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Revising The Balanced Scorecard

Revising The Balanced Scorecard*

By David Creelman

1. Introduction

The balanced scorecard (BSC) appears to have had remarkable success. According to Bain and Company over 60 percent of firms use scorecards. Satisfaction with the scorecard is high. Companies in Bain's survey rate them a 4 out of 5. Kaplan and Norton have expressed disappointment that the BSC is still too dependent on the on-going sponsorship of the senior team. A change at the top can kill even a successful scorecard project, something unlikely to happen to other financial reporting or control systems. Yet, Bain's study shows only 5 percent defection each year which is low compared to CEO turnover.

This picture of success obscures important issues. The issues are seriousness of the implementation, the emphasis on maps or measures, the emphasis on inquiry or control and the number of measures.

 

2. Seriousness of Implementation

Dr. Bernard Marr from the Cranfield School of Management estimates less than half the companies claiming to use a balanced scorecard go beyond adding a few high-level non-financial performance indicators.

There is value in ensuring that top management sees and attends to performance indicators around customers, people and processes. It is low cost and low risk. But this not the same as the full BSC implementation and should be called something different. Anyone embarking on a scorecard project would do well do be clear up front whether they are planning to add a few measures or look for a tool to drive the execution of strategy.

3. Measures vs. Maps

The first articles on the balanced scorecard talked about adding non-financial measures to management reports. This is so obviously a good idea that it is not surprising that it has been widely adopted. However, in more recent work Kaplan and Norton have shifted their focus to strategy maps. This is an a dramatic change in emphasis.

The strategy map is a way to articulate strategy. For example, "Our strategy is to increase sales by improving product quality. We can improve product quality by improving the skills of production workers." For simplicity I've only mentioned three measurable elements: sales, quality, and skills. A real strategy map would have perhaps a dozen key elements.

A strategy map is important because:

a)The management team has to agree on what the strategy is.

b)The causal links can be tested. By measuring quality and sales the firm can learn if improving quality really does lead to improved sales.

c)The articulated strategy can be communicated across the firm.

Kaplan and Norton see measures as a core element to the maps citing the cliché, "you can't manage what you can't measure". However, simply agreeing on strategy and communicating it across the firm is a very valuable exercise. One can do a strategy map without being too concerned about the specific measures.

So there is actually an important divide here. Companies can put in a lot of sensible measures without doing the map, and companies can do the map without worrying much about measures. Since scorecard projects typically get bogged down on the measures companies interested in executing strategy would do well to focus first on the map, and only use measures to the extent they are practical.

4. Inquiry vs. Control

There is a another profound distinction in how the BSC is used: for inquiry and communication or for control. Kaplan and Norton stress that the point of the BSC is to facilitate the discussion and communication of strategy. If everyone understands how training relates to skills, how skills relate to quality, and how quality relates to sales then the firm will run better. It is also a tool for learning because it makes explicit assumptions (e.g. better skills lead to better quality) which can then be tested.

Unfortunately, most organizations are more interested in control than communication or learning. The balanced scorecard often becomes just another source of targets that managers are required to reach. As soon as people are being penalized for not hitting BSC targets learning and communication tend to go out the window. Managers will concentrate on measures and targets they can hit rather than on ones that are helpful for strategy execution, and they will manipulate the numbers rather than learn from them

James Creelman (a distant relative and scorecard expert) says the most common pitfall in scorecard projects is resistance to the transparency the performance measures create. Managers believe, and rightly so in many cases, that the scorecard results will be used to punish them, rather than as a way to learn and communicate.

The tendency for all systems to become control systems, and for control systems to become counterproductive, is one of the central problems of modern management.

5. Few Measures vs. Many

It's easy in a presentation to talk about using a few key measures to drive strategy but according to James Creelman scorecards very often become unmanageable as they try to show everything going on in the organization. He also notes that even when senior managers do try to keep the number of measures small they may fail to come up with something that people really believe in.

Scorecard proponents argue that this is because they, "did it wrong". I argue that it's because often business is too complex to be captured in a few measures. Whatever position you take the truth in practice is that many scorecard projects fail on this hurdle.

6. Conclusions

The apparent success of the scorecard obscures some of the issues with implementation. Adding some non-financial performance indicators to management reports is a safe and simple thing to do. Using a strategy map to facilitate communication of strategy, while not worrying too much about measures, can be a helpful process. However, the full blown scorecard process, the process which could have the greatest potential impact, risks becoming a control system or overly complicated.

Even with the distinctions I've made in this article I've probably left out some fundamental variations in scorecard projects. Dr. Marr says, "The BSC started as a measurement system, then became a management system, then became a strategic change framework, and now has become a framework to manage intangible assets (for which the concept of intangible assets had to be re-defined to fit the model, defying all previous research in the field)."

Firms need to think hard about what they are really trying to achieve before embarking on any scorecard project.

 

Gary Watkins

Gary Watkins

Managing Director

BA LLB

C: +27 (0)82 416 7712

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