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Keywords: Balanced Scorecard, implementation, critical success factors, key success factors, perspectives, financial, innovation, internal, external

The Balanced scorecard: solving the Outdated State of Today’s Measurement Systems

Measurement is a critical component of any management system. Most managers recognize its vital role in communicating, incenting, and tracking the achievement of an organization’s strategy. Despite this recognition, however, most organizations do not operate with a measurement system that adequately fills all of these roles. Because they consist of mainly financial indicators, today’s measurement systems focus organizations on past performance and encourage a short-term view of strategy, failing to provide the long-term strategic management capabilities that today’s organizations need.

A Tool for Translating Vision to Action

The Balanced Scorecard is a proven approach to strategic management that imbeds the long-term strategy into the management system through the mechanism of measurement. It translates vision and strategy into a tool that effectively communicates strategic intent and motivates and tracks performance against the established goals.

A vision describes the ultimate goal - to be the best. A strategy is a shared understanding about how that goal is to be reached. The Balanced Scorecard provides a medium to translate the vision into a clear set of objectives. These objectives are then further translated into a system of performance measurements that effectively communicate a powerful, forward-looking, strategic focus to the entire organization.

In contrast to traditional, financially based measurement systems, the Balanced Scorecard solidifies an organization’s focus on future success by setting objectives and measuring performance from four distinct perspectives. The Learning & Growth perspective directs attention to the basis of all future success - the organization’s people and infrastructure. Adequate investment in these areas is critical to all long term success. The development of a true learning organization supports success in the next perspective, the Internal perspective. The Internal perspective focuses attention on the performance of the key internal processes which drive the business. Improvement in internal processes now is a key lead indicator of financial success in the future. However, in order to translate superior processes into financial success, companies must first please their customers. The Customer perspective considers the business through the eyes of a customer, so that the organization retains a careful focus on customer needs and satisfaction. Finally, the Financial perspective measures the ultimate results that the business provides to its shareholders. Together, these four perspectives provide a balanced view of the present and future performance of the business.

Recognizing a “Good” Balanced Scorecard

The Balanced Scorecard has been quickly accepted by the business world; it is easy to see the value of a focused set of performance measurements. However, an effective scorecard is more than a limited list of measures gathered into four categories. A good Balanced Scorecard should tell the story of your strategy. Three criteria help determine if the performance measures do, in fact, tell the story of your strategy:

• Cause and Effect Relationships. Every measure selected should be part of a chain of cause and effect relationships that represent the strategy.
• Performance Drivers. Measures common to most Companies within an industry are known as “lag indicators.” Examples include market share or customer retention. The drivers of performance (”lead indicators”) tend to be unique because they reflect what is different about the strategy. A good Balanced Scorecard should have a mix of lead and lag indicators.
• Linked To Financials. With the proliferation of change programs underway in most organizations today, it is easy to become preoccupied with a goal such as quality, customer satisfaction or innovation. While these goals are frequently strategic, they also must translate into measures that are ultimately linked to financial indicators.

Since initial publication in the Harvard Business Review in January of 1993, the concept of the Balanced Scorecard has been interpreted in many different ways. While some people have chosen to view the it simply as a focused set of financial and non-financial measures, others have seen the dangers of such a simplistic interpretation - in execution, the measurement system may not reflect the strategy of the organization, mistakenly guiding an organization in directions that are not aligned with the strategy.

The Art of Building

The design of a Balanced Scorecard should not be underestimated. There are two essential ingredients to the successful design:

• An architect who has a framework, philosophy, and a methodology for designing and developing the new management system;
• A client who will be totally engaged and assume ultimate ownership of the project, understanding that he or she must live with the results long after the architect leaves.

The client in this analogy is the Executive Team of the business. The Balanced Scorecard and the Management System which will be built around it are, ultimately, the responsibility of the Executive Team. Without their active sponsorship and participation, a project should not be attempted, because it is doomed to failure.

Applying a Proven Methodology

The architects of the measurement system employ a four phased approach in designing a measurement system:

Step 1: Define the Measurement Architecture
Because the scorecard should reflect the strategy, an organization must develop a distinct strategy. A business strategy and a Balanced Scorecard that describes it are not random. We have found that the architecture has several dimensions which must be incorporated into Scorecard design. A good design process will recognize these dimensions and provide frameworks to guide the architect and the Executive Team in their thinking about the strategy. There are frameworks that describe the strategy and represent the foundation on which a complex design is based. For example, in the financial perspective of the balanced scorecard, one could frame discussions about the three primary components of a financial strategy: (1) revenue growth/mix, (2) productivity, and (3) asset utilization. Whether operating a growing, mature, or harvest-oriented business, Executive Teams use this framework to anchor their financial objectives for the balanced scorecard. Similar frameworks for the Customer, Internal, and Learning perspectives give both the architect and clients a common ground from which to consider the setting of strategic objectives.

Step 2: Build Consensus Around Strategic Objectives
In our experience with the design of Balanced Scorecards, we have never encountered a Management Team that had full consensus on the relative importance of its strategic objectives. In general, these are harmonious management groups in well managed organizations, but the lack of a shared understanding about the overall strategy and the relative roles of different groups within the organization keeps the team from agreeing on priorities. The second step of the development process is designed to build consensus among the members of the Executive Team around the long-term strategic priorities of the organization.

To achieve this goal, each Executive Team member is interviewed individually to capture his or her implicit and explicit strategies for the business. These personal visions are then synthesized into feedback that is reviewed at an executive workshop. During this session, the Executive Team learns about where there is and is not consensus about their strategy and discusses unresolved issues. Ultimately, a coherent group vision for the organization emerges in the form of 10 top priority objectives.

Step 3: Select and Design Measures for the balanced scorecard
With the prioritized strategic objectives agreed upon by the Executive Team, the next step is the selection of measures to track the achievement of these objectives. Sub-team working sessions focus on the development of measures for a subset of the objectives, finalizing the wording of objectives and searching for measures appropriate for tracking each objective. At the end of this step, the sub-teams synthesize their recommendations into a united “strategic story.” With agreement on the strategic objectives and measures, the measurement system design is complete.

Step 4: Develop the Implementation Plan
For a Balanced Scorecard measurement system to create value, it must be integrated into the management system of the organization. The final step of the process entails three primary tasks: (1) identifying the current practices in various management processes, (2) evaluating opportunities for integrating the Balanced Scorecard into the management process, and (3) developing an implementation plan. This step typically reviews the client’s approach to data reporting and review, management meetings and decision-making, strategic learning, strategic communication, personal objective setting and planning and budgeting.

Unlocking the Strategic Payoff of the balanced scorecard

Companies who have been using the Balanced Scorecard for some time and have successfully integrated the tool into their management processes are beginning to see significant financial and operational results. The CEO of a large insurance company estimates that by using their Scorecard as a catalyst for MIS improvements, he was able to increase product profitability by nearly $30 million over a two-year period. Others describe the intangible benefits gained from being able to “understand the drivers of business success” and “educate the organization, deciding how, when and where to raise the bar.”
By developing a Balanced Scorecard that truly tells the story of your strategy, you will set the foundation for a management system that is capable of driving dramatic improvements in performance.