Strategic Objective's Status. How do we calculate it?
Mihai Ionescu, Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author.
As we continue to see debates, in various forums or blogs, about how should we use Lead & Lag KPI Measures for calculating strategic Objective's status and, on the other hand, as discussions about calculating the status of Driven Objectives based on the contribution of their Driving Objectives are rare, we'll use this article to clarify these topics.
Operational Objective's Status
This is a simple case, used here just for highlighting the differences between the status calculation of strategic and non-strategic (operational) Objectives. In this case, we use the KPIs associated with the Objective to calculate Objective's status based on a weighted average of KPIs' statuses, which are, at their turn, calculated based on the % ratio between their actual values and their corresponding targets.
The KPIs are measured from the process or capability that is relevant for their Objective. In the above example-diagram we have two KPIs, each measuring a different aspect related to Objective's accomplishment. Therefore, the status of the Objective is calculated by using the weighted average of their statuses, since the importance or relevance of the KPIs may be different.
Since what we measure are parameters that are representative for process's or capability's output, both KPIs are Lag KPIs, showing us the current status of the Objective, based on past performance and results.
The statuses of both the Objective and the KPIs are translated to a color-status (semaphore), by using a set of Status Limits (Red-Yellow and Yellow-Green limits) that have to be used with the exact same values everywhere in our performance model. For instance, we can have the RY Limit at 90% of the target (for any of the KPIs) and the YG Limit at 70% of the target. In the case of the Objective, since the status value is calculated as an average of multiple % values, the Status Limits are related to the maximum (100%) possible value of its status.
As we are in an operational context, if the Objective is not achieved, as resulting from the status calculated as described above, one or more Corrective Actions are decided and applied directly upon the process or capability from which the KPIs have been measured.
Question: This is how you have calculated (some of) your strategic Objectives' statuses? Well, there is nothing 'strategic' in this way of calculating an Objective's status and just because we call it 'strategic Objective' it doesn't mean that it really is 'strategic'.
Strategic Objective's Status (Lead & Lag KPIs)
What makes an Objective 'strategic' are three things:
A targeted process or capability that has to be significantly changed, improved, or transformed in order to achieve the Objective and to close one or more Strategic Positioning / Coherence Gaps associated with that Objective. In the previous operational case, there is no significant change involved, as the Corrective Actions are applied directly to the process or capability, usually addressing deviations from the normal operational parameters or small improvements of the operational effectiveness, which is not strategic change (remember what Prof. Michael Porter said: “There's a fundamental distinction between strategy and operational effectiveness.”)
One or more strategic Initiatives that are expected to significantly change, improve, or transform the process or capability, as needed for achieving the Objective. The relationships between Objectives and Initiatives are of many-to-many type. If the achievement status of the Objective is insufficient (red or yellow), one or more Corrective Actions are decided and applied upon the Initiative(s)linked to that Objective.
A combination of Lead (anticipation) and Lag (result) KPI Measures, which allow the calculation of Objective's status based on both the current results(output, measured by the Lag KPIs), as well as on the anticipated trend (changes outcome, measured by the Lead KPIs).
Important: So, the status of a strategic Objective doesn't show us only where we are today (based on past performance results output), but also if we are heading towards a better or worse level of accomplishment of our Objective.
Here is the diagram that illustrates an example of strategic Objective's status calculation, using both Lead & Lag KPI Measures and the resulting Lead Status and Lag Status:The diagrams in this article, with higher resolution, can be found at:
Lead Status and Lag Status
The Lead KPI Measures are anticipating the future evolution of their Objective's status because they are not measuring the output (results) of its target process or capability, but certain outcome parameters that are directly and early influenced by the effectsof the changes, improvements or transformations performed upon that process or capability by the strategic Initiatives that are linked to the Objective.
So, the strategic Objective's status is calculated based on a weighted average of a Lead Status, determined by the Lead KPI Measures, and of a Lag Status, determined by the Lag KPI Measures.
Why do we use the weighted average between the Lead and Lag Statuses? Because, depending on the capability to anticipate the outcome of the changes performed upon the process or capability, in our specific case, the Objective's status evolution may be anticipated more or less accurately, so we should give more weight to the Lead Status, if we can accurately anticipate the outcome, based on the Lead KPI Measures, or less weight, if our capability to anticipate the outcome is low.
Lead & Lag Status Cases and Model Design Flaws
If the Lag Status is unsatisfactory (red or yellow) and the Lead Status anticipate a positive evolution (green), then we can expect that the changes that we have performed are having the expected effects that will propagate to the outputs, in the near future, turning the Lag Status to green
If the Lag Status indicates a positive output (green) and the Lead Statusanticipates a negative evolution (red or yellow) of the outcome, the situation is more complex, because this has two possible meanings: (2a). The Objective has been previously achieved, based on the changes produced by its linked Initiatives, but the changes have been unstable, or unsustainable and, as a consequence, the outcome and the process or capability output will return soon to an unsatisfactory status (yellow or red Lag Status) (2b). The Lead & Lag KPI Measures are not consistent, or decoupled, meaning that the effects (outcome) of the changes in the target process or capability, measured by the Lead KPIs, do not propagate in reality to the output measured by the Lag KPIs. And this is a flaw of our BSC model design.
Have you ever wondered why the 5th stage of the Kaplan-Norton BSC Framework (XPP - Execution Premium Process) is called 'Monitor and Learn'. You might have asked yourself 'Learn what, more precisely?'. Part of the answer is the case (2b) above, which allows us to learn if some of the assumptions or the logic used during the design of the BSC model were flawed, as we find out only now, when we are executing the Strategic Plan that is based on that model.
Objective's Status, with Driving Objectives
This is going to be interesting, as this subject is seldom discussed in the public domain and is often not correctly understood during BSC system implementations. (If you might have thought so far that this is just another BSC 101 article, here is the reason to maybe change your mind).
The role played by the Driving Objectives
Let me ask first: What are you using the Cause-Effect relationships between the strategic Objectives for? For better figuring out what Driving Objectives do your Driven Objectives need in the perspective above (sometimes even in the same perspective)? For being able to draw causal links arrows between your Objectives in the Strategy Map?
The main reason why we analyze and select the most important Cause-Effect relationships between Driving and Driven Objectives is to determine which Objectives' accomplishment depend significantly on the supporting or enabling effect of the prior accomplishment other Objectives. But this means that a Driven Objective cannot be fully accomplished if its Driving Objectives haven't been fully accomplished before it, creating the necessary enabling conditions. This dependency remains valid even if the strategic Initiatives that support the accomplishment of the Driven Objective have been successfully performed and have produced the expected change effects.
This is important, so think about it carefully: How do we know that the Initiatives had the expected, changing effects? By looking at the Lag KPI Measures, which tell us if those effects (anticipated by the Lead KPIs) have propagated to the output that they measure. But if the Driving Objectives have NOT been accomplished, failing to enabletheir Driven Objective to be fully accomplished, how can it be possible to have the Driven Objective's Lag KPI Measures indicate that the Driven Objective has been accomplished? One of them must be wrong!
The answer to the last question above can only be: Either (i) we have considered the wrong or not fully relevant set of Cause-Effect relationships between the respective Objectives or (ii) we have chosen the wrong or not fully relevant set of Lag KPI Measures for the Driven Objective. So, back to the 'Monitor and Learn' stage of the Kaplan-Norton BSC Framework, to correct our BSC model, because it has proven to contain flows that do not allow us to correctly monitor the status of our strategic Objectives.
Driving Status and the Status Weighting
The full accomplishment of our strategic Objective's status is anticipated by the two things that happen before its Lag KPIs (the Lag Status) indicate that the measured outcomes have changed successfully, as desired):
The strategic Initiatives are producing the changing effects that are indicated in advance by our Objective's Lead Status (through the Lead KPI Measures)
The Driving Objectives have been achieved, creating the favorable, enabling conditions for our Driven Objective to be fully achieved, as well, and this is indicated by the statuses of the respective Driving Objectives
This means that we have three weighted factors that contribute to the Driven Objective's Status calculation:
The Lag Status, representing Objective's achievement result, which is in fact - as we have seen - a reflection of the past results, calculated through the weighted average of the Lag KPI Measures' statuses
The Lead Status, anticipating the future performance expected, by measuring the early or partial change effects of the strategic Initiatives that are linked to the Driven objective, calculated through the weighted average of the Lead KPI Measures' statuses
The Driving Status, indicating the level of the favorable/enabling conditions created by the Driving Objectives, calculated through the weighted average of the Driving Objectives' statuses
"A lot of weights and weighted averages!", you might say! True, but our BSC model is always a compromise between the manageable simplicity and the accurate reality-reflecting complexity. But the simplification cannot be applied randomly throughout our model! Find at the bottom of the article a guiding principle for how and where to simplify our model.
"How do we determine all these weights?", you might ask. Here is how (some of the logic has been already mentioned above):
The KPI Measures' weights - whether we talk about Lead or Lag KPI Measures (we should do this separately for each of them) we should ask the following question: "Are all the KPIs equally reflecting (lag) or equally anticipating (lead) the accomplishment of their Objective? If their relevance is not equal, which of their statuses should weight more and by how much?"
The Lead and Lag Status weights - we should ask the following question: "How well can the Lead Status anticipate the final accomplishment of the Objective?" If we believe that there is a high level of correlation between the Lead KPI Measures and what the Lag KPI Measures will show us as outcome results, the Lead Status's weight should be higher. If not, it should be lower.
The Driving Objectives' weights - when we compare the contributions of each Driving Objective to enabling the accomplishment of a Driven Objective, we can always tell which of these contributions are more important, deciding their weights, which has to sum-up to 100%. These are the weights used as part of the weighted average formula for calculating the Driving Status.
The Driving Status weight - since not all Driven Objectives depend in the same way and equally significant on their Driving Objectives, we should be able to determine, in each specific case, how much is the Driving Status's weight. In other words, how much is the success of Objective's accomplishment depending on the changes performed through the strategic Initiatives linked to it and how much on the support or enabling effect of its Driving Objectives.
Important observation: We typically look at the Strategy Map and see it in some sort of plane dimension. However, its Cause-Effect relationships have a significant additional dimension: Time. Each relationship between a Driving Objective and a Driven one represents an influence that doesn't propagate immediately - there is always a Cause-Effect Propagation Lag-time, which is typically measured in months.
The immediate consequence is that the Driving Status is not based on the statuses of the Driving Objectives measured in the same month as the Lag Status, or even as the Lead Status of the Driven Objective. If you have questions about this (I expect that you do), put them on hold for a while, because a separate article will soon be published only about the subject: 'Cause-Effect Time-lag and the Strategy Map'.
The diagram below is an illustration of an example of Objective's Status, calculated based on the Lag Status, Lead Status and on the Driving Status:
The diagrams in this article, with higher resolution, can be found at: SlideShare: http://www.slideshare.net/mihaione/objective-status-calculation Issuu: http://issuu.com/mihaiionescu7/docs/objective_status_calculation
The Driven Coefficient
Besides the contribution to calculating the status of a Driven Objective, the Driving Status's weight has has also a major importance in building the Targets Tree. As we cascade the top Corporate Goals to (usually) the Objectives in the Financial perspective, we start determining the contribution of each of these top Objectives to achieving each of the Corporate Goal (growth, profitability, sustainability, etc.). Further on, the Cause-Effect relationships in our Strategy Map are the channels for further cascading these top Objectives' contributions down to each of their Driving Objectives, and so on, until reaching the Objectives at the bottom of our Strategy Map. But how can we determine how much of an Objective's contribution to the achievement of its Driven Objectives should be passed-on downwards, to its own Driving Objectives? By using the Driving Status weight, described above, which now becomes a characteristic of each Objective, called the Driven Coefficient, but used not as a %, but as a decimal value, between 0.0 to 1.0.
You can immediately figure out that the Driven Coefficient of many Objectives in the Financial perspective has a value of 1.0, while for many Objectives in the L&G perspective it has a value of 0.0.
The Targets Tree is a complex subject and we don't want to spoil a future article dedicated to it, by further describing it here. NOTE: All the sections above, as well as the example-diagrams, have focused on the strategic Performance. Although mush of the same logic is applicable to the strategic Risk, we have to say that this represents a completely separate subject, as Objective's Performance Status and its Risk Exposure Status are different topics.
Simplification. How much and where?
As mentioned above, any model, such as the BSC model used to build our Strategic Plan, is a compromise between manageable simplicity (facilitating the easier communication and understanding of the Strategy) and the accurate reality-reflecting complexity that allows it to be perceived as realistic, as opposed to an artificial construct.
How much can we simplify such a model? I think that it depends on the length of time people have been in contact with it. Initially (e.g. during the first year of implementing a BSC system) we should be aware that people need to climb a relatively steep understanding & adoption slope, as many of its principle, tools and methodologies may be new to them.
But once they get more familiar with the model, they will start to see cracks in its simplified logic and spot cases where the results are too far from the reality that they are facing on a day-by-day basis. That's when we need to think about increasing the complexity of the model, bringing it closer to the complex reality of the business processes and relations of our organization and of its interactions with the business environment.
Where should we simplify our model more and where less? That depends on the areas of the model that are visible through the 'user interface'.
For instance, that's why we should keep our Strategy Map simple, with a number of Objectives between 15 and 20 (the fewer, the better), but the Cause-Effect relationships, with which the people don't interact on a frequent basis, should match the complexity level of the dependencies between the changes of our Strategic Choicesand of our Capabilities System.
Further on, the number of the KPI Measures that we use in our Scorecard should not exceed a number of 4-5 per Objective, but the statuses calculation formulas, which are not visible in our Scorecard 'user interface', should reflect as much as [reasonably] possible the relationships and dependencies discussed above.
Think of your automobile. The manufacturer did its best to keep the controls, pedals, dials and buttons to a minimum, so you can drive your car simply and safely, but without interacting with the complexity of the engine under the hood, nor with the complex net of pipes and wires throughout the entire car, nor with the electronic systems that ensure its reliability and safe driving. But if they would be as simple as your car's dashboard, you might need to think again before getting on and driving it. It's a car, not a bicycle. So are our organizations, with their structures, relationships and systems - simple, apparently, but complex in reality.
Do you want to simplify your Balanced Scorecard system? Think twice about when, where and how much do you want to do this.