In the 1990s, Kaplan and Norton developed the Balanced Scorecard. Their idea is that the evaluation of a company should not be restricted to the traditional financial performance measures but should be supplemented with measures concerning customer satisfaction, internal processes, and the ability to innovate. Results achieved within the additional perspectives should assure future financial results (Kaplan & Norton, 1992, 1993, 1996a, 1996b).
Kaplan and Norton propose a three layered structure for the four perspectives: mission (to become the customers' most preferred supplier), objectives (to provide the customers with new products), and measures (percentage of turnover generated by new products). To put the BSC to work, companies should translate each of the perspectives into corresponding metrics and measures that assess the current situation. These assessments have to be repeated periodically and have to be confronted with the goals that have to be set beforehand. At first, the BSC was used as a performance measurement system and a planning and control device. Later on, some companies moved beyond this early vision of the scorecard. They discovered that the measures on a Balanced Scorecard can be used as the cornerstone of a management system that communicates strategy, aligns individuals and teams to the strategy, establishes long-term strategic targets, aligns initiatives, allocates long- and short term resources and finally, provides feedback and learning about the strategy (Kaplan & Norton, 1992, 1993, 1996a, 1996b).Generic IT Balanced Scorecard
Different market situations, product strategies, business units, and competitive environments require different scorecards to fit their mission, strategy, technology, and culture. The general BSC-framework can be translated to the more specific needs of the monitoring and evaluation of the IT function, and recently the IT BSC has emerged in practice (Graeser et al. 1998; Van Grembergen & Saull, 2001). In Van Grembergen and Van Bruggen (1997) and Van Grembergen and Timmerman (1998) a generic IT scorecard is proposed consisting of four perspectives: business contribution, user orientation, operational excellence, and future orientation (Table 2). This IT scorecard differs from the company-wide BSC because it is a departmental scorecard for an internal service supplier (IT): the customers are the computer users, the business contribution is to be considered from management's point of view, the internal processes under consideration are the IT processes (systems development and operations), and the ability to innovate is measuring the use of new technologies and the human IT resources.
Table 2: Balanced Scorecard Applied to IT
Photo by: Stephen VanHorn
The balanced scorecard is a performance measurement tool developed in 1992 by Harvard Business School professor Robert S. Kaplan and management consultant David P. Norton. Kaplan and Norton's research led them to believe that traditional financial measures, like return on investment, could not provide an accurate picture of a company's performance in the innovative business environment of the 1990s. Rather than forcing managers to choose between "hard" financial measures and "soft" operational measures—such as customer retention, product development cycle times, or employee satisfaction—they developed a method that would allow managers to consider both types of measures in a balanced way. "The balanced scorecard includes financial measures that tell the results of actions already taken," Kaplan and Norton explained in the seminal 1992 Harvard Business Review article that launched the balanced scorecard methodology. "And it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement activities—operational measures that are the drivers of future financial performance."
The balanced scorecard provides a framework for managers to use in linking the different types of measurements together. Kaplan and Norton recommend looking at the business from four perspectives: the customer's perspective, an internal business perspective, an innovation and learning perspective, and the financial (or shareholder's) perspective. Using the overall corporate strategy as a guide, managers derive three to five goals related to each perspective, and then develop specific measures to support each goal. Ideally, the scorecard helps managers to clarify their vision for the organization and translate that vision into measurable actions that employees can understand. It also enables managers to balance the concerns of various stakeholders in order to improve the company's overall performance. "The balanced score-card is a powerful concept based on a simple principle: managers need a balanced set of performance indicators to run an organization well," Paul McCunn wrote in Management Accounting. "The indicators should measure performance against the critical success factors of the business, and the 'balance' is the balancing tension between the traditional financial and nonfinancial operational, leading and lagging, and action-oriented and monitoring measures."
The balanced scorecard concept has enjoyed significant success since its introduction. According to the Financial Times, it was adopted by 80 percent of large U.S. companies as of 2004, making it the nation's most popular management tool for increasing performance. In addition, it has increasingly been applied in the public sector since it was promoted by the National Partnership for Reinventing Government. Part of the balanced scorecard's popularity can be attributed to the fact that it is consistent with many common performance improvement initiatives undertaken by companies, such as continuous improvement, cross-functional teamwork, or customer-supplier partnering. It complements these initiatives by helping managers to understand the complex interrelationships among different business areas. By linking the elements of a company's competitive strategy in one report, the balanced scorecard points out situations
where improvement in one area comes at the expense of another. In this way, the scorecard helps managers to make the decisions and tradeoffs necessary for success in today's fast-paced and competitive business environment.HISTORY OF THE BALANCED
In 1990 Robert S. Kaplan, a professor of accounting at the Harvard Business School, and David P. Norton, co-founder of a Massachusetts-based strategy consulting firm called Renaissance Worldwide Inc. conducted a year-long research project involving 12 large companies. The original idea behind the study, as Anita van de Vliet explained in Management Today, was that "relying primarily on financial accounting measures was leading to short-term decision-making, over-investment in easily valued assets (through mergers and acquisitions) with readily measurable returns, and under-investment in intangible assets, such as product and process innovation, employee skills, or customer satisfaction, whose short-term returns are more difficult to measure" (1997, pp.78).
Kaplan and Norton looked at the way these companies used performance measurements to control the behavior of managers and employees. They used their findings to devise a new performance measurement system that would provide businesses with a balanced view of financial and operational measures. Kaplan and Norton laid out their balanced scorecard approach to performance measurement in three Harvard Business Review articles beginning in 1992. Before long, the balanced scorecard had become one of the hottest topics at management conferences around the world. In fact, the Harvard Business Review called it one of the most important and influential management ideas of the past 75 years. In 1996 Kaplan and Norton expanded upon their original concept in a book titled The Balanced Scorecard: Translating Strategy into Action. They followed up with two other books that further developed the approach: The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2001) and Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004).THE FOUR PERSPECTIVES
Kaplan and Norton's basic balanced scorecard asks managers to view their business from four different perspectives: the customer perspective, an internal business perspective, an innovation and learning perspective, and the financial or shareholder perspective. These perspectives are relevant to all types of businesses. However, additional perspectives also may be important in certain types of businesses. For example, a company in the oil industry might wish to incorporate an environmental regulation perspective. In this way, the balanced scorecard maintains some flexibility for companies with special needs to add other perspectives.CUSTOMER PERSPECTIVE.
According to Kaplan and Norton, viewing a business from the customer perspective involves asking the question: "How do customers see us?" They contend that many companies in a wide range of industries have made customer service a priority. The balanced scorecard allows managers to translate this broad goal into specific measures that reflect the issues that are most important to customers. For example, Kaplan and Norton mention four main areas of customer concern: time, quality, cost, and performance. They recommend that companies establish a goal for each of these areas and then translate each goal into one or more specific measurements. Kaplan and Norton note that some possible measures, like percent of sales from new products, can be determined from inside the company. Other measures, like on-time delivery, will depend on the requirements of each customer. To incorporate such measures into the balanced scorecard, managers will need to obtain outside information through customer evaluations or bench-marking. Collecting data from outside the company is a valuable exercise because it forces managers to view their company from the customers' perspective.INTERNAL BUSINESS PERSPECTIVE.
The internal business perspective is closely related to the customer perspective. "After all, excellent customer performance derives from processes, decisions, and actions occurring throughout an organization," Kaplan and Norton wrote. "Managers need to focus on those critical internal operations that enable them to satisfy customer needs." Viewing a company from the internal business perspective involves asking the question, "What must we excel at?" Kaplan and Norton recommend focusing first on the internal processes that impact customer satisfaction, such as quality, productivity, cycle time, and employee skills. Using these critical processes as a base, managers should develop goals that will help the company to meet its customers' expectations. These goals should then be translated into measures that can be influenced by employee actions. It is important that internal goals and measures are broken down at the local level in order to provide a link between top management goals and individual employee actions. "This linkage ensures that employees at lower levels in the organization have clear targets for actions, decisions, and improvement activities that will contribute to the company's overall mission," the authors explained.INNOVATION AND LEARNING PERSPECTIVE.
In including the innovation and learning perspective in their balanced scorecard, Kaplan and Norton recognized that modern companies must make continual improvements in order to succeed in an intensely competitive global business environment. "A company's ability to innovate, improve, and learn ties directly to the company's value," they noted. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins—in short, grow and thereby increase shareholder value. Accordingly, viewing a business from the innovation and learning perspective involves asking the question, "How can we continue to improve and create value?" Managers should establish goals related to innovation and learning, and then translate the goals into specific measures—such as increasing the percentage of the company's sales derived from new products.FINANCIAL PERSPECTIVE.
Kaplan and Norton developed the balanced scorecard at a time when financial measures were increasingly coming under attack from management experts. Critics claimed that judging performance by financial measures encouraged companies to focus on short-term results and avoid taking actions that would create value over the long term. They also argued that financial measures looked backward at past actions rather than forward at future possibilities. Some experts told managers to focus solely on operational improvements and allow the financial performance to improve on its own.
Although these arguments convinced Kaplan and Norton to conduct their study of performance measurement, they found that financial controls are an important part of the puzzle. They claimed that managers need to know whether or not their operational improvements are reflected in the bottom line. If not, it may mean that management needs to reevaluate its strategy for the business. "Measures of customer satisfaction, internal business performance, and innovation and improvement are derived from the company's particular view of the world and its perspective on key success factors. But that view is not necessarily correct," Kaplan and Norton wrote. "Periodic financial statements remind executives that improved quality, response time, productivity, or new products benefit the company only when they are translated into improved sales and market share, reduced operating expenses, or higher asset turnover."
Thus, the fourth perspective in the balanced scorecard asks the question: "How do we look to shareholders?" Some of the goals a company might set in this area involve profitability, growth, and share-holder value. The measures attached to these goals might include traditional financial performance measures, such as return on assets or earnings per share. Although these measures can prove misleading when taken alone, when incorporated into a balanced score-card they can provide managers with valuable information about whether the strategy has contributed to bottom-line improvement. According to Kaplan and Norton, a common mistake for managers making large-scale operational improvements is failing to follow up with additional actions. For example, a company might undertake a quality improvement initiative which, when implemented successfully, creates excess capacity or makes certain employees redundant. Financial measurements will point out the need to make further changes.DEVELOPING A BALANCED SCORECARD
Development of a balanced scorecard begins with the company's overall strategy or vision. It is important to consult with top management, rather than line managers, to obtain a clear picture of where the company wants to be in 3 to 5 years. The next step is to appoint a "scorecard architect" to establish the framework and methodology for designing the scorecard. With this framework in mind, the organization must define a linked set of strategic objectives that will lead the company toward top management's vision. These objectives should be true drivers of performance for the business as a whole, rather than a list of separate goals for business units or departments. It may be helpful to begin with the four perspectives included in the balanced scorecard model and then add more if needed, depending on the industry.
At this point, most companies will begin to involve line managers and staff members—and perhaps even customers—in establishing goals or objectives. The involvement might take the form of an executive workshop at which participants review and discuss the goals and appropriate measures. This approach builds consensus around the balanced score-card and reduces the potential for unrealistic goals to be handed down from the top.
The strategic objectives provide a framework for managers to use in developing specific performance measures. "Most of the measures we use are not new, but they had been held in different silos, different boxes, in the organization," Rick Anderson, a performance analyst at BP Chemicals, told van de Vliet. "The [balanced scorecard] approach has brought existing measures onto one piece of paper, so everybody can relate to one area." The goals and measures in an organization's balanced scorecard can be broken down to provide custom scorecards for all business levels, even down to individual employees. These custom scorecards show how an employee's work activities link to the business's overall strategy. For incentive and compensation purposes, it is possible to assign weights to each measure based on its importance to the company and the individual's ability to affect it.
Once the balanced scorecard is in place, the next step is to collect and analyze the data for performance measurements. This data will enable the organization to see its strong performance areas, as well as areas for potential improvement. It is important to supply the performance data to employees, and to empower employees to find ways to sustain high performance and improve poor performance. Managers also must realize that the balanced scorecard is not set in stone. Experience in using the scorecard may point out areas that should be modified or adapted. In addition, managers may find ways to tie the scorecard into other areas, such as budgets, resource allocation, compensation, succession planning, and employee development.AVOIDING POTENTIAL PITFALLS
Numerous organizations have implemented some version of the balanced scorecard since its introduction in 1992. However, professor Claude Lewy of the Free University of Amsterdam found that 70 percent of scorecard implementations failed. Many companies are attracted by the power and simplicity of the balanced scorecard concept, but then find implementation to be extremely time-consuming and expensive. Lewy admits that the balanced scorecard can be an effective way of translating an overall strategy to the many parts of an organization. However, he stresses that organizations must have a clear idea of what they want to accomplish, and be willing to commit the necessary resources in order to successfully implement the balanced scorecard. Along with Lex Du Mee of KPMG Management Consulting, Lewy conducted a study of seven European companies and came up with what he called the Ten Commandments of Balanced Scorecard Implementation.
In order to ensure an effective balanced scorecard implementation, Lewy and Du Mee recommended that organizations obtain the commitment of a top-level sponsor, as well as relevant line managers. The balanced scorecard initiative must be the organization's top priority if implementation is to succeed. They also emphasized the importance of putting strategic goals in place before implementing the score-card. Otherwise, the goals and measures included in the scorecard are likely to drive the wrong behavior. Lewy and Du Mee also suggested that organizations try a pilot program before moving on to full-scale implementation. Testing the balanced scorecard in a few key business areas enables managers to make necessary changes and increase support for the initiative before involving the entire company. It also is important to provide information and training to employees prior to an organization-wide rollout.
Lewy and Du Mee also warn managers against using the balanced scorecard as a way to achieve extra top-down control. Employees are unlikely to support the goals and measures if the scorecard is used as a "gotcha" by management. Another potential pitfall, according to the researchers, is trying to use a standardized scorecard. Instead, they stress that each organization must devote the time and resources to develop its own customized program. Lewy and Du Mee found that balanced scorecard implementation was more likely to fail when companies underestimated the amount of training and communication required during the introductory phase, or the extra workload and costs involved with periodic reporting later on. Even though the balanced scorecard appears to be a simple idea, implementing it is likely to mean huge changes in an organization.SOFTWARE AND SUPPORT
Once the balanced scorecard has been implemented successfully, the next significant task involves collecting and analyzing measurement data. Some companies found this process to be time-consuming and expensive, because the data was located on numerous different computer systems throughout the organization. However, by the 2000s a number of technological advances—such as data warehouses, enterprise resource planning systems, decision-support tools, groupware, and Internet technology—made data collection and analysis significantly easier. In fact, several software vendors created balanced scorecard applications for desktop computers. Typical software packages allow users to plug in the performance measures the company has chosen to monitor. The computer then collects the data and supplies performance grades according to formulas the company has determined. With the advent of electronic balanced scorecard applications, the process of performance measurement can be automated throughout a company.
In addition, Kaplan and Norton have used computer technology to provide information and support to organizations that adopt the balanced scorecard. For example, Norton's consulting firm, Renaissance Worldwide Inc. and Gentia Software formed the Balanced Scorecard Technology Council. This virtual users group sponsors a Web site (www.balancedscorecard.com) that provides research, product information, and a forum for ideas. Kaplan and Norton also founded an organization called the Balanced Scorecard Collaborative "to facilitate worldwide awareness, use, enhancement, and integrity of the Balanced Scorecard as a value-added management process." The collaborative also hosts a Web site at www.bsccol.com .
Cameron, Preston. "The Balancing Act: Even in Today's Volatile Economic Climate, Many Organizations Are Turning to the Balanced Scorecard to Help Steer Their Organization in the Right Direction" CMA Management 75, no. 10 (2002).
Kaplan, Robert S. and David P. Norton. "The Balanced Scorecard—Measures That Drive Performance." Harvard Business Review 70, no. 1 (1992): 71.
——. The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press, 1996.
——. "Putting the Balanced Scorecard to Work." Harvard Business Review 71, no. 5 (1993).
——. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston: Harvard Business School Press, 2001.
——. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston: Harvard Business School Press, 2004.
——. "Using the Balanced Scorecard as a Strategic Management System" Harvard Business Review 74, no. 1 (1996): 75.
Lester, Tom. "Measure for Measure: The Balanced Scorecard Remains a Widely Used Management Tool, but Great Care Must Be Taken to Select Appropriate and Relevant Metrics." The Financial Times, 6 October 2004.
Lewy, Claude, and Lex Du Mee. "The Ten Commandments of Balanced Scorecard Implementation." Management Control and Accounting, April 1998.
McCunn, Paul. "The Balanced Scorecard…the Eleventh Commandment." Management Accounting 76, no. 11 (1998): 34.
van de Vliet, Anita. "The New Balancing Act." Management Today, July 1997, 78.
Williams, Kathy. "What Constitutes a Successful Balanced Scorecard?" Strategic Finance 86, no. 5 (2004).
Also read article about Balanced Scorecard from Wikipedia
The balanced scorecard revolutionized conventional thinking about performance metrics. When Kaplan and Norton first introduced the concept, in 1992, companies were busy transforming themselves to compete in the world of information; their ability to exploit intangible assets was becoming more decisive than their ability to manage physical assets. The scorecard allowed companies to track financial results while monitoring progress in building the capabilities needed for growth. The tool was not intended to be a replacement for financial measures but rather a complement—and that’s just how most companies treated it.
Some companies went a step further, however, and discovered the scorecard’s value as the cornerstone of a new strategic management system. In this article from 1996, the authors describe how the balanced scorecard can address a serious deficiency in traditional management systems: the inability to link a company’s long-term strategy with its short-term financial goals. The scorecard lets managers introduce four new processes that help companies make that important link.
The first process—translating the vision —helps managers build a consensus concerning a company’s strategy and express it in terms that can guide action at the local level. The second—communicating and linking —calls for communicating a strategy at all levels of the organization and linking it with unit and individual goals. The third—business planning —enables companies to integrate their business plans with their financial plans. The fourth—feedback and learning —gives companies the capacity for strategic learning, which consists of gathering feedback, testing the hypotheses on which a strategy is based, and making necessary adjustments.The Idea in Brief
Why do budgets often bear little direct relation to a company’s long-term strategic objectives? Because they don’t take enough into consideration. A balanced scorecard augments traditional financial measures with benchmarks for performance in three key nonfinancial areas:
When performance measures for these areas are added to the financial metrics, the result is not only a broader perspective on the company’s health and activities, it’s also a powerful organizing framework. A sophisticated instrument panel for coordinating and fine-tuning a company’s operations and businesses so that all activities are aligned with its strategy.
The Idea in Practice
The balanced scorecard relies on four processes to bind short-term activities to long-term objectives:1. Translating the vision.
By relying on measurement, the scorecard forces managers to come to agreement on the metrics they will use to operationalize their lofty visions. Example:
A bank had articulated its strategy as providing “superior service to targeted customers.” But the process of choosing operational measures for the four areas of the scorecard made executives realize that they first needed to reconcile divergent views of who the targeted customers were and what constituted superior service.2. Communicating and linking.
When a scorecard is disseminated up and down the organizational chart, strategy becomes a tool available to everyone. As the high-level scorecard cascades down to individual business units, overarching strategic objectives and measures are translated into objectives and measures appropriate to each particular group. Tying these targets to individual performance and compensation systems yields “personal scorecards.” Thus, individual employees understand how their own productivity supports the overall strategy.3. Business planning.
Most companies have separate procedures (and sometimes units) for strategic planning and budgeting. Little wonder, then, that typical long-term planning is, in the words of one executive, where “the rubber meets the sky.” The discipline of creating a balanced scorecard forces companies to integrate the two functions, thereby ensuring that financial budgets do indeed support strategic goals. After agreeing on performance measures for the four scorecard perspectives, companies identify the most influential “drivers” of the desired outcomes and then set milestones for gauging the progress they make with these drivers.4. Feedback and learning.
By supplying a mechanism for strategic feedback and review, the balanced scorecard helps an organization foster a kind of learning often missing in companies: the ability to reflect on inferences and adjust theories about cause-and-effect relationships.
Feedback about products and services. New learning about key internal processes. Technological discoveries. All this information can be fed into the scorecard, enabling strategic refinements to be made continually. Thus, at any point in the implementation, managers can know whether the strategy is working—and if not, why.
Editor’s Note: In 1992, Robert S. Kaplan and David P. Norton’s concept of the balanced scorecard revolutionized conventional thinking about performance metrics. By going beyond traditional measures of financial performance, the concept has given a generation of managers a better understanding of how their companies are really doing. These nonfinancial metrics are so valuable mainly because they predict future financial performance rather than simply report what’s already happened. This article, first published in 1996, describes how the balanced scorecard can help senior managers systematically link current actions with tomorrow’s goals, focusing on that place where, in the words of the authors, “the rubber meets the sky.”
As companies around the world transform themselves for competition that is based on information, their ability to exploit intangible assets has become far more decisive than their ability to invest in and manage physical assets. Several years ago, in recognition of this change, we introduced a concept we called the balanced scorecard. The balanced scorecard supplemented traditional financial measures with criteria that measured performance from three additional perspectives—those of customers, internal business processes, and learning and growth. (See the exhibit “Translating Vision and Strategy: Four Perspectives.”) It therefore enabled companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth. The scorecard wasn’t a replacement for financial measures; it was their complement.
Recently, we have seen some companies move beyond our early vision for the scorecard to discover its value as the cornerstone of a new strategic management system. Used this way, the scorecard addresses a serious deficiency in traditional management systems: their inability to link a company’s long-term strategy with its short-term actions.
Most companies’ operational and management control systems are built around financial measures and targets, which bear little relation to the company’s progress in achieving long-term strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.
Managers using the balanced scorecard do not have to rely on short-term financial measures as the sole indicators of the company’s performance. The scorecard lets them introduce four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions. (See the exhibit “Managing Strategy: Four Processes.”)
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The first new process—translating the vision —helps managers build a consensus around the organization’s vision and strategy. Despite the best intentions of those at the top, lofty statements about becoming “best in class,” “the number one supplier,” or an “empowered organization” don’t translate easily into operational terms that provide useful guides to action at the local level. For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.
The second process—communicating and linking —lets managers communicate their strategy up and down the organization and link it to departmental and individual objectives. Traditionally, departments are evaluated by their financial performance, and individual incentives are tied to short-term financial goals. The scorecard gives managers a way of ensuring that all levels of the organization understand the long-term strategy and that both departmental and individual objectives are aligned with it.
The third process—business planning —enables companies to integrate their business and financial plans. Almost all organizations today are implementing a variety of change programs, each with its own champions, gurus, and consultants, and each competing for senior executives’ time, energy, and resources. Managers find it difficult to integrate those diverse initiatives to achieve their strategic goals—a situation that leads to frequent disappointments with the programs’ results. But when managers use the ambitious goals set for balanced scorecard measures as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.
The fourth process—feedback and learning —gives companies the capacity for what we call strategic learning. Existing feedback and review processes focus on whether the company, its departments, or its individual employees have met their budgeted financial goals. With the balanced scorecard at the center of its management systems, a company can monitor short-term results from the three additional perspectives—customers, internal business processes, and learning and growth—and evaluate strategy in the light of recent performance. The scorecard thus enables companies to modify strategies to reflect real-time learning.
None of the more than 100 organizations that we have studied or with which we have worked implemented their first balanced scorecard with the intention of developing a new strategic management system. But in each one, the senior executives discovered that the scorecard supplied a framework and thus a focus for many critical management processes: departmental and individual goal setting, business planning, capital allocations, strategic initiatives, and feedback and learning. Previously, those processes were uncoordinated and often directed at short-term operational goals. By building the scorecard, the senior executives started a process of change that has gone well beyond the original idea of simply broadening the company’s performance measures.
For example, one insurance company—let’s call it National Insurance—developed its first balanced scorecard to create a new vision for itself as an underwriting specialist. But once National started to use it, the scorecard allowed the CEO and the senior management team not only to introduce a new strategy for the organization but also to overhaul the company’s management system. The CEO subsequently told employees in a letter addressed to the whole organization that National would thenceforth use the balanced scorecard and the philosophy that it represented to manage the business.
National built its new strategic management system step-by-step over 30 months, with each step representing an incremental improvement. (See the exhibit “How One Company Built a Strategic Management System…”) The iterative sequence of actions enabled the company to reconsider each of the four new management processes two or three times before the system stabilized and became an established part of National’s overall management system. Thus the CEO was able to transform the company so that everyone could focus on achieving long-term strategic objectives—something that no purely financial framework could do.Translating the Vision
The CEO of an engineering construction company, after working with his senior management team for several months to develop a mission statement, got a phone call from a project manager in the field. “I want you to know,” the distraught manager said, “that I believe in the mission statement. I want to act in accordance with the mission statement. I’m here with my customer. What am I supposed to do?”
The mission statement, like those of many other organizations, had declared an intention to “use high-quality employees to provide services that surpass customers’ needs.” But the project manager in the field with his employees and his customer did not know how to translate those words into the appropriate actions. The phone call convinced the CEO that a large gap existed between the mission statement and employees’ knowledge of how their day-to-day actions could contribute to realizing the company’s vision.Essential Background Balanced Scorecard Feature
Answer these four questions to get a fast but comprehensive view of your business.
Metro Bank (not its real name), the result of a merger of two competitors, encountered a similar gap while building its balanced scorecard. The senior executive group thought it had reached agreement on the new organization’s overall strategy: “to provide superior service to targeted customers.” Research had revealed five basic market segments among existing and potential customers, each with different needs. While formulating the measures for the customer-perspective portion of their balanced scorecard, however, it became apparent that although the 25 senior executives agreed on the words of the strategy, each one had a different definition of superior service and a different image of the targeted customers .
The exercise of developing operational measures for the four perspectives on the bank’s scorecard forced the 25 executives to clarify the meaning of the strategy statement. Ultimately, they agreed to stimulate revenue growth through new products and services and also agreed on the three most desirable customer segments. They developed scorecard measures for the specific products and services that should be delivered to customers in the targeted segments as well as for the relationship the bank should build with customers in each segment. The scorecard also highlighted gaps in employees’ skills and in information systems that the bank would have to close in order to deliver the selected value propositions to the targeted customers. Thus, creating a balanced scorecard forced the bank’s senior managers to arrive at a consensus and then to translate their vision into terms that had meaning to the people who would realize the vision.Communicating and Linking
“The top ten people in the business now understand the strategy better than ever before. It’s too bad,” a senior executive of a major oil company complained, “that we can’t put this in a bottle so that everyone could share it.” With the balanced scorecard, he can.
One company we have worked with deliberately involved three layers of management in the creation of its balanced scorecard. The senior executive group formulated the financial and customer objectives. It then mobilized the talent and information in the next two levels of managers by having them formulate the internal-business-process and learning-and-growth objectives that would drive the achievement of the financial and customer goals. For example, knowing the importance of satisfying customers’ expectations of on-time delivery, the broader group identified several internal business processes—such as order processing, scheduling, and fulfillment—in which the company had to excel. To do so, the company would have to retrain frontline employees and improve the information systems available to them. The group developed performance measures for those critical processes and for staff and systems capabilities.
Broad participation in creating a scorecard takes longer, but it offers several advantages: Information from a larger number of managers is incorporated into the internal objectives; the managers gain a better understanding of the company’s long-term strategic goals; and such broad participation builds a stronger commitment to achieving those goals. But getting managers to buy into the scorecard is only a first step in linking individual actions to corporate goals.
The balanced scorecard signals to everyone what the organization is trying to achieve for shareholders and customers alike. But to align employees’ individual performances with the overall strategy, scorecard users generally engage in three activities: communicating and educating, setting goals, and linking rewards to performance measures.Communicating and educating.
Implementing a strategy begins with educating those who have to execute it. Whereas some organizations opt to hold their strategy close to the vest, most believe that they should disseminate it from top to bottom. A broad-based communication program shares with all employees the strategy and the critical objectives they have to meet if the strategy is to succeed. Onetime events such as the distribution of brochures or newsletters and the holding of “town meetings” might kick off the program. Some organizations post bulletin boards that illustrate and explain the balanced scorecard measures, then update them with monthly results. Others use groupware and electronic bulletin boards to distribute the scorecard to the desktops of all employees and to encourage dialogue about the measures. The same media allow employees to make suggestions for achieving or exceeding the targets.
The balanced scorecard, as the embodiment of business unit strategy, should also be communicated upward in the organization—to corporate headquarters and to the corporate board of directors. With the scorecard, business units can quantify and communicate their long-term strategies to senior executives using a comprehensive set of linked financial and nonfinancial measures. Such communication informs the executives and the board in specific terms that long-term strategies designed for competitive success are in place. The measures also provide the basis for feedback and accountability. Meeting short-term financial targets should not constitute satisfactory performance when other measures indicate that the long-term strategy is either not working or not being implemented well.
Should the balanced scorecard be communicated beyond the boardroom to external shareholders? We believe that as senior executives gain confidence in the ability of the scorecard measures to monitor strategic performance and predict future financial performance, they will find ways to inform outside investors about those measures without disclosing competitively sensitive information.
Skandia, an insurance and financial services company based in Sweden, issues a supplement to its annual report called “The Business Navigator”—“an instrument to help us navigate into the future and thereby stimulate renewal and development.” The supplement describes Skandia’s strategy and the strategic measures the company uses to communicate and evaluate the strategy. It also provides a report on the company’s performance along those measures during the year. The measures are customized for each operating unit and include, for example, market share, customer satisfaction and retention, employee competence, employee empowerment, and technology deployment.
Communicating the balanced scorecard promotes commitment and accountability to the business’s long-term strategy. As one executive at Metro Bank declared, “The balanced scorecard is both motivating and obligating.”Setting goals.
Mere awareness of corporate goals, however, is not enough to change many people’s behavior. Somehow, the organization’s high-level strategic objectives and measures must be translated into objectives and measures for operating units and individuals.
The exploration group of a large oil company developed a technique to enable and encourage individuals to set goals for themselves that were consistent with the organization’s. It created a small, fold-up, personal scorecard that people could carry in their shirt pockets or wallets. (See the exhibit “The Personal Scorecard.”) The scorecard contains three levels of information. The first describes corporate objectives, measures, and targets. The second leaves room for translating corporate targets into targets for each business unit. For the third level, the company asks both individuals and teams to articulate which of their own objectives would be consistent with the business unit and corporate objectives, as well as what initiatives they would take to achieve their objectives. It also asks them to define up to five performance measures for their objectives and to set targets for each measure. The personal scorecard helps to communicate corporate and business unit objectives to the people and teams performing the work, enabling them to translate the objectives into meaningful tasks and targets for themselves. It also lets them keep that information close at hand—in their pockets.Linking rewards to performance measures.
Should compensation systems be linked to balanced scorecard measures? Some companies, believing that tying financial compensation to performance is a powerful lever, have moved quickly to establish such a linkage. For example, an oil company that we’ll call Pioneer Petroleum uses its scorecard as the sole basis for computing incentive compensation. The company ties 60% of its executives’ bonuses to their achievement of ambitious targets for a weighted average of four financial indicators: return on capital, profitability, cash flow, and operating cost. It bases the remaining 40% on indicators of customer satisfaction, dealer satisfaction, employee satisfaction, and environmental responsibility (such as a percentage change in the level of emissions to water and air). Pioneer’s CEO says that linking compensation to the scorecard has helped to align the company with its strategy. “I know of no competitor,” he says, “who has this degree of alignment. It is producing results for us.”
As attractive and as powerful as such linkage is, it nonetheless carries risks. For instance, does the company have the right measures on the scorecard? Does it have valid and reliable data for the selected measures? Could unintended or unexpected consequences arise from the way the targets for the measures are achieved? Those are questions that companies should ask.
Furthermore, companies traditionally handle multiple objectives in a compensation formula by assigning weights to each objective and calculating incentive compensation by the extent to which each weighted objective was achieved. This practice permits substantial incentive compensation to be paid if the business unit overachieves on a few objectives even if it falls far short on others. A better approach would be to establish minimum threshold levels for a critical subset of the strategic measures. Individuals would earn no incentive compensation if performance in a given period fell short of any threshold. This requirement should motivate people to achieve a more balanced performance across short- and long-term objectives.
Some organizations, however, have reduced their emphasis on short-term, formula-based incentive systems as a result of introducing the balanced scorecard. They have discovered that dialogue among executives and managers about the scorecard—both the formulation of the measures and objectives and the explanation of actual versus targeted results—provides a better opportunity to observe managers’ performance and abilities. Increased knowledge of their managers’ abilities makes it easier for executives to set incentive rewards subjectively and to defend those subjective evaluations—a process that is less susceptible to the game playing and distortions associated with explicit, formula-based rules.
One company we have studied takes an intermediate position. It bases bonuses for business unit managers on two equally weighted criteria: their achievement of a financial objective—economic value added—over a three-year period and a subjective assessment of their performance on measures drawn from the customer, internal-business-process, and learning-and-growth perspectives of the balanced scorecard.
That the balanced scorecard has a role to play in the determination of incentive compensation is not in doubt. Precisely what that role should be will become clearer as more companies experiment with linking rewards to scorecard measures.Business Planning
“Where the rubber meets the sky”: That’s how one senior executive describes his company’s long-range-planning process. He might have said the same of many other companies because their financially based management systems fail to link change programs and resource allocation to long-term strategic priorities.
The problem is that most organizations have separate procedures and organizational units for strategic planning and for resource allocation and budgeting. To formulate their strategic plans, senior executives go off-site annually and engage for several days in active discussions facilitated by senior planning and development managers or external consultants. The outcome of this exercise is a strategic plan articulating where the company expects (or hopes or prays) to be in three, five, and ten years. Typically, such plans then sit on executives’ bookshelves for the next 12 months.By the Same Authors Business Processes Feature
How to effectively manage both strategy and operations.
Meanwhile, a separate resource-allocation and budgeting process run by the finance staff sets financial targets for revenues, expenses, profits, and investments for the next fiscal year. The budget it produces consists almost entirely of financial numbers that generally bear little relation to the targets in the strategic plan.
Which document do corporate managers discuss in their monthly and quarterly meetings during the following year? Usually only the budget, because the periodic reviews focus on a comparison of actual and budgeted results for every line item. When is the strategic plan next discussed? Probably during the next annual off-site meeting, when the senior managers draw up a new set of three-, five-, and ten-year plans.
The very exercise of creating a balanced scorecard forces companies to integrate their strategic planning and budgeting processes and therefore helps to ensure that their budgets support their strategies. Scorecard users select measures of progress from all four scorecard perspectives and set targets for each of them. Then they determine which actions will drive them toward their targets, identify the measures they will apply to those drivers from the four perspectives, and establish the short-term milestones that will mark their progress along the strategic paths they have selected. Building a scorecard thus enables a company to link its financial budgets with its strategic goals.
For example, one division of the Style Company (not its real name) committed to achieving a seemingly impossible goal articulated by the CEO: to double revenues in five years. The forecasts built into the organization’s existing strategic plan fell $1 billion short of this objective. The division’s managers, after considering various scenarios, agreed to specific increases in five different performance drivers: the number of new stores opened, the number of new customers attracted into new and existing stores, the percentage of shoppers in each store converted into actual purchasers, the portion of existing customers retained, and average sales per customer.
By helping to define the key drivers of revenue growth and by committing to targets for each of them, the division’s managers eventually grew comfortable with the CEO’s ambitious goal.
The process of building a balanced scorecard—clarifying the strategic objectives and then identifying the few critical drivers—also creates a framework for managing an organization’s various change programs. These initiatives—reengineering, employee empowerment, time-based management, and total quality management, among others—promise to deliver results but also compete with one another for scarce resources, including the scarcest resource of all: senior managers’ time and attention.
Shortly after the merger that created it, Metro Bank, for example, launched more than 70 different initiatives. The initiatives were intended to produce a more competitive and successful institution, but they were inadequately integrated into the overall strategy. After building their balanced scorecard, Metro Bank’s managers dropped many of those programs—such as a marketing effort directed at individuals with very high net worth—and consolidated others into initiatives that were better aligned with the company’s strategic objectives. For example, the managers replaced a program aimed at enhancing existing low-level selling skills with a major initiative aimed at retraining salespersons to become trusted financial advisers, capable of selling a broad range of newly introduced products to the three selected customer segments. The bank made both changes because the scorecard enabled it to gain a better understanding of the programs required to achieve its strategic objectives.
Once the strategy is defined and the drivers are identified, the scorecard influences managers to concentrate on improving or reengineering those processes most critical to the organization’s strategic success. That is how the scorecard most clearly links and aligns action with strategy.
The final step in linking strategy to actions is to establish specific short-term targets, or milestones, for the balanced scorecard measures. Milestones are tangible expressions of managers’ beliefs about when and to what degree their current programs will affect those measures.In Practice Balanced Scorecard Feature
Examples of how different companies use it.
In establishing milestones, managers are expanding the traditional budgeting process to incorporate strategic as well as financial goals. Detailed financial planning remains important, but financial goals taken by themselves ignore the three other balanced scorecard perspectives. In an integrated planning and budgeting process, executives continue to budget for short-term financial performance, but they also introduce short-term targets for measures in the customer, internal-business-process, and learning-and-growth perspectives. With those milestones established, managers can continually test both the theory underlying the strategy and the strategy’s implementation.
At the end of the business-planning process, managers should have set targets for the long-term objectives they would like to achieve in all four scorecard perspectives; they should have identified the strategic initiatives required and allocated the necessary resources to those initiatives; and they should have established milestones for the measures that mark progress toward achieving their strategic goals.Feedback and Learning
“With the balanced scorecard,” a CEO of an engineering company told us, “I can continually test my strategy. It’s like performing real-time research.” That is exactly the capability that the scorecard should give senior managers: the ability to know at any point in its implementation whether the strategy they have formulated is, in fact, working, and if not, why.
The first three management processes—translating the vision, communicating and linking, and business planning—are vital for implementing strategy, but they are not sufficient in an unpredictable world. Together they form an important single-loop-learning process—single-loop in the sense that the objective remains constant, and any departure from the planned trajectory is seen as a defect to be remedied. This single-loop process does not require or even facilitate reexamination of either the strategy or the techniques used to implement it in light of current conditions.
Most companies today operate in a turbulent environment with complex strategies that, though valid when they were launched, may lose their validity as business conditions change. In this kind of environment, where new threats and opportunities arise constantly, companies must become capable of what Chris Argyris calls double-loop learning —learning that produces a change in people’s assumptions and theories about cause-and-effect relationships. (See “Teaching Smart People How to Learn,” HBR May–June 1991.)
Budget reviews and other financially based management tools cannot engage senior executives in double-loop learning—first, because these tools address performance from only one perspective, and second, because they don’t involve strategic learning. Strategic learning consists of gathering feedback, testing the hypotheses on which strategy was based, and making the necessary adjustments.
The balanced scorecard supplies three elements that are essential to strategic learning. First, it articulates the company’s shared vision, defining in clear and operational terms the results that the company, as a team, is trying to achieve. The scorecard communicates a holistic model that links individual efforts and accomplishments to business unit objectives.
Second, the scorecard supplies the essential strategic feedback system. A business strategy can be viewed as a set of hypotheses about cause-and-effect relationships. A strategic feedback system should be able to test, validate, and modify the hypotheses embedded in a business unit’s strategy. By establishing short-term goals, or milestones, within the business-planning process, executives are forecasting the relationship between changes in performance drivers and the associated changes in one or more specified goals. For example, executives at Metro Bank estimated the amount of time it would take for improvements in training and in the availability of information systems before employees could sell multiple financial products effectively to existing and new customers. They also estimated how great the effect of that selling capability would be.
Another organization attempted to validate its hypothesized cause-and-effect relationships in the balanced scorecard by measuring the strength of the linkages among measures in the different perspectives. (See the exhibit “How One Company Linked Measures from the Four Perspectives.”) The company found significant correlations between employees’ morale, a measure in the learning-and-growth perspective, and customer satisfaction, an important customer perspective measure. Customer satisfaction, in turn, was correlated with faster payment of invoices—a relationship that led to a substantial reduction in accounts receivable and hence a higher return on capital employed. The company also found correlations between employees’ morale and the number of suggestions made by employees (two learning-and-growth measures) as well as between an increased number of suggestions and lower rework (an internal-business-process measure). Evidence of such strong correlations help to confirm the organization’s business strategy. If, however, the expected correlations are not found over time, it should be an indication to executives that the theory underlying the unit’s strategy may not be working as they had anticipated.
Especially in large organizations, accumulating sufficient data to document significant correlations and causation among balanced scorecard measures can take a long time—months or years. Over the short term, managers’ assessment of strategic impact may have to rest on subjective and qualitative judgments. Eventually, however, as more evidence accumulates, organizations may be able to provide more objectively grounded estimates of cause-and-effect relationships. But just getting managers to think systematically about the assumptions underlying their strategy is an improvement over the current practice of making decisions based on short-term operational results.
Third, the scorecard facilitates the strategy review that is essential to strategic learning. Traditionally, companies use the monthly or quarterly meetings between corporate and division executives to analyze the most recent period’s financial results. Discussions focus on past performance and on explanations of why financial objectives were not achieved. The balanced scorecard, with its specification of the causal relationships between performance drivers and objectives, allows corporate and business unit executives to use their periodic review sessions to evaluate the validity of the unit’s strategy and the quality of its execution. If the unit’s employees and managers have delivered on the performance drivers (retraining of employees, availability of information systems, and new financial products and services, for instance), then their failure to achieve the expected outcomes (higher sales to targeted customers, for example) signals that the theory underlying the strategy may not be valid. The disappointing sales figures are an early warning.This article also appears in:
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Managers should take such disconfirming evidence seriously and reconsider their shared conclusions about market conditions, customer value propositions, competitors’ behavior, and internal capabilities. The result of such a review may be a decision to reaffirm their belief in the current strategy but to adjust the quantitative relationship among the strategic measures on the balanced scorecard. But they also might conclude that the unit needs a different strategy (an example of double-loop learning) in light of new knowledge about market conditions and internal capabilities. In any case, the scorecard will have stimulated key executives to learn about the viability of their strategy. This capacity for enabling organizational learning at the executive level—strategic learning—is what distinguishes the balanced scorecard, making it invaluable for those who wish to create a strategic management system.Toward a New Strategic Management System
Many companies adopted early balanced scorecard concepts to improve their performance measurement systems. They achieved tangible but narrow results. Adopting those concepts provided clarification, consensus, and focus on the desired improvements in performance. More recently, we have seen companies expand their use of the balanced scorecard, employing it as the foundation of an integrated and iterative strategic management system. Companies are using the scorecard to
The balanced scorecard enables a company to align its management processes and focuses the entire organization on implementing long-term strategy. At National Insurance, the scorecard provided the CEO and his managers with a central framework around which they could redesign each piece of the company’s management system. And because of the cause-and-effect linkages inherent in the scorecard framework, changes in one component of the system reinforced earlier changes made elsewhere. Therefore, every change made over the 30-month period added to the momentum that kept the organization moving forward in the agreed-upon direction.
Without a balanced scorecard, most organizations are unable to achieve a similar consistency of vision and action as they attempt to change direction and introduce new strategies and processes. The balanced scorecard provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company’s competitive, market, and technological environments.
A version of this article appeared in the July–August 2007 issue of Harvard Business Review .
Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development, Emeritus, at Harvard Business School. He is a coauthor, with Michael E. Porter, of “How to Solve the Cost Crisis in Health Care” (HBR, September 2011).
David P. Norton is a founder and director of the Palladium Group and is co-author of The Balanced Scorecard .
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