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How do I create an operational Balanced Scorecard?

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The process described here is intended to help you build a Balanced Scorecard for a management team with a primarily operational focus. 2GC FAQ - How do I create a Strategic Balanced Scorecard? outlines a process that works better when building a Balanced Scorecard with a strategic focus. Keep in mind that the best Balanced Scorecard designs are those developed directly by the people who will eventually use them: the development process described here focuses on establishing consensus within the management team about the design and its implementation.

A process for creating an Operational Balanced Scorecard

Step 1 – Choose key delivery objectives/Outcomes

Start by identifying the key delivery objectives for the organisational unit or process to be monitored by the Balanced Scorecard. These objectives will usually describe required outcomes from the activity (e.g. volumes, quality levels, costs etc.) and need to be chosen in such a way that they are consistent with the wider strategic goals of the organisation. Aim for about 8 to 10 objectives. For now, put them to one side and label them all as Outcomes.

Step 2 - Identify Action-orientated objectives/Activities

Next, you need to work out what key actions are required if you are to achieve the objectives described in step 1. Some will relate to the execution of core processes (e.g. keep wastage below 2%), others to the making of changes that will subsequently influence your ability to deliver core processes (e.g. retrain operators). Aim for 10 - 15 activity objectives. You may also identify during the discussion some additional outcome objectives that were missed in step 1 – add these to your ‘Outcomes’ set, but try and keep the total number of outcomes at or below 12.

Now try and link the activity objectives to the outcome objectives using ‘causal’ links. Drawing a diagram, or arranging paper shapes helps a lot at this stage. You may find that you have some objectives that don’t ‘link’ to any of the others - try and work out why as disconnected objectives are usually a sign of a gap in your thinking.

Assign individual managers ownership of the objectives from the Balanced Scorecard, and charge them with ensuring their delivery. These managers are then best placed to determine the most appropriate measures and targets associated with each of their objectives - see Steps 3 and 4 below.

Step 3 - Identifying Measures or Metrics

For each of the Outcome objectives chosen, you should select one or two measures/metrics that inform you about how well the objective is being achieved. Looking at what others are using to monitor similar activities can often help you choose such measures – public measure databases can be useful here too. Measure selection is usually influenced by the need to obtain information quickly and cheaply and to use sources that update fairly frequently (typically at least four times a year or more). The measures should be identified with the focus on establishing ‘how well are we doing at achieving the objective’ rather than perfectly measuring a specific part of the underlying process. Some organisations struggle at this stage by trying too hard to find ‘perfect’ measures which are hard to define, and even harder to actually implement.

For the Activities - focus on measuring whether the actions detailed under each Activity are being completed and if they are on time. For this to happen deadlines must be set. This is more like Project Management measurement than Outcome measurement - measures are not quantitative.

Step 4 - Set Targets

Next set targets for these measures (or deadlines for the Actions under Activities). Many processes are similar to those found in other organisations, and targets for these often can be based on industry standards or benchmark data (e.g. from TQM initiatives such as EFQM etc.). Simulation and modelling can also be used to help identify the right level of targets.

Step 5 – Report and Review on regular basis

The most effective use of this type of Balanced Scorecard is simply to review it on a regular basis. Typically, these reviews are supported by a single concise report describing the performance against targets for all the measures on the Balanced Scorecard. Decisions on standard pre-planned actions are taken in case of detection of a variance of outcomes from targets.

Step 6 – Define appropriate remedial actions in case of variances

Having a Balanced Scorecard in place is not enough – success will only be achieved if the results are reviewed regularly by the management team and then acted upon. Ideally, the existing processes will work smoothly to deliver the outcome goals selected, but it is usually prudent to allocate some additional resource to identify both appropriate actions in case of variances, and who will be responsible for making these interventions. This helps provide operational teams with a structured process for what needs to happen when variances occur.