Well, I think they're a lot of fun and a nice addition, and should never ever be made into army battles. There are of course plenty of things that should be fixed.
Like I said the whole point is to challenge you with a select handful of troops without the army. Also there should be consequences to failing, and you shouldn't always get some reward for just attempting one like in your flowchart.
A few things I think needs fixing.
I think the number of troops you bring should vary depending on something, probably roguery. Even better, let the player decide between a max number dependent on roguery, and the regular 8 soldiers, and if you pick a too high number and are unlucky, the hideout just re-localizes to somewhere else and you lose your chance at it.
If it's true that they end up with 100's of bandits in the late game, then that has to stop because at that point it is an army battle.
You should be able to send a companion+troops to deal with them. If you e.g specialize in int/cha and can't fight for jack. Of course this can fail too.
The distance you have to walk to finish some of them takes for-friggin-ever if you're in proper armor and don't have 600 athletics.
Also the punishment is a bit too severe as many have said. You get knocked out, yes, but there should be a chance of capture and a chance of them just leaving you and your army rediscovering you and just losing the men you brought.
If they capture you, then do the normal thing, and if you have companions one of them could take your army temporarily, otherwise it should go to a holding. If you don't have either then you're sol on that front.
But the core idea, you+a few men vs overwhelming odds, that bit needs to stay.
