Balanced Scorecard
Chapter 17
The Promise and Perils of the Balanced Scorecard
The balanced scorecard, the methodology developed by Drs. Robert S. Kaplan and David Norton, 1 recognizes the shortcoming of executive management’s excessive emphasis on after-the-fact, short-term financial results. It resolves this myopia and improves organizational performance by shifting attention from financial measures to managing nonfinancial operational measures related to customers, internal processes, and employee innovation, learning, and growth. These influencing measures are reported during the period so that quick action can be taken. This in turn leads to better financial results.
The balanced scorecard is one of the underpinnings needed to complete the full vision of the performance management framework. Will the adoption of the balanced scorecard meet with the same difficulties encountered by activity-based costing (ABC) systems in the 1990s? It took many failures in ABC system implementations before organizations learned what ABC is and how to shape, size, and level the detail of ABC systems and begin to get them ready for use. Are balanced scorecard implementations going to travel down the same bumpy road?
LACK OF CONSENSUS
An early indication of trouble is the confusion about what a balanced scorecard is, and what its purpose is. There is little consensus. If you ask executives whether they are using a balanced scorecard, many say they are. But if you ask them to describe it, you will get widely different descriptions. There is no standard—yet. Some executives have successfully transferred their old columnar management reports into visual dashboards with flashing red and green lights and directional arrows. Some realize a scorecard is more than that, and have put their old measures on a diet, compressing them into smaller, more manageable and relevant measures. However, neither of these methods may be the correct one.
How does anyone know whether those measures—the key performance indicators (KPIs)—support the strategic intent of the executive team? Are the selected measures the right measures? Or are they what you can measure rather than what you should measure? Is the purpose of the scorecard merely to better monitor the dials, or is it to facilitate the employee actions needed to move the dials?
Talk about balanced scorecards and dashboards seems to be appearing in business magazines, Web site discussion groups, and conferences. Today’s technology makes it relatively simple to convert reported data into a dashboard dial. But what are the consequences? What actions are suggested from just monitoring the dials?
In the performance management framework, results and outcome information should answer three questions: What? So what? and Then what? Sadly, most scorecards and dashboards answer only the first question. Worse yet, answering the what might not even focus on a relevant issue. Organizations struggle with determining what to measure.
Organizations need to think more deeply about which measures drive value and reflect the accomplishment of the direction-setting strategic objectives of their executive team. Once they have the correct measures, organizations should strive toward optimizing them and ideally be continuously forecasting their expected results.
IMPLEMENTING TOO QUICKLY AND SKIPPING KEY STEPS
Why is it that so many people are familiar with the term balanced scorecard but are unfamiliar with the term strategy maps? I believe the strategy map is orders of magnitude more important than the scorecard, which is merely a feedback mechanism. Why do executives want a balanced scorecard without a strategy map? One possible explanation is the mistaken belief that those vital few KPI measures (as opposed to the trivial many) can be derived without first requiring employee teams and managers to understand the answer to the the key question: “Where does the executive team want the organization to go?” This question is best answered by the executive team’s vision and mission—they must point out the direction in which they want the organization to go. That is the executive team’s primary job—setting direction. The strategy map and its companion scorecard are important, too, but their combination answers a different question: “How will we get there?”
Exhibit 17.1 illustrates a generic strategy map with its four stacked popular perspectives. Each rectangle represents a strategic objective and its associated projects or competencies to excel at, plus their appropriate measures and targets.
Note that there are dependency linkages in a strategy map with an upward direction of cumulating effects of contributions. The derived KPIs are not in isolation, but rather have context in the mission and vision. To summarize, a strategy maps linkages from the bottom perspective upward:
• Accomplishing the employee innovation, learning, and growth objectives contributes to the internal process improvement objectives.
• Accomplishing the internal process objectives contributes to the customer satisfaction objectives.
• Accomplishing the customer-related objectives results in the achievement of the financial objectives, typically a combination of revenue growth and cost management objectives.
Exhibit 17.1 Generic Strategy Map
Source: © Gary Cokins. Used with permission.
The strategy map is like a force field in physics, as with magnetism, where the energy, priorities, and actions of people are mobilized, aligned, and focused. One can say, at the top of the map, that maximizing shareholder value (or, for public sector organizations, maximizing community and citizen value) is not really a goal—it is a result. It is the result of accomplishing all of the linked strategic objectives with cause-and-effect relationships.
The peril that threatens the success of this methodology is executive teams that are anxious to assign measures with targets to employees and hold them accountable. Executives typically skip two critical steps: involving the employees to gain their buy-in (and commitment to the measures) to ensure that they understand the executive team’s strategy, and the more critical, prior step of identifying the mission-essential projects and initiatives that will achieve the strategic objectives. The presence of enabling projects and initiatives is what distinguishes a strategic objective from just getting better at what you have already been doing.
Exhibit 17.2 illustrates ideally who should be responsible for each of the five elements of a strategic objective: the executive team or the managers and employees. Sadly, many organizations neglect the first two elements identified in a strategy map. They begin with the third column to select KPIs without constructing a strategy map. The performance management intelligence resides in the strategy map.
Exhibit 17.2 Who Is Responsible for What?
Source: © Gary Cokins. Used with permission.
Source: © Gary Cokins. Used with permission.
Strategy maps and their derived scorecard are navigational tools that guide the organization to execute the strategy, not necessarily to formulate the strategy. Executive teams are pretty good at defining strategy, but a high involuntary chief executive officer (CEO) turnover rate and the increasingly shorter tenure of CEOs are evidence of their failure to implement their strategy.
MEASUREMENTS ARE MORE OF A SOCIAL TOOL THAN A TECHNICAL TOOL
Please do not misunderstand me; selecting and measuring KPIs are critical. You get what you measure, and strategy maps and scorecards serve more of a social purpose than a technical one (although information technology and software are essential enablers). Performance measures motivate people and focus them on what matters most.
Imagine if every day, every employee in an organization, from the janitor at the bottom of an organization to the CEO or managing director at the top, could answer this single question: “How am I doing on what is important?” The first half of the question can be easily displayed on a dial with a target; it is reported in a scorecard or dashboard. But it is the second half of the question that is key—“on what is important”—and that is defined from the strategy map.
The risk and peril of the balanced scorecard involve the process of identifying and integrating appropriate cause-and-effect linkages of strategic objectives that are each supported by the vital few measures, and then cascading the KPIs down through the organization. KPIs ultimately extend into performance indicators (PIs)—operational performance indicators—that employees can relate to and directly affect.
The primary task of a strategy map and its companion balanced scorecard is to align people’s work and priorities with multiple strategic objectives that, if accomplished, will achieve the strategy and consequently realize the end game of maximizing shareholder wealth (or maximizing citizen value). The strategic objectives are located in the strategy map, not in the scorecard. The KPIs in the scorecard reflect the strategic objectives in the strategy map.
Debate will continue about how to arrive at the vital few KPIs for workgroups. Here are two contrasting approaches:
1. Newtonian-style managers, who believe the world is a big machine with dials, pulleys, and levers to push and pull, find appeal in looking at benchmark data to identify which relevant and unfavorably large performance gaps should be areas for their focus. They want to know “What must we get better at?” The KPIs are then derived. Strategies are then deduced from recognizing deficiencies.
2. Darwinian-style managers, who believe the organization is a sense-and-respond organism, find appeal in having the executive team design the strategy map by applying a SWOT (strengths, weaknesses, opportunities, and threats) analysis approach. This approach begins with the executive team freely brainstorming and recording an organization’s SWOTs. They then cluster similar individual SWOTs into strategic objectives with causal linkages in the strategy map. Following this initial step, the middle managers and core process owners are then tasked with identifying the few manageable projects and core processes to improve that will attain the executive team’s strategic objectives in the strategy map. After that step, those same middle managers can identify the KPIs that will indicate progress toward achieving the projects and improving critical core processes. This latter approach not only ensures that middle managers and employee teams will understand the executive’s strategy (about which most middle managers and employees are typically clueless), but it further encourages their buy-in and ownership of the scorecard and KPIs since these have not been mandated to them from the executives. (Of course, the executive team can subsequently challenge and revise their lower managers’ selected projects and KPIs—debate is always healthy—but only after the buy-in and learning has occurred.)
SCORECARD OR REPORT CARD? THE IMPACT OF SENIOR MANAGEMENT’S ATTITUDE
Regardless of which method is used to identify the KPIs, the KPIs ideally should reflect the executive team’s strategic intent and not be reported in isolation—disconnected—as typically the annual financial budget is disconnected from the strategy (see Chapter 23, “Put Your Money Where Your Strategy Is”). This is the peril of the balanced scorecard. Its main purpose is to communicate the executive team’s strategy to employees in a way they can understand it, and to report the impact of their contribution to attaining it. But starting with KPI definition without the context of the executive’s mission and vision precludes this important step.
Research from Professor Raef Lawson when he was at the State University of New York, Albany, suggests that a major differentiator of success from failure in a balanced scorecard implementation is senior management’s attitude. Is it a scorecard or report card? Will it be used for punishment or remedy? Do we work for bosses we must obey as if we were dogs—“roll over”? Or do we work for coaches and mentors who guide and counsel us?
For example, is senior management anxiously awaiting those dashboards so they can follow the cascading score meters downward in order to micromanage the workers under their middle managers, acting like Darth Vader to see which of their minions may need to be cut off from their air supply? Or will the executives appropriately restrict their primary role and responsibility to defining and continuously adjusting strategy (which is dynamic, not static, always reacting to new insights) and then allow empowered employee teams to select KPIs from which employees can actively determine the corrective interventions to align with the strategy?
The superior strategy map and scorecard systems embrace employee teams communicating among themselves to take actions, rather than a supervisory command-and-control, in-your-face style from senior managers. An executive team micromanaging the KPI score performance of employees can be corrosive. If the strategy map and cascading KPI and PI selection exercise is well done and subsequently maintained, then higher-level managers need only view their own score performance, share their results with the employee teams below them, and coach the teams to improve their KPI and PI scores and/or reconsider adding or deleting KPIs or PIs. More mature scorecard users using commercial software can readjust the KPI and PI weighting coefficients to steer toward better alignment with the strategic objectives.
WHY NOT AN AUTOMOBILE GPS NAVIGATOR FOR AN ORGANIZATION?
The latest rage is to have a global positioning system (GPS) route navigator in our automobiles. As with most new technologies, such as the handheld calculators that replaced slide rules, or laptop computers, the GPS is evolving into a must-have. It gets you to your destination without a hassle and with a comforting voice to guide you along the way. Why not have a similar device for an organization?
My belief is that with their refinement in usage, the strategy map and its companion balanced scorecard are becoming the GPS route navigator for organizations. The destination input to the GPS is the executive team’s strategy. As described earlier, the executive team’s primary job is to set strategic direction, and the “top” of their strategy map is their destination. A GPS has knowledge of roads and algorithms to determine the best route managers and employee teams must map which projects, initiatives, and business process improvements are the best ones to get to the destination of realizing the strategy. In addition, when you are driving a car with a GPS instrument and you make a wrong turn, the GPS’s voice chimes in to tell you that you are off track—and it then provides you with a corrective action instruction. However, with most organizations’ calendar-based and long-cycle-time reporting, there is delayed reaction. The performance management framework includes a GPS.
Next, the organization, as with the automobile itself, needs to be included. The motor and driveshaft are the employees with their various methodologies, such as customer value management and service delivery, that propel the organization toward its target. Collectively, the many methodologies, including lean management and activity-based costing, constitute performance management as the organization’s intermeshed gears.
To some people, the rearview mirrors of an auto implies that events have already happened, so they are already behind you and cannot be affected. These people promote only looking through the front windshield. I personally like having rearview mirrors, and when driving I glance at them often. I want to see what types of vehicles are behind me and what rate they may be speeding up on me. With performance management there is much to be gained from analyzing trends and drawing inferences from the past. A trend starts back in time, but it ends with last moment you checked. Collectively that information is near real time. An inference is a conjecture that allows you to deduce what is going on, and in many cases our wonderful human brain can instantly draw conclusions about what it all means to respond with a next action. If I am driving in the fast lane, the passing lane, of the German autobahn, and I see a BMW approaching me, then I should shift to the slow lane. In some cases your inference and subsequent alternative actions need to be validated. This is where the symbolism of the windshield comes in. The ability to project what-if scenarios is powerful because then you can select the best alternative—strive for optimization.
There is an important aspect of this automobile analogy that is missing—fuel efficiency. Performance management as a framework has arguably been around for decades (although information technology research firms, like the Gartner Group and IDC, have only recently tagged this new name in the late 1990s). However, just as a poorly performing car that has some broken gears, tires out of alignment, and gunky lubrication will yield poor mileage, poorly integrated methodologies, impure raw data, and lack of digitization and analytics result in a poor rate of shareholder wealth creation. The full vision of performance management removes the friction and vibration and weak torque to optimize the consumption of the organization’s resources—its employees and spending—and gets the organization to its strategy destination faster, cheaper, and smarter. The result is a higher shareholder wealth creation yield.
Finally, as mentioned, a strategy is never static; it is constantly adjusted. This means that the destination input to the GPS navigator is constantly changing. This places increasing importance on predictive analytics to determine what is the best destination for stakeholders. How much longer do you want to drive your existing automobile when a performance management car with a GPS is now available to lift wealth creation efficiency and yield?
HOW IS YOUR ORGANIZATION DIFFERENT FROM TIGER WOODS?
If you play golf, you know how frustrating it is to try to improve your score. Similarly organizations striving to mprove results know that raising performance can be frustrating. But Tiger Woods, the greatest golfer today, rarely seems to be frustrated. How is your organization different from Tiger Woods? The answer is about one foot. Tiger Woods may be just over six feet tall, but where he excels and differs from everyone is in his upper five feet!
In golf, the immediate result of your golf stroke is in where the club head strikes the ball. But how far and where the ball goes is all about what happens above. It is Tiger Woods’ arms and body movement that control his swing. The club head simply carries out the action.
How is this comparison similar to performance management? The problem with most organizations is their performance management systems put too much emphasis on their financial and aggregate outcome results. These are after-the-fact lagging indicators. They are the golf-club head. These companies need to shift their emphasis to the influencing leading indicators. They need to work on the upper-body golf-club swing.
An organization’s balanced scorecard and supporting dashboards are intended to improve an organization’s performance. But there is little consensus as to how scorecards differ from dashboards. Worse yet, organizations typically have far too many key performance indicators (KPIs) reported in their scorecard, many financial measures, that arguably should be reported as operational performance indicators in their dashboards. In any golf shot the bottom 12 inches is what you did. Everything above that is what you need to do next—to improve results.
ARE FAILURES DUE TO ARROGANCE, IGNORANCE, OR INEXPERIENCE?
Some proposed management improvement methodologies, such as the lights-out manufacturing factory touted in the 1980s as a manufacturing facility totally automated with machines and parts conveyers that do not require workers, are fads that come and go. But the strategy map and its companion balanced scorecard for feedback are certain to be a sustained methodology in the long term—perhaps forever. It is logical. The executive’s role is to set direction by formulating strategic objectives, and then the managers and employee teams should be involved in determining how to accomplish each objective. Are the early-twenty-first-century missteps and misunderstandings in implementing the balanced scorecard due to arrogance, ignorance, or inexperience? I suggest they are due to inexperience.
Conflict and tension are natural in all organizations. Therefore, it takes time for managers and employees to stabilize a behavioral measurement mechanism of cause-and-effect KPIs, to distinguish between KPIs and PIs, and then to get mastery in how to use both of these types of measures to navigate, power, and steer as an integrated enterprise. As stated by the author Peter Senge, 2 who was a thought leader in the field of organizational change management, the differentiator between successful and failing organizations will be the rate, and not just the amount, of organizational learning. Intangible assets—employees as knowledge workers and the information provided to them—are what truly power the performance management framework.
NOTES
1 Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996).
2 Peter M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday, 1990).