A P P LY I N G T H E B A L A N C E D S C O R E C A R D
WHY BUSINESS NEEDS THE BALANCED SCORECARD
Since the late 1980s, a growing numberof managers at the corporate and busi-ness unit levels have concluded thattraditional management and financialaccounting fails to give them completeinformation for managing their com-panies. Although these managers receivea prodigious flow of financial figures,they often get few of the nonfinancialfigures critical to making decisionsabout day-to-day operations or long-term strategy. These managers havecalled for a revolution in performancemeasurement. In particular, they arecalling for more measures of quality,customer satisfaction, turnaroundtimes, pollution control, and other
WHY BUSINESS NEEDSTHE BALANCED SCORECARD 1
THE DEVELOPMENT OF VARIOUS MODELS 4
IMPLEMENTING THE BALANCED SCORECARD 7
USING THE BALANCED SCORECARD 19
CONCLUSION 26ENDNOTES 27BIBLIOGRAPHY 28
As business becomes more complex and competi-
tive, traditional financial measures of performance
fail to give managers all the information they
need to make intelligent strategic and day-to-day
decisions. A powerful new means of delivering
this information is called the balanced scorecard,
a mix of financial and nonfinancial indicators –
about customers, internal processes, organiza-
tional learning, shareholder value, quality,
community relations, and so on. The balanced
scorecard enables managers to accelerate continu-
ous performance improvement, facilitate strategic
formulation and execution, and strengthen
internal and external accountability for creating
value. This publication describes the concept
of the balanced scorecard; explains the critical
steps in implementing one; and shows how
companies have applied scorecards to corporate
advantage.
PAGE
nonfinancial factors. The result ofthese calls for change has been amanagement innovation that helpsmanagers implement complex andnuanced corporate strategies: the balanced scorecard.
The Nomenclature Today
The balanced scorecard is a focusedset of vital financial and nonfinancialmeasures of performance. The notionis simple, but the nomenclature ofthe balanced scorecard can be con-fusing. To many people, “balancedscorecard” refers to the model devel-oped by Robert Kaplan and DavidNorton in a definitive set of HarvardBusiness Review articles (1992, 1993,1996c). But in practice, consultants
Responsibility for the content of this material rests solely with The Society of Management Accountantsof Canada. Applying the Balanced Scorecard is designed to provide accurate information in regard to thesubject matter covered. This publication does not represent an official position of The Society of Manage-ment Accountants of Canada and is distributed with the understanding that the authors, editor andpublisher are not rendering tax, legal, accounting or other professional services in the publication.
Exhibits 2, 5 and 11 reprinted by permission of Harvard Business Review. From “Using the BalancedScorecard as a Strategic Management System” by Robert S. Kaplan and David P. Norton. January 1996.Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved.
C O N T E N T S E X E C U T I V E S U M M A R Y
STRATEGICMANAGEMENT
SERIES
ManagementAccountingGuideline
Published by:
C A N A D A
Shaping the Future
STRATEGIC PERFORMANCEMEASUREMENT
and managers use the term loosely to referto any set of financial and nonfinancialmeasures. In a study by Walker Information,59 percent of Canadian executives and 33percent of U.S. executives claimed familiaritywith the terms “balanced scorecard” or“balanced measurement system” (WalkerInformation, 1998:4). The term has thusapparently gained a strong foothold as partof the management lexicon.
To be sure, the notion of using a balancedset of measures developed over many years.As far back as 1900, managers in Francebegan using the “tableau de bord,” ordashboard of financial and nonfinancialmeasures (Epstein and Manzoni 1998). Inthe 1980s, with the advent of total qualitymanagement, executives in the NorthAmerica began to take the same approach,attempting to manage with the vital fewindicators of success (The Society of Manage-ment Accountants of Canada 1994). Theconcept came to be increasingly associatedwith the term “balanced scorecard.” Thusthe term is used in its generic fashionthroughout this guideline.
The term is popular for good reason.Managers have embraced the notion of“scorecard,” which suggests a simple docu-ment, a shorthand way of putting all criticalvariables for running the organization onone page. They have also embraced thenotion of “balance” among performancemeasures – balance between the leading andlagging, financial and nonfinancial, inter-nal and external. Note that “balance” doesnot necessarily imply equivalence amongall measures. It simply means balancingthe single-minded focus on financial mea-sures with additional focus on nonfinancialones.
To Manage Within the Company
Managers can use the balanced scorecardas a means to articulate strategy, communi-cate its details, motivate people to executeplans, and enable executives to monitorresults. The advantages of using a focusedset of financial and nonfinancial measuresin this way are legion, as documented inmany recent works (Epstein and Birchard1999; The Society of Management Account-ants of Canada 1994; Hronec 1993; Kaplanand Norton 1996a; Lynch and Cross 1995;Rummler and Brache 1995). Perhaps theprime advantage is that a broad array ofindicators can improve the decision mak-ing that contributes to strategic success,
whether in big organizations or small, profit-focused or nonprofit, whether at the exec-utive level or the team level. Nonfinancialmeasures enable managers to consider morefactors critical to long-term performance.These factors, flowing directly from theorganization’s strategy, vary from how wellthe organization cares for customers to howfast it innovates.
The gap is huge between the kinds ofmeasures managers consider critical andthe variables they actually measure. In arecent study, 63 percent of firms ratedinnovation as highly important, but only22 percent measured it; 76 percent ratedmorale and corporate culture as important,but only 38 percent measure them; and 76 percent of firms considered core com-petencies as important, but only 36 per-cent measure them (Stivers et al. 1998:47).Although hard to quantify, variables likeinnovation and competencies often rankamong the most pivotal measures in accu-rately gauging the success of organizationalstrategy.
One of the key reasons managers yearnfor more nonfinancial measurement isthat financial measures, used alone, givean incomplete picture of an organization’sperformance. Employees evaluated accord-ing to their ability to achieve short-termtargets cannot be expected to consistentlymake the best possible long-term decisions.In an attempt to meet quarterly revenuetargets, for example, they will fast track atleast some high-value product shipments,even at the risk of breaking delivery promis-es on low-value shipments. The harm toorganizational reputation will not show upin the quarterly budget but will certainlyreappear later in the form of dissatisfiedcustomers.
Another reason managers yearn for morenonfinancial measures is that traditionalfinancial measures give an historical viewof performance – “through the rear-viewmirror,” as the saying goes. The “lagging”financial figures, like sales volume, helpthe firm keep score for quarters and yearsjust past. They often do not provide asmuch insight as forecasted data on qualityand shipping performance. In other words,financial measures often don’t offer thepredictive information contained in manynonfinancial metrics. They enable managersonly to extrapolate from the past – clearlya risky practice in fast-paced organizationstoday.
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By incorporating new measures in a bal-anced scorecard, an organization’s managersarm themselves to compete in the 21st century:• To improve performance continuously.
Improving financial results depends onimproving upstream quality, customersatisfaction, product innovation, andother results. Managers who identify thevital few nonfinancial factors in theirbusiness will have the capability to fine-tune them to deliver reliable long-termfinancial results.
• To implement more complex strategies. Manyorganizations today compete throughhighly differentiated strategies, strategiesthat rely on unique products, reengineeredprocesses, premium service, superiorinformation, a select mix of sales channels,and so on. To execute these strategies,managers need measures that defineorganizational objectives precisely.
• To better run lean, decentralized organiza-tions. Today’s lean organizations rely onmanagers, workers, and teams with theresponsibility and authority to act quicklyand independently to achieve the objec-tives set by top executives. Managersmost effectively empower people acrossthe organization by providing them withprecise, quantified, financial and non-financial targets to act upon.
• To feed systems for organizational learning.Both continuous and breakthroughimprovement first demand that peopleunderstand where they are falling short.Managers need quantified measures thatlet them make “fact-based” decisions aboutwhere they must change to successfullyexecute the strategy and continue to addvalue to the organization over the longterm.
• To drive organizational change. Managersand executives who believe they mustexecute a new strategy need hard datathat show the effectiveness of the newstrategy. They next need measurementtargets to guide everyone in aligning theirefforts with the new strategy. Executivesmust use measures to communicate thefine points of the strategy, and give clearmarching orders on how to proceed.
By managing the operations and strategyof an organization with an expanded familyof financial and nonfinancial measures,managers essentially create a new nervoussystem for sending and receiving signals.This new system, summarized in a single
document, helps top executives to alignaction, change, and innovation at everylevel, with the strategy set at the top. Thepower and utility of this system – the bal-anced scorecard – has been widely embracedby managers around the world.
Surveys show just how much companiesneed this capability. In a 1996 study, 57percent of respondents reported only “little”or “some” linkage between the priorities ofthe long-range strategy and the annualbudget. More than two thirds (69 percent)said that strategic planning had only “some,”“little,” or “no” influence on the company’soverall success (Renaissance Solutions andCFO 1996:4,5). Business organizations clearlyneed a means to integrate and execute thedetails of corporate strategy.
To Manage Outside the Company
While managers have found they need abroader set of measures to manage insidethe organization, they are also finding thatthey need a broader set to identify externalissues and manage external relationships.Much of the organization’s success dependson managing the partners, suppliers, cus-tomers, shareholders, and other stakeholdersthrough whom the organization createsvalue. To this end, a balanced scorecardhelps in a variety of ways: • To sense the demands of markets, competition,
and society. In the past, many managersgauged their success compared to year-earlier results, or compared to peer-groupcompanies. But to stay apprised of allthreats and opportunities, managersmust measure not just their own perfor-mance but that of the “best in class” –direct and indirect competitors, organiza-tions running similar processes, andorganizations competing broadly for thefavor of the same customers, shareholders,employees, and other stakeholders.
• To broaden and deepen supply-chain relation-ships. Companies today are cutting costs,increasing speed, accelerating innovation,and making other improvements byworking as business partners with cus-tomers and suppliers. To compete throughintegrating the supply chain, managersneed to measure and report internal andexternal variables that inform decisionmaking along this chain.
• To broaden and deepen relationships withstakeholders. Competition in product,labor, and capital markets has intensifiedinexorably in recent years. Today, to
A p p l y i n g t h e B a l a n c e d S c o re c a rd
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secure the loyalty of increasingly power-ful customers, employees, and sharehold-ers, managers need to develop and reportmeasures that demonstrate the companyis delivering the value demanded.
• To demonstrate accountability for perfor-mance. Regulators and the public con-tinue to pressure companies for greatertransparency. People outside the firmseek reassurance that companies operatewith acceptable, if not superior, perfor-mance. Managers need measures – ofperformance and management-systemimplementation – to demonstrate theydeserve a “license to operate.”
By managing relationships outside thecompany with an expanded family ofmeasures, managers position themselves toturn corporate accountability to competitiveadvantage. Measures of financial, opera-tional, and social performance become the language of strategic execution, fromdeveloping goals and initiatives to settingtargets and dispensing pay and incentives.Many firms today have embedded measure-ment systems in both their internal andexternal management systems to win inthe marketplace for low-cost capital, talent-ed employees, loyal, profitable customers,and supportive local communities.
Ultimately, the balanced scorecard canprovide the basis for fulfilling a new modelof accountability known as the account-ability cycle (Epstein and Birchard 1999:143).The measures, monitored by an enlightenedboard of directors, integrated in manage-ment control systems, and reported broadlyinside and outside the corporation, becomethe fuel for powering a cycle of continuousand breakthrough performance. (See Exhibit1) In this way, the balanced scorecardhelps managers deliver maximum valuefor the organization.
THE DEVELOPMENT OF VARIOUS MODELS
With the swirl of activity in the late 1980sand early 1990s, academics and consultantsproposed a number of new models fordeveloping balanced scorecards. In eachcase, these experts sought to provide man-agers with a formula to develop the criticalmeasures for guiding long-term corporatemanagement. They posed the question: Howcan managers choose measures, financialand nonfinancial, that will guide them indelivering consistent value for the enter-prise over the course of months and years?
From the results of a research projectconducted in 1990 with twelve companies,
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Exhibit 1 – The Accountability Cycle
Accountability
Shareholders
Measurement
Management
Systems
Reporting
Customers
Co
mm
unit
ies
Em
ploy
ees
Governance
ExternalReporting &Review
Objectives & CriticalSuccessFactors
FinancialOperational &Social Measures
InternalReporting& Review
Pay &Incentive
Feedback Feedback
FeedbackFeedback
Initiatives
Strategy(with Board of Directors)
Targets & Budgets
Kaplan, of Harvard Business School, andNorton, of Renaissance Worldwide, answeredthat question in their first article introducingthe balanced scorecard (Kaplan and Norton1992). They presented the scorecard as anorganizational scheme. The concept breaksout the critical categories of performancemeasurement into four “perspectives”: finan-cial, customer, internal business, and innova-tion and learning. (See Exhibit 2)
Taken together, the measures that fall intoKaplan and Norton’s four balanced scorecardcategories comprise a broad set of financialand nonfinancial gauges for running theorganization. They aid people in focusingon more than financial measures.
One of Kaplan and Norton’s most signifi-cant contributions was to stress that execu-tives should use the measures to translatevision and strategy into concrete directionsfor action by people throughout the organiza-tion. In their later work, Kaplan and Nortonshowed managers how to use the balancedscorecard as a strategic management system(Kaplan and Norton 1996). The measures inthe balanced scorecard were not to be a wishlist for continuous improvement. They pre-scribe a plan for strategic execution.
Meanwhile, in Sweden, at Skandia Group,a team led by Leif Edvinsson, corporatedirector, intellectual capital, operated underthe belief that to succeed as an insurer, thecompany had to build value through “intel-
lectual capital.” That is, to deliver reliablefinancial results, Skandia had to build andleverage the value of intangible assets likesolid customer relationships and uniquecomputer software. In 1990, Skandia pio-neered new ways to value intellectual capitaland created measures for managing a firmthat relies on intellectual capital to buildvalue (Edvinsson and Malone 1997). Skandiacreated a balanced scorecard called the“navigator” (Edvinsson and Malone 1997),separating corporate performance into fivecategories, or “focuses”: financial, customer,human, process, and renewal and develop-ment. As with the Kaplan and Norton model,performance in the latter four contribute tofinancial performance. (See Exhibit 3) Notethat Edvinsson, like Kaplan and Norton,stressed the importance of learning andrenewal as a root source of financial results.
At about the same time, other companieswere experimenting with a third approachto the balanced scorecard. In Canada, atBank of Montreal, a team led by the thenChief Executive Matthew Barrett operatedunder the belief that, to succeed as a bank,executives had to deliver top performanceto four stakeholder groups: shareholders,customers, employees, and communities.The team thus created measurements ofperformance for each group, and becameone of the leaders in this “stakeholder” bal-anced scorecard (Atkinson et al. 1997:33-35and Epstein and Birchard 1999:91-93).
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Source: Kaplan and Norton 1996c:76. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by permissionof Harvard Business Review.
Exhibit 2 – The Balanced Scorecard Framework
FINANCIALObjectives Measures Targets Initiatives“To succeed
financially, howshould we
appear to ourshareholders?”
INTERNAL BUSINESS PROCESSObjectives Measures Targets Initiatives
“To satisfy ourshareholders
and customers,what business
processes mustwe excel at?”
CUSTOMERObjectives Measures Targets Initiatives“To achieve
our vision,how should weappear to ourcustomers?”
LEARNING AND GROWTHObjectives Measures Targets Initiatives“To achieve our
vision, how willwe sustain ourability to changeand improve?”
Vision andStrategy
In various versions of the stakeholder-style balanced scorecard, managers organizecorporate measures into three to five cate-gories, according to stakeholder groups.Managers first choose the three to fivestakeholder groups who contribute mostto execution of corporate strategy. Theythen, as with other versions of the balancedscorecard, ask a series of probing questionsto devise measures to gauge performance ineach category. (See Exhibit 4) The measurescreated for customers, employees, commu-nities, and suppliers drive performance forshareholders in much the same cause-and-effect fashion as proposed by Edvinsson andKaplan and Norton.
Note that some organizations operatingwith a stakeholder-style scorecard may givepriority to one stakeholder or another. Bankof Montreal gives a weight of 40 percent toshareholders, 30 percent to customers, 20percent to employees, and 10 percent tocommunities. But other organizationssteer clear of priority rankings. EastmanChemical of Kingsport, Tennessee breaksout five stakeholders, customers, employees,investors, suppliers, and publics (i.e., com-munities, government agencies). Eastmangives all five stakeholder categories equalpriority (Epstein and Birchard 1999:149).
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Exhibit 3 – The Skandia Navigator Framework
Source: Skandia Group, 1999.
➡➡➡ ➡
HumanFocus
Market Focus
Renewal and Development Focus
Process Focus
Yesterday
Today
Tomorrow
Financial Focus
Exhibit 4 – The “Stakeholder” Balanced Scorecard
Source: Adapted from Epstein and Birchard 1999:149-154. Copyright © 1999 by Marc Epstein and Bill Birchard. Used by permission.
Shareholders
Customers
Em
ploy
ees
Co
mm
unit
ies
Vision
&
Strategy
How can employeeshelp fulfill our strategy?
—How can we show wedeliver value in return?
How can communitieshelp fulfill our strategy?
—How can we show wedeliver value in return?
How can we show we’re delivering value customers expect?
How can we show our strategy is
succeeding financially?
IMPLEMENTING THE BALANCED SCORECARD
To implement the balanced scorecard, man-agers must take into account not only orga-nizational structure and systems; they mustconsider their organization’s history, manage-ment style, and culture. The approach toimplementation that suits one organizationwill not always suit the next. This is especiallytrue of nonprofit organizations, whose mis-sions vary dramatically. For example, whenthe United Way of Southeastern New Englandcreated a balanced scorecard in 1996, a bigquestion was which constituency to stressas the “customer” for the sake of scorecardmeasures. Was it donors, charitable organi-zations, or communities? Any of the threecould have been appropriate. But managerschose donors because the United Way unit’stotal quality management efforts had alreadymade the organization donor-focused (Kaplan1997).
The size of the organization does not significantly matter to implementation.Research shows that the scorecard works for companies of all sizes. Chow, Haddad,and Williamson (1997), for example, showthat the scorecard, though developed atlarge companies, functions equally well forcompanies with just 100 to 1,200 employees.The United Way of Southeastern NewEngland, again, provides a good example.The organization had less than 50 full-timeemployees, albeit supplemented by manyvolunteers.
How long does the implementation of a balanced scorecard take? Generally aboutone to three years. This assumes a small teamof under a half dozen people initially worksfull time on the effort, and executives makethemselves available for interviewing, brain-storming, and support. The initial rollout ofperformance measures takes considerablyless time, roughly four months, but experi-ence shows that integrating the scorecardinto organizational management systemscan take an additional year of time (TheSociety of Management Accountants ofCanada 1994:48-49; Kaplan and Norton1996a:278, 288, 309).
Getting Started
The objective from the start is to create alist of measures that, by gauging only themost critical factors of success, telegraphs toall managers and employees what they needto do to help achieve corporate strategy. As
Kaplan and Norton say, the balanced score-card should tell the story of the strategy. Infact, someone without knowledge of thestrategy should be able to infer it from thefinal set of measures, which will numberperhaps no more than two dozen. The mea-sures will then become the marching ordersof the corporation, and if measures arepoorly chosen, the corporation will marchoff in the wrong direction.
Managers should not make the mistakeof building a scorecard comprised solely oflagging, internal, financial, or nonstrategicindicators. Certainly some of the indicatorswill be financial, and will lag, since theseare the characteristics that describe the“outcome,” or “results,” measures of tradi-tional financial systems. Many of theseindicators – net income, for example – areeven the same from company to company.But most of the indicators should measurethe elements of corporate performance thatlead to good results and may include inputand process measures in addition to outputmeasures. Note how the four perspectivesalso connect in a chain of cause and effect:innovation and learning improve internalbusiness processes; internal business processesimprove customer satisfaction; and customersatisfaction leads to improved financial per-formance. In other words, one category ofmeasurement drives performance in thenext. These indicators should reinforce eachother, all contributing to measuring theaccomplishment of a unified strategy. (SeeExhibit 5)
In practice, the notion of leading versuslagging should be thought of as a continuum.Customer satisfaction is a leading indicatorof financial performance, and also a laggingindicator of on-time delivery. Toxic emissionsare a leading indicator of environmentalcosts, and also a lagging indicator of processefficiency. Managers should think of measuresas data points in a complex flow of causesand effects. They will then better understandthat they have to pinpoint the drivers ofcorporate performance to succeed with theirscorecard effort.
As a rule, the final list of measures shouldbe both financial and nonfinancial; externaland internal; and lagging and leading. Arich mix of measures reflects the complexityof business today. (See Exhibit 6) In comingup with a diverse list, managers will haveseveral difficulties. The first is coming upwith new measures of factors, like innovation,that the company has never measured
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before. In some instances, developing areliably quantifiable outcome measure maynot be feasible, owing to lack of data or tohigh cost. Substituting an “input” measure,however, may have to suffice. Hours oftraining, for example, may have to substituteas an indicator of organizational learning.
Exhibit 6 — Measurement Mix
A bit of both makes the scorecard balanced:
A second difficulty is winnowing thelist of measures to the vital few, and thusblessing a final list that embraces all criticalfactors while avoiding duplication. Oneguide to minimizing the number of mea-sures is seeking those that are both completeand controllable (Epstein and Manzoni1998:201-202). Complete means the mea-sure sums up in one number the contribu-tion of all elements of performance thatmatter. For example, long-term financialreturns are the most complete measure ofcorporate performance at the executivelevel. Controllable means that people canactually control improvement in the factormeasured. So that the scorecard translatesstrategy into action, employees shouldbelieve that they or their work groupscould act personally to make at least asmall difference in a measured variable.
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Exhibit 5 — The Cause-and-Effect Flow of the Balanced Scorecard
Source: Kaplan and Norton 1996c:83. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by permission of Harvard Business Review.
Financial
Customers
Internal
Business
Processes
Learning
and
Growth
Return on capital Employed (ROCE)
AccountsReceivable
OperatingExpenses
CustomerSatisfaction
On-timeDelivery
ProcessQuality
ShorterCycleTime
LowerRework
Employee Morale
Employee Skills
Employee Suggestions
Leading Lagging
Nonfinancial Financial
External Internal
Strategic Tactical
Process Product
People Technology
Input Output
In practice, managers creating the balancedscorecard will find much room for disagree-ment. They will disagree on the fine pointsof strategy, and they will disagree on whichfactors drive success of the strategy. Gainingconsensus takes time, as managers work outtheir differences over, say, the drivers ofinnovation, customer satisfaction, and prof-its. Conflicts in points of view actually offeran opportunity to align, sometimes for thefirst time, the details of strategic executionso that people down in the organization donot work at cross purposes. In this sense,the process of creating a scorecard, of gain-ing consensus and alignment, can be morevaluable than the result itself.
Successful implementations follow a roughsequence of steps, covered in detail in otherpublications (The Society of ManagementAccountants of Canada 1994). The essentialprecondition for success is top managementsupport, followed by engaging a broad-crosssection of people in the organization toassure buy-in at all levels. The sequence ofimplementation generally begins after topmanagers articulate strategy. Among themost critical aspects of implementation:• Devising the measures;• Pinning down causal linkages;• Cascading the scorecards;• Linking to compensation; and• Preparing the technology infrastructure.
Devising the Measures
To speed the process of both brainstormingand winnowing the set of measures, managersmay turn to one of the models of balancedmeasurement for guidance (The Society ofManagement Accountants of Canada 1994;Hronec 1993; Kaplan and Norton 1996;Epstein and Birchard 1999; Lynch andCross 1995; Rummler and Brache 1995).Each model provides a means to surfaceideas, group them, and guide the logic oflinking each driver to final outcome mea-sures. To begin with, managers can considerthe four categories in the Kaplan and Nortonmodel:i) Financial. The first category on the
Kaplan and Norton balanced scorecardis financial. Managers devising financialmeasures should ask themselves, Howcan we show our strategy is succeedingfinancially? At the highest level, long-term profitability and stock price growthdemonstrate financial success of thestrategy. But managers should also con-sider financial measures particular to
their strategy. If the firm is young, on ahigh-growth trajectory, sales growth bysales channel may be a critical financialmeasure. If the firm operates in a maturebusiness, cash flow may be the rightmeasure. If it falls in between, economicprofit, a measure that charges the com-pany for the cost of equity capital, maybe the right measure.
ii) Customer. The second box in the Kaplanand Norton model is the customer per-spective. Managers devising customermeasures should ask themselves, Howcan we show we’re delivering to customersthe value they expect? At the highestlevel, many companies track customersatisfaction. But other measures are alsonecessary, like customer retention, mar-ket share, and share of wallet (i.e., shareof a customer’s business in a particularproduct or service line). Companies mayalso devise specific surveys. For example,Eastman Chemical surveys companiesto find out how they score Eastman on“customer value.”
iii) Internal business process. The third boxin the Kaplan and Norton model isinternal business. Managers developingmeasures for this perspective should ask,What processes must we excel at todeliver value to our customers? Forexample, Analog Devices measures chipyield, cycle time, on-time delivery, andparts per million defects to gauge theperformance of manufacturing process-es. CIGNA Property & Casualty, thePhiladelphia insurer acquired by Ace Ltd.of Bermuda, developed a system to mea-sure underwriting quality (by survey)and loss ratio (claims paid divided bypremium collected) to gauge the qualityof its underwriting processes.
iv) Learning and growth. The fourth box inthe Kaplan and Norton model is learn-ing and growth. For this perspective,managers should ask, What action mustthe company take to prepare the peopleand organization for the future? As anexample, CIGNA Property & Casualtydeveloped measures for competencydevelopment, key staff turnover, andacquisition of key staff. Whirlpool devel-oped measures of variables such as com-pletion of cultural milestones and, bysurvey, strength of leadership, commit-ment, and diversity. The measures inthe learning and growth perspectivestress reskilling, systems development,
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change procedures, and developmentof personal and organizational capabil-ities.
One business that followed Kaplan andNorton’s balanced scorecard model wasMobil Corporation’s U.S. Marketing andRefining Division. In 1994, the $20 billiondivision was searching for a means tocement in place a new strategy of targetingand selling to specific market segments.Mobil’s research showed that American gasbuyers come in five varieties, which Mobildubbed road warrior (generally men whodrive a lot), true blues (affluent, loyal cus-tomers), generation F3 (yuppies on the gowho want fuel, food, and want them fast),homebodies (generally homemakers), andprice shoppers. Mobil aimed to focus onjust the first three, which included 61 per-cent of all gas buyers (Kaplan 1996a:1, 3).
Exhibit 7 shows how the measures Mobildeveloped clarified the strategy precisely.Note that the exhibit includes objectivesas well, showing that in the developmentof measures, managers don’t brainstormdirectly from strategy, but first come upwith objectives. After creating objectivesand measures, they launch initiatives tomeet them. In Mobil’s case, the divisionupgraded its stations to give fast, friendlyservice – with “speed, smiles, and strokes.”It also redesigned its onsite conveniencestores to recast them as destination shopswith the right food and snacks for its seg-ments of buyers.
As with every other management model,managers should view the balanced score-card as flexible. The Kaplan and Nortonmodel, and the other models, offer a start-ing point. Many managers will see fit toalter the groups in each model or add dif-ferent ones. Companies that rely heavilyon good relationships in the local commu-nity – a bank for example – might add acategory for community. Companies thatconsume vast amounts of raw materials –oil, wood products, and mining firms –might add a category for the environment.Companies that rely heavily on upstreamsuppliers might single out a category forperformance with partners in the supplychain.
Alternatively, companies can include abroader array of measures than suggestedby any of the models. Other possible areasof measurement include society, regulators,and even milestones for major strategic
projects, such as building a plant, establish-ing an overseas distribution operation, orreengineering a process. Managers may alsowant to complement their internal datagathering with information from bench-marking and competitive analysis. Theycan then report scorecard results not justfor their own operations but for the opera-tions of peers and competitors, heighteningmanagement’s awareness of future threatsand opportunities.
Managers must bear in mind, however,that too many measures can spoil thescorecard as an effective management tool,especially if the measures fail to contributein an overall cause-and-effect fashion tostrategic success. Many critical measures,such as order turnaround time, may benecessary for operational control, but notnecessary to include on the corporate-levelscorecard. If managers cannot justify a mea-sure as critical to organizational priorities,they should consider dropping it duringthe winnowing process.
Allstate Insurance Corporation is anexample of one company that has cus-tomized its scorecard to fit its industry.Allstate operates with a strategy of winningthrough the building of strong, enduringrelationships with customers, employees,agents, shareholders, and even communitypartners. As a result, the company hasdevised a scorecard that today essentiallyfollows the stakeholder model of measure-ment, as discussed in Epstein and Birchard(1999:144-154). (See Exhibit 8) For Allstate,taking care of stakeholders means takingcare of the bottom line.
Allstate, for example, maintains thatexpanding career and advancement oppor-tunities equally for all employees drivesemployee satisfaction. These measures arecaptured under the “employee” focus.Employee satisfaction drives customergrowth and retention. The latter two mea-sures are captured under the “customer”focus. And customer growth and retentiondrive profitability, captured under the“shareholder” focus. In practice, feedingthe community stakeholder, as Allstate doesthrough financial and volunteer support,feeds the customer and employee stakehold-ers, which in turn feeds the shareholderstakeholder.
How does a company get started on theprocess of developing measures? The spurto action may come from a variety of causes:
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a financial shock, in which profits turndown for several quarters; a new strategicvision, in which executives lay a new courseto attack growth markets; a change in chiefexecutive, in which priorities shift sharplyto align with the new executive’s way of
managing. Whatever the cause, the spurconvinces top executives that the companyhas to adopt a new approach to managing,and probably a new culture that valuesmeasurement and accountability.
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Exhibit 7 – Mobil Corporation, U.S. Marketing and Refining, Balanced Scorecard
Source: Kaplan 1996a. Copyright © 1996 by the President and Fellows of Harvard College. Reprinted by permission.
Financial Perspective
Return on capital employed ROCE
Cash flow Cash flow excluding dividendsCash flow including dividends
Profitability P&L ($millions after tax)Net margin (cents/gal before tax)
Lowest cost Total operating expenses (cents/gal)
Most profitable growth targets Volume growth, gas retail salesVolume growth, distillate to tradeVolume growth, lubes
Customer Perspective
Continually delight the targeted consumer Share of segment% of road warriors% of true blues% of generation F3s
Mystery shopper rating
Improve the profitability of our partners Total gross profit, split
Internal Perspective
Improve environmental, health, and safety performance Safety incidentsEnvironmental incidents
Product, service, and APC development APC gross margin/store/month
Lower costs of manufacturing versus competition Refinery ROCERefinery expense
Improve hardware performance Refinery reliability indexRefinery yield index
Improve environmental, health, and safety performance Refinery safety index
Reducing laid down cost LDC vs. best comp. supply – gasLDC vs. best comp. supply – dist
Inventory management Inventory levelProduct availability index
Quality Quality index
Learning and Growth
Organization involvement Climate survey index
Core competencies and skills Strategic competency availability
Access to strategic information Strategic systems availability
Objective Measure
Exhibit 8 – Allstate Balanced Framework
Source:The Allstate Corporation, 1999.
Once the top management team commitsitself to a balanced scorecard project, a singleexecutive or senior manager can lead ateam of managers to guide and coordinatea series of executive interviews and brain-storming sessions that result in a group oftentative objectives and measures. Theseinterviews and sessions often reveal thatexecutives do not all agree on the answersto two questions: Where do we want tobe? How are we going to get there?
The balanced scorecard team can high-light for executives the inconsistencies intheir responses. The executive team cansubsequently debate elements of strategy,objectives, and measures – in several ses-sions with breakout groups as necessary. Byironing out the kinks in corporate strategy,executives can arrive at clear priorities and,in turn, create the final scorecard (Kaplanand Norton 1996:300-308).
During the early 1990s, BC Rail, in NorthVancouver, Canada, developed business-unit scorecards, which managers incorpo-rated into the monthly corporate financialpackage. Although useful, the measuresnever became integral to the company’smanagement process. Alan Owen, BC RailController, maintained that the reason forthis lack of takeup was that the measuresnever connected directly to corporate goals.When BC Rail introduced a formal balancedscorecard in 1996, the measures camedirectly from the strategic plan. BC Railmanagers adopted the following process tocreate their scorecard (Owen 1997:12-13):• Involve a broad senior management team.• Reexamine the corporate mission.
• Analyze strengths, weaknesses, opportu-nities, and threats.
• Reexamine the successes and failures ofthe previous five-year strategic plan.
• Define the company’s three criticalgoals.
• Establish core strategies to achieve eachgoal.
• Identify key metrics to measure progresstoward each goal.
• Establish clear responsibilities and targetsfor each metric.
• Develop action plans to achieve targets.• Develop annual objectives for each
manager and link them to incentivecompensation.
Note that, to succeed, top managementmust remain intensively involved with thescorecard. This involvement, throughoutthe early phases of the scorecard develop-ment, may last six to twelve months. Rarelydo balanced scorecards succeed when thechief executive and his or her team with-draw their support before completion ofthe initial rollout, or play only a tokenrole in the process (Kaplan and Norton1996a:294). The executives may also haveto change their attitudes or behavior tostress measurement, and accountability formeasured results, as a management priority.If they do not hold themselves and theorganization responsible for reporting andreviewing results, people within the com-pany will not take the effort seriously.
A big part of signaling the shift in priori-ties is a change in reporting. Internal reportsshould broadcast the critical balancedscorecard priorities, targets, and results –to every level of the organization. The newinternal reports will help to demonstratemanagement commitment. Many compa-nies will want to go on to broadcast keymeasures and results externally as well.Putting balanced scorecard targets andresults in the annual report shows convinc-ingly that management is serious andexpects shareholders and other stakeholdersto hold it accountable for executing strategy.
Pinning Down Cause and Effect Linkages
If managers have chosen measures to fitcarefully in a chain of cause and effect, theywill end up with a concrete logic for creat-ing value. They will be able to express thislogic in a number of if/then hypotheses. Ifwe train employees more intensively, thenwe will satisfy more customers. If we satisfy
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The Allstate Corporation
Key Focus Areas – Long Term Goals
Customers• Satisfaction• Retention
Communities Employees• Volunteerism • Leadership Index• Giving Campaign • Communication • Reaching Youth Index
Shareholders• Growth• Expenses
Process
more customers, then we will sell more ser-vices. If we sell more services, then we willboost both margins and profits. The obviousquestion remains: Will the hypothesized logic,albeit a product of the collective wisdom ofmany executives, prove out in practice?
This is not always easy to answer when a scorecard has a dozen or more measures,especially given the complexity of somecausal links. At Allstate, for example, man-agers measure such front-line statistics asclaim contact time (the elapsed time betweenan auto accident and when an Allstate cus-tomer is contacted by an Allstate adjuster tobegin the repair process). By Allstate’s wayof thinking, shorter contact time leads tohigher customer satisfaction; higher customersatisfaction leads to higher renewal rates;higher renewal rates to higher premium revenues; and higher premium revenues tohigher operating income and share prices.In graphical form, the linkage looks like this:
Contact time ➝ customer satisfaction ➝ customerretention ➝ premium revenues ➝ operating income➝ share prices
Allstate also believes that shorter contacttime leads to lower claims costs (such asamounts paid for rental vehicles and storageof disabled vehicles); lower claim costs leadto lower claims payments; lower claims pay-ments lead to lower loss ratios; and finallylower loss ratios lead, again, to higher oper-ating income and share prices. In graphicalform, this parallel linkage looks like this:
Contact time ➝ lower costs ➝ severities ➝ lossratio ➝ operating income ➝ share prices
This complexity – especially when drawnas a web of interdependencies among numer-ous front-line and corporate measures –makes clear why managers must take a rig-orous approach to creating a “performancelogic” (Rummler and Brache 1995). Gettingthe performance logic right, a far morecomplex job than drafting a few linear chainsof cause and effect, means constantly retest-ing to be sure that the entire executive teamachieves a genuine consensus on each ele-ment of strategy: which markets and seg-ments the firm will serve; which elements ofvalue the firm will promise customers; andwhich processes and capabilities the com-pany will develop to deliver on its valueproposition. Only then will the measuresof, say, competency development, actuallycontribute to customer value and createsales in the targeted market segments.
To the extent that companies are bettingtheir future on their strategy, they shouldthen prove the links between specific non-financial measures and financial success.Managers can take their cue from modelslike the service profit chain: internal servicequality leads in turn to employee satisfaction,employee retention, external service quality,customer satisfaction, customer retention,and finally to profit (Heskett et al. 1997). Thiswas the approach taken by Sears, Roebuck,when it examined the chain of causationlinking employee attitudes to customer satisfaction, and customer satisfaction toprofits (Rucci et al. 1998).
Sears’s dedication to nonfinancial perfor-mance developed in 1993 and 1994, whenthe company’s top 150 managers crystal-lized the company’s new direction in whatthey called the three Cs: to make Sears acompelling place to work, a compellingplace to shop, and a compelling place toinvest. They then began an attempt to cor-relate all three, and they found they couldnot only quantify the factors that driveeach kind of performance, they could alsoquantify how much an improvement ineach link of the “employee-customer-profit”chain stemmed from improvements in aprevious link.
By 1996, Sears actually developed a cor-porate-wide, statistically rigorous means tomanage employee attitudes and customerimpressions to boost financial returns. Itcan now actually calculate that a 5-pointgain in employee attitudes will translateinto a 1.3-unit increase in customer impres-sions. The 1.3-unit customer-impressionincrease will then boost revenue growth by0.5 percent. The model even predicts thelag time between one improvement and the next.
Though many companies rely on a com-mon-sense approach to linkage, Sears relieson data – data verified by external auditors.Why is this so important? Sears managersfound, for example, that two measures orig-inally proposed for the employee-customer-profit chain – personal growth and develop-ment, and empowered teams – failed torelate statistically to any customer data. Thetwo measures do matter to managers, butthey don’t lie on the causal pathway fromemployee satisfaction to profits. Sears alsofound that 10 of 70 questions in the com-pany’s employee survey do relate well tocustomer data, in particular those in just
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two categories: peoples’ attitude abouttheir jobs and attitude about the company.So Sears uses those ten questions in itsemployee-customer-profit chain, givingmanagers uncanny insight on how tomanage the contributors of company value.This is precisely the kind of thinking, ifnot the approach, that other companiesshould consider.
Cascading the Scorecards
Once top managers have devised a balancedscorecard for the organization as a whole,
their next job is to help each unit devisecomplementary scorecards. This process,referred to as cascading the scorecards, callson team, division, and functional managersto craft measures that contribute, via a natural performance logic, to furtheringthe strategic objectives prescribed in theorganization’s scorecard.
By involving many managers at manylevels, the cascading process enlists theenergy and engenders the commitment of a broad cross-section of people to meetambitious goals. Managers at each level
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Constancy and Change
A prime lesson learned by veterans of balanced scorecard management? Executives and managers have to refineor revamp measures as times change. At least annually, they need to evaluate measures for consistency with corporate strategies and priorities.They may even want to assign a team to conduct this balanced scorecardreview.
One company that illustrates the constancy of evolution is Analog Devices.Analog, first chronicled for its measurement work in 1990 (Kaplan, 1990), actually provided the prototype for the balanced scorecard.Analogreviews and changes its measures at least slightly every year, attempting to retain consistency while assuring relevancy.
Analog’s scorecard has three parts: financial, product development and quality improvement.These categoriesreflect the variables that, as both leading and lagging indicators, make or break a firm in the intensely competitiveintegrated-circuit business, where customers the world over demand leading-edge designs, delivered to meetdemanding manufacturing schedules. In recent years, Analog has added such measures as customer responsivenessand quality of work environment.
Analog Devices Balanced Scorecard:Ten Years of Evolution
1987 1997
Source: Robert Stasey, director of Quality Improvement,Analog Devices, personal communication, September 1997. Used by permission.
Financial
Quality Improvement Process
New Products
Revenue BookingsRevenue growth RevenueProfit Gross margin %ROA SMGA %
Profit
New product introductions 6Q window salesNew product bookings 6Q window gross margin %Business peak plan revenue # of products to first siliconTime to market customer sample hit rate
# of products releasedTape-outs per productNew product WIP
On-time delivery On-time deliveryCycle time Cycle timeYield YieldPPM (defects) PPM (defects)Cost Quality of work environmentEmployee productivity Customer responsivenessTurnover Baldridge score
work interactively, in the same way as thetop management team, and through theirparticipation gain a sense of buy-in to boththe company’s strategy and the measuresthat specify how to execute it.
At Mobil’s U.S. Marketing & RefiningDivision, each tier of management createda scorecard that dovetailed with the score-cards above in the hierarchy. The scorecardsvertically connect like links in a chain allthe way to the individuals on the front lines,who have their own personal scorecard. Thisof course helps employees, from truck driverson up, to understand how they contributeto corporate strategy: Specific, measurableobjectives and performance plans make theconnection clear.
In the Mobil Lubricants Business Unit, thebalanced scorecard team developed sevencriteria for creating personal scorecards(Kaplan 1996c:2):• Personal scorecard must support supervi-
sor/manager’s scorecard;• Scorecard must include an objective and
measure that supports another part ofthe business;
• Every supervisor/manager must have anobjective and measure related to coaching,counseling, or employee development;
• Scorecard must include a mix of lead andlag indicators;
• Minimum of one objective/measure perperspective;
• Do not exceed 15 measures; and• Any change must be agreed to by both
supervisor and employee.
Properly done, the scorecards at each levelalign everyone’s efforts because they are rel-evant, understandable, and controllable atthe local level. While the scorecard for thechief financial officer’s team may prescribea 30 percent reduction in working capital,the scorecard for billing clerks may prescribea 50 percent reduction in invoicing errors(inaccurate invoices slow payment andincrease working capital). The clerks cannotrally around a working capital goal, butthey can rally around a goal to fix mistakesin their own work.
As an example of how one measure cas-cades down through multiple tiers of manage-ment, consider the measurement of safetyperformance at Eastman Chemical Company.At the corporate level, executives track threesafety measures, including the U.S. Occupa-tional Safety and Health Administration“recordable incidence rate.” In turn, the
Tennessee Eastman Division tracks itemslike consecutive work days worked safelyand number of serious incidents. TheTennessee division’s acid unit measures itemslike total injury rate and documentation ofnear misses. The department responsible foracetic anhydride measures items like safetyconcerns identified and corrected and thenumber of safety projects per crew. Thedepartment’s crews measure safety concernsidentified and safety improvement projects(Epstein and Birchard 1999:155).
Exhibit 9 provides an example of cascadingan entire scorecard. On the left is a balancedscorecard for the insurance company affiliatedwith a bank. On the right is the scorecardfor the customer service subunit. Whilesome of the measures cascaded are the same,others have been dropped as irrelevant tothe subunit, and still others have beenadjusted or changed to fit the subunit’sapproach to contributing to the company’soverall strategy.
Linking to Compensation
Even if managers masterfully cascade score-cards down through their organizations,they can fall victim to what Steven Kerr has called “the folly of rewarding A, whilehoping for B.” In an update to Kerr’s classic1975 article on this topic (Kerr 1995), henotes how managers even today routinelydeclare one set of objectives yet reward people for another. They hope for long-termgrowth but reward quarterly earnings; theyhope for total quality but reward on-timeshipment even with defects. They in effectengage in doubletalk – and the result is theydouble the difficulty of aligning people’sbehavior with strategy.
While many organizations have begun to pay people for achieving goals beyondtraditional financial budget numbers, therecord is spotty. In one survey, in whicheight out of ten executives said they includedmeasures of operating efficiency and cus-tomer satisfaction in regular managementreviews, only five out of the ten linked theoperational measures to pay and only threeout of ten linked customer satisfaction topay. In the same survey, in which three often executives measure innovation/change,only one of ten linked the measure to pay(Lingle and Schiemann 1996:59). It is safeto say that the pay programs in these firmssend mixed signals on which goals areimportant.
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Organizations that fail to link measuresto pay and other rewards often explain thatthey are taking a “wait while we learn”approach. They hesitate to change pay systems until they believe they have bothreliable data for each new measure andample experience in verifying the causallinks among scorecard measures. Theseconcerns are understandable, yet as Kerrpoints out, it is unreasonable to hopemanagers will invest valuable time andenergy in behavior B if they get rewardedfor A. Ultimately, executives have to puttheir money where their mouth is. Theyhave to involve the human resourcesdepartment in developing pay and rewardprograms that motivate people to do morethan achieve short-term budget numbers.
Among the companies that have tightlylinked pay to balanced scorecard perfor-mance are CIGNA Property & Casualty,
Mobil, and Citibank. At Citibank (Dávilaand Simons1997), the California divisionadopted a “performance scorecard” in1996 with six categories: 1) financial, 2)strategy implementation, 3) customer sat-isfaction, 4) control of internal processes,5) people management, and 6) standards(for leadership, business ethics, customerinteraction, community involvement andcontribution to the overall business). Thepresident of Citibank California cascadedthese measures to his regions (“areas”) andthen to bank branches.
As an example of how the measures linkto pay, in October of each year, CitibankCalifornia area managers set targets foreach of their branch managers in four per-formance categories. For the financial andstrategy implementation categories, theynegotiate numbers with each branch man-ager. For the customer satisfaction and
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Exhibit 9 – Cascading an Insurance Company Scorecard
Insurance Company Scorecard Customer Service Unit Scorecard
Source:Adapted from Epstein and Manzoni 1998:195.
Company Financials Unit Financials
Contribution (income less direct costs) Costs vs budgetCost/income trend Unit costs vs budget unit costsCosts vs budgetIncome vs budgetHeadcount vs budgetInvestment performance
Company Customer Satisfaction Unit Customer Satisfaction
Monthly customer survey (weighted average, five criteria) Average customer survey scoreDepth/breadth of parent bank’s customer base Sales force perceptionNumber of complaints Complaints receivedMarket share Call abandonment rateCustomer retention % of calls answered within 20 seconds
Company Growth and Development Unit Growth & Development/Investing in People
Progress on key projects Training time (% of permanent headcount)Sales force growth AbsenteeismSales force turnover Self-certified sickness/certified sicknessTraining days (per employee) TurnoverProduct mix (% of sales from a certain type of products) Staff satisfactionNumber of suggestions Skills/knowledge perception
Company Business Efficiency Unit Business Efficiency/Process Efficiency
Product profitability Service standards– Line A Zero carried forward– Line B Quality checksNew business pipeline (work-in-progress as a % of Resource allocationproposals received) Customer services pipeline Premium collectionTeleservicing (abandoned calls + response time)
control categories, they pass down numericalgoals set by the division. For the remainingtwo categories, people management andstandards, they leave targets open to judg-ment at the time of the appraisal.
Every quarter, the area managers workwith a team from finance, quality, andhuman resources to evaluate each branchmanager. For each measure, the evaluatorsgive a par, above par, or below par rating.For the finance category, for instance, theygive a par to branch managers who hit goalsfor revenues, expenses, and margins. Forstrategy implementation, they give a par tomanagers hitting goals for total households,new-to-bank households, lost-to-bank house-holds, cross-sold households, retail assetbalances, and market share. For customersatisfaction, they give a par to managersscoring above a threshold figure calculatedfrom independent surveys of customers.
These ratings and those for the remainingthree categories are then tallied. Without apar rating in all categories, a manager cannotachieve an “above par” rating overall. A parrating yields a 15 percent bonus. An abovepar rating can mean a bonus of up to 30percent. At Citibank California, linking payin such a direct fashion to long-term driversof performance assures that executives rewardthe performance they hope for. They thushave gone a long way toward eliminatingmixed signals that can hobble execution ofthe bank’s strategy to build strong relation-ships and deliver premium service.
Preparing the Information Technology
Like many recent management innovations,the balanced scorecard has emerged as anespecially powerful tool thanks to advancesin information technology. Today’s comput-ers, networks, software, and databases enablemanagers to access, compile, distill, andanalyze data like never before. Managers cannow make decisions with the benefit ofinsights gained only through the power oftechnology. On the other hand, the advanceof technology forces companies to face anongoing threat: As competitors use informa-tion technology to turn data into intelligence,organizations that don’t follow risk losingtheir competitiveness.
To prepare the information technologyinfrastructure necessary for the balancedscorecard, managers face two tasks. The firstis preparing the information, the secondpreparing the technology. The biggest chal-
lenge may often be the first. Most organiza-tions simply haven’t organized their datagathering and reporting to match the logicof the balanced scorecard. Managers gener-ally receive data on functional or business-unit performance, not on cross-companyperformance. The result is that the perfor-mance-measurement language spoken in onepart of the organization fails to match thelanguage elsewhere. In organizations thatcompete through strong organization-widecapabilities and cross-company processes,language barriers of this sort can be debili-tating.
The first task, then, is standardizing defi-nitions for shared data and shared measure-ments, and standardizing the way unitscompile, aggregate, and report information.Many companies have worked long andhard to standardize their general ledgers forunified global financial reporting. They mustmake the same kind of effort to standardizethe ledgers of the balanced scorecard, atleast for data that flows upward and down-ward in the company’s balanced scorecardperformance logic. Many companies todaymanually adjust figures to create consistentnumbers at quarterly or annual reportingtime. Increasingly, they must automate thistask, lest they hamstring the effectivenessof their balanced scorecard program.
In this reengineering of data definitionsand flows, accountants should take theopportunity to relink financial and manage-ment accounting. In the 1980s, in theirclassic book Relevance Lost, Thomas Johnsonand Robert Kaplan advocated delinking thetwo, and for good reason (Johnson andKaplan 1987). Over the years, managementaccountants had come to build managementaccounts mainly to fit the mandated rulesof financial reporting, and thus the numbersincreasingly failed to serve the decision-making needs of executives. The manage-ment accounts yielded good data on, say,average costs of inventory, but precious littleon, say, the real cost to make one productor another.
Today, however, as accountants restorerelevance to the management accountsthrough such innovations as activity-basedcosting and the balanced scorecard, thetime has come to relink the two cousins ofaccounting. The numbers of managementaccounting can feed financial reporting inone system of rationalized information flows.Accountants have the opportunity to bringinto a single database the numbers used for
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both running the business and reportingresults.
As accountants do complete this task,they must tackle the second part of theinformation technology challenge, thetechnology. In the same way that an orga-nization must rationalize information flows,it must rationalize the myriad informationsystems for delivering them. This requiresconfiguring and managing the componentsof the systems appropriately to create anintegrated system (Silk 1998:40-44).
Some companies initially deliver balancedscorecard figures in an executive informa-tion system, generally personal computersdrawing data from mainframes. An EIS ofthis sort is a welcome advance. However,the balanced scorecard gains its full poweras part of an enterprise-wide informationsystem that provides balanced scorecarddata for each organizational unit, and offerscomprehensive analytic software for localdecision-making.
CIGNA Property & Casualty, for example,developed a system of this kind. Thousandsof managers and employees can view theirunits’ scorecards, the company’s scorecard,or any other unit’s scorecard, on theircomputers – all thanks to putting the com-pany’s entire strategic information, moni-toring, assessment, and feedback systemon-line (Epstein and Birchard 1999:111-112).People throughout the organization canstudy lists of objectives, numerical results,written assessments, and initiatives, eachidentified by “owner.” In effect, they canget a complete picture of where the com-pany and its units’ performance is today, aswell as its priorities, initiatives, and futuregoals for tomorrow.
The new system enables people all overthe company to take charge of their work.By using the company intranet and browser,they can point and click their way to thespecific screens of information they needfor their jobs. If they feel unclear abouthow they support company strategy, theycan browse their group’s scorecards, studyobjectives and initiatives, and even readassessments to get a feel for what theirbosses want. In this way, the system enablesevery person at the bottom to fathom thestrategic wishes of the executives at the top.If someone has a question as to how, or if,his or her work furthers the company’sstrategic thrust, he or she need only grab acomputer mouse to find out.
CIGNA Property & Casualty’s goal is tounleash a rich flow of feedback from peopleall over the company. On each browser page,employees can click a button to log anidea, complaint or comment. A claims repin one unit could read about troubles withan analogous problem in another unit –and in seconds offer lessons from experiencethat become part of the company’s knowl-edge base. The promise of the system is tosignificantly shorten the lag time betweenfield learning and management action. Onlythe most current technology today canmake this happen.
To top off this digital nervous system,one high-tech firm, N.E.T. Research ofBelgium, even offers a product called the“management cockpit.” In one room,flanked by dozens of computer screens, atop manager can track the operations ofthe entire company, the same way MissionControl tracks a space flight from Houston.Screens show internal and external infor-mation like profit, customer satisfaction,brand value, project progress, sales activities,quality of staff, and threats and opportuni-ties. Red lights flash when a screen revealsoff-target results, and a cockpit officer givesregular briefings.
A Few Barriers to Implementation
When managers introduce the balancedscorecard, they will face not only challengesin devising new systems and practices, theywill face challenges in managing people.The scorecard brings change to an organi-zation, and people with secure jobs andfamiliar work routines rarely open their armsand accept change eagerly. Among thebarriers to people embracing the balancedscorecard are resistance to added work; alack of sustained support by management;failure to link the scorecard to reporting;and resistance to greater transparency.
Developing and maintaining the bal-anced scorecard naturally creates addedwork, if only temporarily, for many people.Some of the measures will probably requiredata nobody yet collects. Capturing thisdata may require people to devise altogethernew measurement and reporting mecha-nisms. Managers stretched by currentworkloads will reflexively resist doing more.They have learned through experiencethat if they wait long enough, they mayget away without doing anything at all.Executives serious about implementing thescorecard must guard against people writ-
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ing off the scorecard as a passing whimsy ofmanagement.
A second barrier to implementation ismanagement that withdraws its support forthe balanced scorecard. Too often, at thefirst sign of missed financial targets, man-agers set the scorecard aside and embracethe traditional budget numbers anew. Thisbacksliding will immediately undermine,perhaps fatally, the credibility of the score-card. Executives must demonstrate theircommitment to a balanced set of measuresover and over, praising efforts and rewardingpeople for acting to improve the nonfinan-cial drivers of long-term financial perfor-mance. They must continue to take thisnew approach even as economic cycles comeand go and corporate strategy evolves tomeet new demands of the market and com-petition.
A third barrier to implementation ariseswhen management fails to organize all cor-porate reporting around the scorecard. Whenan organization introduces the scorecard,some employees view it as an additionalburden on top of other reporting. Managersmust ruthlessly eliminate conflicting andcompeting reports and measures from theorganization. The balanced scorecard shouldnot simply add to an already unwieldy bliz-zard of paper and cacophony of numbers,but instead should draw focus to the impor-tant.
A fourth barrier, perhaps the most diffi-cult, is resistance to greater transparency.Introducing new measures threatens manypeople. New, quantitative information thatpaints a holistic picture of various units’performance, especially when exposedbroadly for the first time, immediatelychanges the balance of power within theorganization. Some managers will see theirpower erode as new measures replace theirrole as interpreters and managers of corporateperformance drivers. Others will see theirpower threatened as measures limit theirfreedom to operate in their own interestsrather than in the interests of the corporation.
Senior managers should not assume thatan absence of quantitative indicators in thepast was always due to ignorance or excessiveworkload. In many cases, such absencereflects “opaqueness by design” (Epsteinand Manzoni 1998:199). Local managershave learned to develop secondary sourcesof information that are not accessible to topmanagement or subordinates. Maintaining
this opaqueness can help managers centralizeauthority, thus taking power from lowerlevels of the organization. Or it can helpmanagers protect themselves from scrutinyand questioning by their boss, thus takingpower from the upper levels. When man-agers boost quarter-end revenue figures bydeferring shipment of low-value product toone customer and speeding shipment ofhigh-value product to another, they don’tnecessarily want to let top managers in ontheir game.
It is safe to say that, as with any changeproject, introducing the balanced scorecardcan expose top managers to a minefield ofpolitical barriers to change. To succeed withthe implementation, executives must antici-pate these difficulties and have a strategyfor dealing with them. A chief componentof that strategy will be to engage a broadcross-section of people to gain buy-in to thenew measurement approach.1
USING THE BALANCED SCORECARD
As organizations develop balanced score-cards, they can apply them in at least threeways: as part of a performance improve-ment system, as part of a strategic manage-ment system, and as part of an internal andexternal accountability system. The firstapplication is the most modest and themost straightforward, the last the mostambitious while being the most sophisticatedand powerful. Each application builds onthe one before. In each case, managers will
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10 Questions for Better Measure
• Do measures include critical drivers of long-termperformance?
• Do the measures mix leading/lagging,financial/nonfinancial, input/output variables?
• Do the measures incorporate the feedback and buy-in of managers at all levels?
• Do the measures provide data for strategicimprovement, not just tactical control?
• Do measures reflect performance required bystakeholders?
• Do measures link in causal-chain to strategic success?
• Are measures critical to competitive advantage?
• Do the measures tell the story of the company’sstrategy?
• Are the measures complete and controllable?
• Are the measures limited to a compact list of 10 to 20?
find themselves using measures to integratethe organization and its managementpractices to an ever-greater degree. Achievingthis integration – extending up and downthe hierarchy, spanning functions anddivisions, embracing outside stakeholders– will increasingly become a competitiverequirement of the 21st century.
As a Performance Improvement System
Using the balanced scorecard as a perfor-mance improvement system enables man-agers to deliver better results with currentplans and processes. Top executives whoare largely satisfied with the company’schosen strategy, yet dissatisfied with strategicexecution, can use a balanced set of mea-sures to drive continuous improvementwith the same plan-do-check-act cycle theyare familiar with from total quality manage-ment. The difference is that they can relyon the powerful linking of measures, in acascading fashion, to the drivers of perfor-mance at every level. This cascading enablesfirm-wide, not just factory-wide, improve-ment of performance.
To make this happen, managers mustintegrate the new performance measuresinto management planning and controlsystems. Integrated into these systems, thebalanced scorecard enables managers toclearly identify gaps between expected andtargeted performance. This gives managersthe capability to engage in real-time, con-tinuous tuning to improve performance –essentially total quality management on a corporate-level scale. Some companieseven use a stoplight-reporting model toalert managers of critical gaps in perfor-mance. Management reports show a redlight when the company is falling short,yellow when in danger of falling short, andgreen when meeting or exceeding plan.
One of the most obvious advantages ofthe balanced scorecard is that it enablesmanagers to begin improving results simplyby making company objectives unmistak-ably clear. No more do managers have tolook only to foggy narrative phrases fromthe strategic plan for guidance. Placing themeasures on the scorecard, quantified togive them a hard edge, calls unprecedentedattention to concrete actions that make adifference. As the old adage goes, “Whatgets measured gets done.”
To gain the full benefit of integratingthe measures in the management control
systems, however, managers must use themconsistently, at every level, for empower-ment and learning rather than for com-mand and control. They have to reversethe pattern of traditional corporate budgetmeetings, which often degenerate into ses-sions where managers obsess over variancesand engage in fingerpointing. They mustturn review meetings into deliberative sessions where managers clarify the rootcauses of problems and share insights onhow to close gaps.
In other words, managers must usequantitative figures not as ends in them-selves but as a means to understand andimprove corporate activities. Managers canengage in these continuous-improvementdiscussions during normal review meet-ings, monthly or quarterly, during capitalspending reviews, and during meetings forpreparing plans or budgets. The balancedscorecard then facilitates learning by struc-turing the agenda. These discussions alsogive managers the opportunity to set anexample of a new culture – a learning culture. If executives squander this oppor-tunity, if they instead use quantitative datato assign guilt for errors, people will with-hold information, stall communication,and slow continuous improvement.
As an example of the results companiescan achieve by using measures to bothempower and oblige managers to delivercontinuous performance improvement,take the case of Tenneco. During Tenneco’sturnaround, which began in 1992, execu-tives sought to reverse severe losses bydrastically cutting costs and boosting qual-ity. They installed, and cascaded to everylevel, a set of balanced measures. One newmeasure was called the “cost of quality.”Cost of quality is the sum of failure costs(scrap, rework, warranties, lawsuits) andprevention and appraisal costs (inspection,testing, training, planning). The cost-of-quality measure, albeit one of many newmeasures focused Tenneco managers onthe same goals like never before – takingout costs that pointed to opportunities for improving quality. In 1992, Tennecocut $215 million in quality costs; in 1993,it cut $246 million more. In 1997, thecompany was still at it, cutting another$236 million.
Applying the cost-of-quality measure atTenneco, along with a host of other non-financial measures, helped to quickly restore
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the company to health. No more did man-agers focus just on income before interestand taxes (IBIT), the previous preeminentmeasure. By focusing on a balanced score-card, Tenneco executives returned all six ofits original units (shipbuilding, farm andconstruction equipment, automotive parts,packaging, natural gas transportation, andchemicals) to strong competitive positions(Epstein and Birchard 1999:28-29).
Another example of a firm that applied abalanced scorecard to continuously improveperformance is Rexam Custom Europe, aprecision coater, laminator, and converterof flexible materials, and a unit of Rexam ofthe United Kingdom (Butler et al. 1997).Rexam Custom Europe had two main goals:to grow rapidly, in excess of 20 percent peryear, and focus on continuous improvement,particularly project cycle times. As a supplier
of custom products, its ability to enlarge its customer base and increase its speed inworking on customer projects was critical torapid growth.
To meet its goals, the unit tailored itsbalanced scorecard in a novel way. Early on,managers concluded that traditional formsof the balanced scorecard boxes fit poorlywith its goals, so it created a two-tier score-card. One part focused the organization on measures directly driving its strategy forgrowth and continuous improvement. Asecond focused on measurement of fourearlier-established Rexam Custom Europeprinciples, widely embraced by managers,for building the high-performance cultureand work practices needed to propel thefirm into the 21st century. The scorecardbecame the basis for improving performanceof the business. (See Exhibit 10.)
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Customer Principle Shareholder’s Perspective(Objective: customer focus, durable relationships) (Objective: RONA improvement)
Customer satisfaction index Gross margin% partners Overhead, % of sales
Working capital %
People Principle Extraordinary Growth Perspective(Objective: integrity, culture of learning, (Objective: % sales growth, broader world-class competence) base of customers)
Employee satisfaction index % annual sales growthTraining hours/employee % sales from new projects
% sales from top 4 customersFactored sales of new projects sanctionedMarket share in markets where number 1 or 2
Innovation Principle Continuous Profit Improvement (Objective: Foster creativity, making problems opportunities) (Objective: % target return on sales)
% sales from new products Capacity utilization# of “Spirit of Innovation” awards Contribution/productive machine hour
Waste% annual production cost improvementGross margin for new project developmentCustomer returns
Process Principle Continuous Cycle Time Reduction Improvement(Objective: Cross-functional team work, open information sharing, (Objective: % targeted reduction) participative decision making)
# of “Spirit of Co-operation” awards Average turnaround, sample requests# of commendations Projects, sanctioned/commercialized
R&D time on new projects% projects productive# projects changed after commercializedOn-time delivery
Part A: Strategy Part B: Principles
Exhibit 10 – Rexam Custom Europe’s Two-Part Scorecard
Source:Adapted from Butler et al. 1997:249, 251
As a Strategic Management System
The second way to apply the balanced score-card is as a strategic management system,the application championed by Kaplan andNorton. This enables managers to delivermore than better results. It helps themdeliver a better strategy. As Kaplan andNorton maintain, executives can use it, asshown in Exhibit 11, to translate the cor-porate vision, communicate strategy downthrough the organization, integrate businessand financial plans to deliver the strategy,and stimulate feedback that shows how tochange the strategy to increase its effective-ness (Kaplan and Norton 1996). Each ofthese processes is useful by itself; togetherthey can play a decisive role in corporatesuccess, especially when a firm launches a new strategy or undergoes considerablechange.
One company that clarified its strategy byusing the scorecard is CIGNA Property &Casualty (Epstein and Birchard 1999:86-88and Gouillart and Kelly 1995:16, 79-83,165-168). In 1993, a new management teamsought to change the unit from a generalistto a specialty insurer. In a generalist strategy,an insurer seeks premium revenue wherever
it can find it. In a specialist strategy, it seeksincome only in selected markets (marine,farm, aerospace, residential, financial insti-tutions) with carefully selected customerswhere underwriters understand the riskand the company can make good margins.
What kinds of measurements translatethe specialty vision into a working strategy?One of those created by CIGNA was per-centage of premiums from new segments.Another was quality of relationships withbrokers in segments targeted for growth.Executives at CIGNA worked for threemonths to develop these kinds of measures.By working together, they weeded out mis-understandings and resolved differences todevelop a precise, shared view of the driversof success. The entire process created ajoint, and strong, commitment to a strategydefined more explicitly than ever before.
CIGNA P&C went on to use the balancedscorecard to communicate its strategy downthrough the organization. Managers carriedout this communication during the processof cascading, when they worked with sub-ordinates down through the hierarchy togain agreement on how to tailor comple-mentary scorecards to unit strategies. As
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Source: Kaplan and Norton 1996c:77. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by permission of Harvard Business Review.
Exhibit 11 – Using the Balanced Scorecard as a Strategic Management System
Translating the Vision
• Clarifying the visions• Gaining consensus
Communicating and Linking
• Communicating objectives• Setting goals• Linking strategies
Feedback and Learning
• Articulating the feedback• Supplying strategic information• Facilitating learning
Business Planning
• Setting targets• Aligning initiatives• Allocating resources• Establishing milestones
BALANCEDSCORECARD
an example, executives at the top wanted tocommunicate forcefully that every unit –whether selling insurance to the marinemarket or residential market – should pur-sue stronger relationships with brokers andagents. Some units believed they could beststrengthen relationships by providing moreflexible underwriting. Others felt they couldstrengthen relationships by faster under-writing decisions. Still others felt they shouldfocus on providing a broader array of services.And yet others felt they should stress moreprice competitiveness. Each unit worked withexecutives to devise appropriate measuresaccordingly.
Along with translating the vision andcommunicating strategy, companies canapply the balanced scorecard to strengthen-ing business planning processes. The score-card specifically helps companies by linkingtwo critical parts of the planning and con-trol system, strategic planning and annualbudgeting. To be sure, companies have longsought this integration, but often they havefailed. The people and processes for settingstrategy (a part of the planning and develop-ment function) have meshed poorly with thepeople and processes for establishing theannual and day-to-day orders for the troops(a part of finance). Moreover, the languageof strategy – ordinarily a set of qualitativestatements about markets, innovation,process changes, competency management,and so on – have translated poorly into thelanguage of financial budgets. The balancedscorecard bridges the gap between strategyand execution. It assures that the companyfocuses on long-term drivers of success –most often nonfinancial measures.
Tenneco used its balanced set of measuresto integrate management planning andcontrol. Today, in the Tenneco process,executives first lay out the big picture forthe company with long-term strategic plan-ning (Epstein and Birchard, 1999:106-108).They then move to long-term businessplanning and annual operating planning to create a working plan for each businessunit. Next, they flesh out those plans byspecifying objectives, measures, and peopleresponsible in a document called a matrix.Finally, they link every employee to thematrix with individual, annual performanceagreements. The management planning andcontrol system essentially takes the grandscheme for company strategy, defined by avariety of financial and nonfinancial mea-sures, and explodes it into concrete, bite-size
pieces – essentially individual scorecards foreach person in the company.
Once managers have applied the scorecardto translating the vision, communicatingstrategy, and integrating planning, they havepositioned themselves for the fourth criticalaspect of strategic management: gainingfeedback to change the strategy itself (Kaplanand Norton 1996a). Given that a flawedstrategy can mire a company in mediocreperformance, the scorecard provides aninvaluable means to test the strategy’svalidity. At most companies, managementreview meetings focus almost entirely onoperational issues, rarely on strategic ones.Managers at companies with a balanced setof measures derived from strategy, however,can use the meetings to ask whether themeasures indicate the strategy is working.
If managers have placed their bets on a strategy of using quality improvement to boost sales, for example, they will havecreated a performance logic to go along withtheir thinking. They will probably have theorized that lower product defect rateswill boost customer satisfaction; that highercustomer satisfaction will boost customerretention; and that higher retention willboost sales. They can use the results on thescorecard to see whether their hypothesesare borne out in practice. In other words,the balanced set of measures can provideearly-warning signs of a strategy gone wrong.
Managers may find as they review resultsthat defect rates are falling as planned, andcustomer satisfaction and retention are rising– but sales are running flat. If so, they mustdig deeper to find potential flaws in theirstrategy. They may find, for example, thatbuyers of low-end products are buying more,but buyers of high-end products are buyingelsewhere. They may then want to go backto the strategic drawing board. For theirbusiness, the quickest route to higher salesmay not lie principally in improving qualitybut in accelerating innovation or addingpremium service.
Note that in today’s competitive environ-ment, using the scorecard to refine strategydemands more than asking a cloisteredmanagement team to drill deep into amountain of freshly obtained data. It alsodemands collecting insights from the bestand brightest employees, wherever they are.For this reason, managers cannot considerstrategy evaluation solely the job of executives.A broad cross-section of people throughout
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the organization – if not everyone – shouldhave access to balanced scorecard results.The more transparent the reporting ofinternal measurement, the better to stimu-late people to express ideas on rectifyingshortfalls.
That’s not to say that organizationsshould release to outsiders every measureon the balanced scorecard. At times, thescorecard may reveal sensitive aspects ofstrategy best kept proprietary. WhirlpoolCorporation, for example, releases to thework force only a subset of the data givento top executives. (Epstein and Birchard1999:85). On the whole, however, manyelements of strategy reflect industry-wideefforts to compete on like terms, or reflectinformation willingly disclosed by topmanagers to explain their actions to stake-holders. In such cases, the small selectionof measures in the corporate-level balancedscorecard rarely reveal secrets that manage-ment must keep within the organization.
Weyerhauser Company’s Prince Albert Pulpand Paper unit, in northern Saskatchewan,developed four scorecards, one for the pulpmill, one for the paper mill, one for the“site” activities, and one for the overall unit.Managers publish much of the informationin the scorecards – on safety, productivity,quality, and environmental performance –either daily or weekly. The company believesthe information gives employees more fre-quent feedback on how to better managethe mill, and gives managers feedback onthe success of their strategies (Hribar et al.1997:36-40). Managers at other firms shouldencourage such openness, reporting finan-cial and nonfinancial numbers and provid-ing means for employees to communicateideas back up the chain of command.
Note also that managers should not treatthe balanced scorecard as simply a sophis-ticated control panel for management byexception, where indicators are discussedonly if they fail to reach some pre-set stan-dard. Instead, the balanced scorecard shouldhelp managers control their organizationsin an interactive manner, providing thefodder for frequent face-to-face meetingsof superiors, subordinates, and peers todiscuss what is going right and wrong. Inthese meetings, rather than discussingnumbers for numbers’ sake, managersshould challenge and debate the underlyingdata, assumptions, and action plans. Fromthis discussion comes true insight ondeveloping the best possible strategy.
As an External Accountability System
The third way to apply the balanced score-card is as part of a corporate accountabilitysystem. When managers use measures as aperformance-improvement system, or as astrategic management system, they arelargely restricting themselves to an internalfocus. They consequently develop stronginternal accountability – systems for defin-ing goals, meeting them, and gatheringintelligence on doing better next time.
But in today’s world, systems of internalaccountability aren’t enough for long-termsuccess. A firm also needs a means to fulfillthe competitive and social demands forexternal accountability, The balancedscorecard provides that means. Managerscan use it outside the firm in much thesame way they do inside. They can use itto communicate strategy, align goals, stim-ulate strategic feedback, and engage thehearts and minds of outsiders in workingin the company’s favor.
To begin with, companies can use theirbalanced set of measures to communicatestrategy to outsiders. A variety of stake-holders either need or want this informa-tion. After all, companies work peer topeer with these stakeholders – with share-holders, customers, suppliers, communityleaders, and a mobile pool of talentedemployees – to execute corporate strategies.By providing a snapshot of a balanced mix of measures, a company clarifies thenuances of its strategy for partners outsidethe company in the same way it does formanagers within the company.
Company executives cannot expect totighten linkages along the supply chainunless they open their measurement doorswith more financial and nonfinancialinformation. In a sense, managers areextending the concept of open-book man-agement beyond the walls of the compa-ny, and expanding the scope of open-bookdata beyond the financial metrics. Theycan then better align stakeholder interestswith company interests.
Opening a window on the balanced setof measures is also a means for a firm todemonstrate its superiority as a businesspartner. Disclosing reliable, germane,quantified data on performance reducesskepticism and uncertainty on the part ofbusiness partners. A more open sharing ofinformation is critical to strengthen stake-holder loyalty, and may be a powerful way
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to market organizational capabilities to cus-tomers and other stakeholders (Epstein andBirchard 1999:207).
Some industries have already applied thescorecard externally as a critical competitivetool. One of these industries is health care.In the early 1990s, the largest managed-carefirms in the U.S., including U.S. Healthcare(now Aetna U.S. Healthcare) and UnitedHealthcare, began releasing some of theirbalanced-measurement data – data on cus-tomer satisfaction, quality of care, adminis-trative efficiency, and cost reduction. Thecompanies used the reporting of measuresto attract customers and repel efforts to reg-ulate the industry. In the years since, usingthe scorecard measures to fill in a reportcard of progress has become a competitiverequirement for leading health-care organi-zations in the U.S. In 1999, the premierhealth-maintenance organization accreditingorganization, the National Committee forQuality Assurance, started to require health-maintenance organizations to report non-financial measures of performance.
Some executives doubt the advantages of applying a balanced scorecard developedinternally to help the company externally.Some even view this application of thescorecard as risky. But recent research sug-gests that shareholders give companies acompetitive edge for disclosing more (Healyet al. 1998). Better disclosure – even whencontrolled for earnings increases – is accom-panied by better stock performance, moreinstitutional ownership, more analyst fol-lowing, and greater liquidity.
Managers can also use the broader report-ing of measures in the balanced scorecardas a way to spur performance. Publiclycommitting to the practice of regularly stating and reporting on quantified perfor-mance goals creates a far greater sense ofobligation than a commitment made behindclosed doors. In adopting new shareholdervalue measures in recent years, several com-panies have adopted this approach to usingpublic commitments and reporting as a leverfor better internal performance. Briggs &Stratton, Eli Lilly, SPX Corporation, andHerman Miller report economic profit,committing the firms to financial returnsexceeding the weighted average cost of capital. This sends a strong message toemployees that the new measures count.
This kind of external sharing of balancedscorecard measures enables another valuablecorporate capability: incorporating stake-
holders within the feedback system thatstimulates corporate learning. As withbenchmarking internal processes with out-siders, sharing a balanced set of measuresmore broadly promises to elicit even morelearning from outside sources. This is oneof the reasons behind Skandia’s practice ofreporting in a series of intellectual capitalreports an unparalleled amount of data onthe operational performance of a number ofits units. (For an excerpt, see Exhibit 12)
Willing to take the risk of disclosing evensome sensitive competitive information,Skandia has unleashed a flood of feedback.In 1998, the company published 40,000copies of its Intellectual Capital report tomeet demand, four times the print run ofits traditional financial report. Starting in2000, for fiscal year 1999, Skandia hopes to expand its reporting further, integratingcorporate-wide intellectual capital measuresinto its traditional financial report.
Finally, a company can use the balancedscorecard to fulfill a growing expectation ofthe public, an expectation that stakeholdershave a “right to know” about what goes oninside a corporation. Whether managersagree or not, outsiders believe they deservemore information about finances, operations,environmental performance, diversity, andeven social responsibility. By developing arigorous system of measures to help thecompany compete internally, and then
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Source: Skandia Group. 1998. Human Capital in Transformation: IntellectualCapital Prototype Report, Skandia 1998. Stockholm: Skandia Group.
Gross premiums writtenGross premiums written per employee
Telephone accessibilityNumber of individual policiesCustomer satisfaction index
Average ageNumber of employeesTime in training (days/year)
IT employees/total number of employees
Increase in gross premiums writtenShare of direct payments in claims assessment systemNumber of ideas filed with Idea Group
Financial Focus
Customer Focus
Human Focus
Process Focus
Renewal & Development Focus
Exhibit 12 – Skandia Group’s Navigator(Navigator for Dial)
reporting the results, managers help assurethat the public will continue to trust theirword, and continue to support their “licenseto operate.”
An example of this application of mea-sures appears most prominently in the realmof environmental performance. In 1998, 600companies issued formal environmentalreports, disclosing numerous quantitativemeasures of improvement. Nortel Networksreported an “environmental performanceindex,” for example. It uses the index tohelp continuously track and reduce itsenvironmental impacts. The index aggre-gates and weights 25 variables of environ-mental performance – from energy con-sumption to hazardous waste cleanup.Nortel has learned to apply its measure toboth improve operationally and strategicallyinternally and to demonstrate accountabilityexternally.
CONCLUSION
Management accountants, financial execu-tives, general managers, and external accoun-tants all need to improve the way theymeasure the performance of organizationsin our society today. They must improvethese measures to raise performance; theymust improve them to compete withstronger strategies more adeptly executed;and they must improve them to demon-strate accountability to stakeholders forbuilding value.
The measures chosen by outstandingorganizations of the future must be a bal-anced set, a mixture of familiar financialfigures and – to many organizations –unfamiliar nonfinancial ones. These mea-sures must reflect the complexity of businesstoday, and the heightened requirement forworld-class performance in far more aspectsof corporate operations — from emphasiz-ing innovation to fostering diversity.
At a minimum, measures should reflectfinancial performance along with two tofour nonfinancial categories, such as cus-tomer, employee, internal business process,or learning and growth. But they shouldbe tailored to meet the needs of each com-pany’s business, and they should be expand-ed when necessary to take into account
the critical stakeholder relationships thefirm depends on to prosper, whether withsuppliers, customers, community, lenders,or others.
The measures should link one to theother in a web of logic that, in a sort ofshorthand, shows the core cause-and-effectrelationships that enable the company tocreate value. The balanced scorecard high-lights the drivers of company profits – inmuch the same way that activity-basedcosting elucidates the drivers of costs. Inmany companies, the critical success factorsare poorly defined, and poorly communi-cated. Many people just don’t understandthem. With the balanced scorecard, thekey performance indicators can be crisplydefined, crisply communicated, and easilymonitored to evaluate success.
Today, companies of all sizes, centralizedand decentralized, local and global, haveadapted the balanced scorecard in order torun at a much higher level of performance.They have cascaded scorecards down thecorporate hierarchy to make strategy clearto everyone in the company. They havelinked employees’ compensation to thescorecard to motivate action that consis-tently contributes to company goals. Theyhave even begun to incorporate their measures into the accountability modeldescribed by Epstein and Birchard (1999),an integration of enlightened board gover-nance, financial, operational and socialmeasures, management planning and control systems, and internal and externalreporting systems (Exhibit 1).
Realizing the full power of the balancedscorecard calls on top managers to firstmake a commitment to introduce the newmeasures that will guide decision makingaway from a single-minded focus on finan-cial figures. As they learn to manage witha dashboard of new dials, they will alignthemselves, and their organizations, behindtheir strategies with a precision they havenever before experienced. And they willposition themselves to generate the profit-ability and to demonstrate the accountabil-ity demanded by customers, shareholders,employees, and the communities aroundthem.
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ENDNOTES
1 See also, The Society of ManagementAccountants of Canada. 1992, revised1999. Managing the Human Aspects ofOrganizational Change. ManagementAccounting Guideline. Mississauga, ON:The Society of Management Accountantsof Canada.
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©1999 by The Society of Management Accountants of CanadaAll rights reserved.ISBN 1-55302-135-5Printed in Canada 1/2000
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C A N A D A
Shaping the Future
This Management Accounting Guideline was prepared with the assistance of: Marc Epstein, Research Professor of Management, Jesse H. Jones Graduate School of Management, Rice University, and Bill Birchard, Contributing Editor, CFO Magazine, Amherst, New Hampshire.
