Choosing Strategic Targets
This is the third in a series of four articles that collectively provides key learning for the basic architecting of the Balanced Scorecard. Respectively, the first and second articles considered strategy mapping and choosing strategic measures. The next looks at strategic initiatives, while in this article, we focus on choosing strategic targets.
The Problem with Targets
Of course, all organizations set targets. However, these are still predominantly financial, with most fixed for an annual, budgeted timeframe. Within the Balanced Scorecard, equal attention must be paid to both financial and non-financial targets, and goals must be synchronized to a longer term, or strategic horizon.
Too often, targets (financial or not) tend to be an outcome of negotiations between, for example, the corporate center and business unit managers. As a result, targets become more about reaching a compromise than beating the competition. More, targets are normally based on an inside-out view of the marketplace (the performance we want to achieve in our chosen markets), rather than outside-in perspective (what can really be achieved in those markets, and perhaps more importantly what is being achieved).
We shall discuss the weaknesses of traditional target-setting in a moment. But first, the basics.
All measures on a Balanced Scorecard should have a corresponding target, just as all objectives require supporting metrics. The target represents a tangible, and quantifiable, vision of desired performance. But targets must not be simply ‘plucked out of the air’, but be based on a thorough analysis of both required performance and internal capabilities. This analysis has several steps.
As much as anything, a Balanced Scorecard implementation is a major change program. As one leading Balanced Scorecard Manager rightly said in the white paper ‘The Balanced Scorecard Manager: A new profession for the knowledge-era’, “The scorecard is about strategy, and strategy is just another word for change.” As such, targets on the Balanced Scorecard should represent quantum step-changes in performance. A change effort is not about incrementalism, so the same law applies for the scorecard effort. Quantum performance advances require commensurately stretching performance targets.
Setting Stretch Targets
And this brings us to one observable weakness in conventional target-setting processes. Most employees are unlikely to volunteer that they be held accountable for reaching stretch targets, understandably being more disposed to signing up to more comfortable goals. Convincing employees to set stretch targets requires the Balanced Scorecard Manager to adeptly sidestep the most common obstacle to a scorecard implementation effort – cultural resistance. Employees at each level that targets are set must believe that the Balanced Scorecard (in particular its target component) is about continuous performance improvement and learning and is not a system for reward and punishment. If employees fear negative effects of not hitting stretch targets they will fiercely resist their setting and, even if imposed, will continually explain why these goals cannot be hit.
Communication with employees regarding targets also gets confused due to a basic misunderstanding of what constitutes a target. To explain, a target should be what the organization believes to be its best performance outcome over a specified period – if all goes as well as it can. It is crucial to recognize that target-setting is not about forecasting. Bjarte Bogsnes, Beyond Budgeting Manager at the Norway-headquartered Statoil made this insightful comment in a case study
“…a target and a forecast are not the same, or should not be the same. A target is an ambition in that it is what you would like to achieve. A forecast is what you expect to achieve. Therefore these should be separate numbers, with separate processes for their setting and management. When you artificially force together a target and a forecast you either have a bad target or a bad forecast, and most likely both.”
With this separation, which is as much cultural as structural, communicated as part of the process of building the Balanced Scorecard, then there is a greater likelihood that employees will set and agree to stretch targets – as this target is more an ambition than an expectation. An expectation is a forecast.
Comparative Performance Goals
In the setting of stretch targets, organizations should, wherever possible, identify comparative performance goals. Organizations typically set targets based on what they think they can do. Yet, increasingly, leading companies are less concerned with what they themselves believe they can achieve, but what is actually being accomplished by competitors. For instance, for Company A the moving from 75% to 85% customer satisfaction in a nine month timeframe might be perceived as a stretch and its achievement a success, but if there are competitors that are already at 85% and are aiming for 90%+, then performance for Company A can legitimately still be described as below required standards – despite the ‘stretch’.
Consequently, the management team of Company A must raise the performance bar so that they can beat the competition, rather than meet an unacceptable internal target. This, of course, is easier said than done and organizations often set targets while ignoring what they are actually capable of achieving in light of the present capacity of the organization and the capability of its processes. So if senior management sets a target to be better than the competition by Y%, but doesn’t analyze whether the organization is configured to achieve Y%, then it’s a short-sighted approach that will demotivate the lower level managers that are being asked to hit targets that they know to be unrealistic.
A Capability Audit
Therefore, a critical step in setting strategic targets on the Balanced Scorecard is to conduct an audit of the present state of the organizational and/or individual skills, competencies and capabilities required to achieve the targeted quantum performance step-change. This is vital because targets, and therefore objectives, are not achieved simply through their identification.
With the scorecard being about quantum step-change in performance then the organization should be continually reconfiguring processes, learning systems and best practice sharing mechanisms to make stretch targets legitimate goals. Such reconfiguration requires clear processes for identifying and launching strategic initiatives to achieve step-changes to organizational or individual capabilities (and therefore heightening the chance of achieving targets and succeeding to objectives).
And it is through strategic initiatives that the real work of the Balanced Scorecard gets done. We consider the selection of strategic initiatives within the next and final article on the basic architecting of the Balanced Scorecard.