this issue is to simply develop a visualized outcomes model which includes all steps and outcomes regardless of whether they can, or cannot be measured, and then to map indicators onto this visualization. (see Indicators - why they should be mapped onto a visual model). This can be particularly important in not-for-profit settings where some of the outcomes being sought will be particularly difficult to measure (this may be because of appropriateness, feasibility and/or affordability). Discussions between funders and providers should be undertaken against an outcomes model which can include currently not measured steps and outcomes (see Contracting for outcomes). Such discussions are likely to be much richer from a strategic point of view because they can explore exactly what it is that is being attempted rather than just being limited to that which is currently being measured. The outcomes theory approach suggested here provides the 'best of both worlds' in that is encourages continuing wide reflection of what is being attempted in terms of outcomes, but also provides information on which steps and outcomes, are, and are not, currently being measured.

Keeping a strategic eye on the currently not measured is good for both risk management and identifying novel strategic advantage. In the lead up to the 2008 Wall Street Collapse there was a risk management failure which arose because of an exclusive focus on the relatively easily measurable (ratings by credit rating agencies) rather than the more difficult to estimate timing of the inevitable collapse in the housing bubble. Novel strategic advantage in both the for-profit and not-for-profit sector is also likely to come from the currently difficult to measure because the more difficult an area is to measure, the less likely it is that other actors are already operating in that area. An organization should attempt to keep its focus on its true outcomes (in the form of an outcomes model which includes all steps and outcomes, not just the currently measurable). Doing this likely to help it chart a course to its true outcomes (rather than just its measurable outcomes) because it will help it identify possibilities for measuring and work towards steps and outcomes which others have not been able to measure in the past.

Where to from here?

The insights from the Balanced Scorecard/Strategy Map approach can be built on by using an outcomes theory-based approach, this would allow you to use the categories from the Balanced Scorecard as the basis for developing steps and outcomes and then you could build your 'Strategy Map' according to the outcomes theory Standards for drawing such models. This will almost always require relaxing the Strategy Map requirement that a Strategy Map fit on one page as there will not be room to model the necessary steps, outcomes and indicators on a single page in most situations. A comprehensive system for working with an outcomes model, which which incorporate outcomes theory principles as outlined in this article is set out in the Easy Outcomes approach.

Conclusion

This outcomes theory analysis of the Balanced Scorecard/Strategy Map approach has shown that the approach has a number of advantages over more simplistic approaches to organizational monitoring. In particular it encourages the identification of a set of indicators from a number of domains which is more likely to ensure comprehensive indicator coverage. The use of Strategy Maps within the approach, to provide visualizations of indicator lists, is totally consistent with the direction encouraged by outcomes theory. Limitations of the Balanced Scorecard/Strategy Map system can be overcome by taking an outcomes theory-based approach. This would use the four domains identified within the Balance Scorecard approach and use them as prompts to suggest elements that could go into an outcomes model, but any other relevant steps and outcomes could also be included in such models. Secondly, models should be able to be larger than the traditional one page Strategy Map. Third, outcomes models should allow the inclusion of any relevant steps and outcomes and not just be restricted to measurable indicators since this has a number of advantages in terms of managing risk around outcomes and identifying novel strategic advantage in areas which are currently difficult to measure.



Please comment on this article

This article is based on the developing area of outcomes theory which is still in a relatively early stage of development. Please critique any of the arguments laid out in this article so that they can be improved through critical examination and reflection.

Citing this article

Duignan, P. (2009). Balanced Scorecard and Strategy Maps - an analysis. Outcomes Theory Knowledge Base Article No. 234. (http://knol.google.com/k/~/~/2m7zd68aaz774/71).

[If you are reading this in a PDF or printed copy, the web page version may have been updated].