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Quality Digest

Six Sigma

The Balanced Scorecard and Beyond

Part 1

Published: Tuesday, June 3, 2008 - 22:00

Over the years, scorecards have progressed through many changes, good and bad. Although scorecards often evolve into a meet-the-numbers game, regardless of the consequences to an enterprise as a whole, restructuring can produce dramatic improvements for any organization. This results in counter-productive initiatives, 24/7 firefighting, the blame game, and proliferation of fanciful stories about why goals weren’t met. 

Scorecards that show raw numbers—with no trend lines and only how well the latest response is in tracking against a goal—often of questionable origin, can be very misleading. Most scorecards fail to distinguish between common cause and special cause variability. That doesn’t produce true remediation of systemic problems.

Some scorecards use a single index for factors that should be tracked separately. The opposite can produce metrics overload with so many factors being measured that what’s truly meaningful is buried in a sea of numbers.

Some companies have implemented the balanced scorecard to add transparency to their governance. Openness of performance metrics enables managers and associates to recognize the effect on an organization by using the scorecard in their routine decision processes. The ability to cascade performance metrics from leadership down through individual work groups provides a view of their role in the success of a business. This would seem to be good, but is it?

With the balanced scorecard and other scorecarding approaches, organization-chart functions can be tracked against goals using various tabular/graphical formats or a red-yellow-green scorecard. 

Scorecard balance is essential to avoid giving one metric more focus than another. Imbalance can lead to serious miscalculations and costly problems. When focus is given, for example, only to on-time delivery, product quality can suffer dramatically. However, a forced balanced-scorecard structure can be ineffective. The often-suggested four-perspective balanced scorecard structure of financial, customer, internal business process, and learning and growth can lead to an abundance of metrics and still not the best metric for each business function.

The metric-tracking system for a scorecard is often red-yellow-green in a graph or table format. When a metric appears red the metric goal is not being met and action should be taken. Green indicates satisfactory goal performance and yellow is a warning signal relative to performance objectives.

Scorecards can be disappointing . It’s not uncommon when red-yellow-green scorecards show rapid-fire changes back and forth between the colors where a time-series chart would show no recognizable trend toward long-lasting improvements. 

Traditional scorecards provide a picture of the past, and no insight into future performance. They often fail to include process variability and separate common-cause from special-cause variation, which can yield a distorted picture of the actual environment. Focus is given in these scorecards to the process outputs or the Ys in the relationship Y=f(X), which are lagging performance measures. With traditional scorecards, little or no attention tends to be given to using a structured approach for causal determination and process improvement relative to meeting measurement-goal objectives. A roadmap that blends analytics with innovation can provide insight into what could be done differently to enhance future performance by improving the process flow and/or inputs to the process. 

An organization can have many performance goals for their metrics. It would seem to be a good thing if everyone could look at their metric and also judge how their personal performance will be measured. Most employees work to maximize their performance in areas where they are rewarded. These new metrics and goals can then be included in their performance plans. This should drive behavior to improve the scorecard metrics and meet established goals.

From those metrics, managers can direct and assume that employees will resolve issues whenever a periodic measurement indicates a goal is not being met. If these measurements are on day-to-day process-input activities that an employee can control (e.g., number of sales calls per day), then this approach could be beneficial. However, goals often are set for the output of the process (e.g., sales call revenue) with no structured effort to determine what might be done to improve the overall process (e.g., who should be approached for sales calls and what should be said during the sales call).

At Enron, assets were transferred from one entity to another to make the numbers.  Managers at different levels may play games with the metric system by creating measures they are certain to meet. Salespeople may be paid commissions based on total products sold, while large numbers of returns are deteriorating the bottom line. Data gathering may be faulty. For example, employees may be allowed to seek evaluations of their performance only from others who will give them glowing reviews.

So why are businesses still interested in improving their scorecards? Often organizations use scorecards to track how well they’re performing in the execution of strategies, although this may not have been the real problem. Maybe the strategies should flow from performance metric improvement needs—a current implementation reversal. If so, why not start with measuring performance as it relates to the organizational value chain. Then use analytics to determine specific, measurable, actionable, relevant, and time-based (SMART) goals for these metrics. Focus then would need to be on creating analytical, innovatively determined strategies to accomplish these goals. These strategies would lead to process improvement and/or design projects that will provide long-lasting improvement in the metric response (See figure 1).

This organizational governance system provides an enterprise define-measure-analyze-improve-control (E-DMAIC) roadmap, where process-improvement projects are pulled (not pushed) for creation. This is in contrast to a traditional Six Sigma or lean Six Sigma deployment where there’s some form of voting for projects to be undertaken for process improvement. A newer approach will enable businesses to create strategies that flow directly from scorecard metrics rather than try to make better linkage from strategy to the scorecard.

Figure 1: Aligning projects with business needs through the E-DMAIC roadmap. SMART goals = specific, measurable, actionable, relevant, time-based

Lloyd S. Nelson, Ph.D. (Deming 1986) stated: “If you can improve productivity, sales, quality, or anything else, by, for example, five percent next year without a rational plan for improvement, then why were you not doing it last year?”

Within this new enterprise define-measure-analyze-improve-control (E-DMAIC) process, scorecards are created (step 2) so there is alignment to the overall business value chain process needs. SMART goals are determined (step 4) after analyzing the enterprise (step 3). Strategies are then created (step 5), which leads to the establishment of goals for operational level metrics (step 6).

Operational metric owners understand the only way long-lasting improvements can be made to their metrics is through process improvements. This pull-for-project creation (step 7) leads to an aligned targeted effort that benefits the enterprise as a whole (step 8) that is long-lasting (step 9).

Some organizations even have conference rooms called war rooms, where the same basic problems are fought over and over. Good firefighters get an adrenalin rush from quick priority changes and the need for immediate action. The best firefighters can be highly rewarded. But the fire-prevention team never seems to be recognized equally by management. The war room strategy drains an organization of resources and can cause companies to lose focus.

When we manage simply toward goals and targets throughout an organization chart, we are managing to the Ys in the mathematical relationship Y = f(X). This can lead to wrong behavior. Enron did this in spades. The way to make long-lasting improvements is through process changes or improving the management of the Xs. Efforts to improve all areas of a business might seem good, but it can be detrimental. What if the efficiency of a machine is improved, but all the products produced could not be sold? If we let a machine set idle more because it’s not needed, process improvement efforts should have been spent elsewhere.

The chart above was reproduced with permission from The Integrated Enterprise Excellence System: An Enhanced, Unified Approach to Balanced Scorecards, Strategic Planning, and Business Improvement, by Forrest W. Breyfogle III (Bridgeway Books, 2008).


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