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Performance Management: Making It Work:
The Promise and Perils of the Balanced Scorecard

online columnist Gary Cokins     Column published in DMReview.com
August 4, 2005
 
  By Gary Cokins

Hope and Sadness

The balanced scorecard, the methodology developed by Drs. Robert S. Kaplan and David Norton, recognizes executive management's excessive emphasis on after-the-fact, short-term financial results and improves organizational performance by shifting attention to measuring and managing the non-financial operational measures of customers, internal processes, and learning and growth that lead to better financial results. The balanced scorecard is one of the underpinnings needed to complete the full vision of a performance management system. Will the adoption rate of the balanced scorecard find the same difficulty crossing the chasms encountered by activity-based costing (ABC) systems in the 1990s? It took many failures in ABC system implementations before organizations learned what ABC is and how to shape, size, and level them before organizations began to get them right for use. Are balanced scorecard implementations going to travel down the same bumpy road?

An early indication of trouble is the confusion about what a balanced scorecard is, and more confusion about what its purpose is. If you ask executives whether they are using a balanced scorecard, many say they are. But if you next ask them to describe it, you'll get widely different descriptions. There is no standard - yet. Some say they have successfully transferred their old columnar management reports into visual dashboards with flashing red and green lights and directional arrows. Some realize a scorecard is more than that, and they have put their old measures on a diet, compressing them into a smaller, more manageable number of measures. Neither may be the correct method.

But how does anyone know if those measures - the so-called "key performance indicators" or KPIs - support the strategic intent of the executive team? Are the selected measures the right measures? Or are they what you can measure rather than what you should measure? And is the purpose of the scorecard to better monitor the dials, or is it to facilitate the employee actions needed to move the dials?

Implementing Too Fast and Skipping a Key Step

Why are so many people familiar with the term balanced scorecard but so few familiar with the term strategy maps? And why might they now allegedly have scorecards without strategy maps? One possible explanation is the mistaken belief that those vital few KPI measures, rather than the trivial many, can be derived without first requiring employee teams and managers to understand the answer to a key question: "Where does the executive team want the organization to go?" This question is best answered by the executive team's vision and mission, which point in the direction they want the organization to follow. The strategy map and its companion scorecard are important too, but this combination answers a different question: "How will we get there?" Strategy maps and their derived scorecard are navigational tools to guide the organization to execute the strategy, not necessarily to formulate the strategy. Executive teams are pretty good at defining strategy, but a high CEO turnover rate and short tenure is one piece of evidence of their failure to implement their strategy.

Do not misinterpret me: KPIs are critical. You get what you measure, and strategy maps and scorecards serve a greater social purpose than a technical one (although information technology and software are essential enablers). The problem is identifying and integrating appropriate cause-and-effect linkages of objectives that are supported by the vital few measures, and then subsequently cascading the KPIs down through the organization.

But the primary task of a balanced scorecard is to align people's work and priorities with multiple strategic objectives that, if accomplished, will achieve the strategy and consequently realize the end game of maximizing shareholder wealth (or maximizing citizen value if you are a public sector governmental organization). The strategic objectives are located in the strategy map, not in the scorecard. The KPIs in the scorecard reflect the strategic objectives.

Debate will continue about how to arrive at the vital few KPIs for workgroups. Here are two approaches:

  • Newtonian-style managers, who believe the world is a big machine with pulleys and levers to push and pull, find appeal in looking at benchmark data to identify which relevant, unfavorably wide performance gaps should be areas for their focus. They want to know, "What must we get better at?" The KPIs are then derived. Strategies are deduced from recognizing deficiencies.
  • In contrast, Darwinian-style managers, who believe the organization is a sense-and-respond organism, find appeal in having the executive team design the strategy map by applying a SWOT approach. This approach begins with the executive team freely brainstorming and recording an organization's strengths, weaknesses, opportunities and threats. They then cluster the SWOTs into strategic objectives with causal linkages in the strategy map. Following this initial step, the middle managers and core process owners are then tasked with identifying the few and manageable projects and core processes to improve that will attain the executive team's strategic objectives in the strategy map. After that step, then those same middle managers can identify the KPIs that will indicate progress toward the projects or critical core process. This latter approach not only assures that mid-managers and employee teams will understand the executive's strategy, about which most mid-managers and employees are typically clueless, but it further generates their buy-in and ownership of the scorecard and KPIs since they have not been mandated to them from above. (Of course, the executive team can subsequently challenge and revise their lower managers' selected KPIs - debate is always healthy to do - but only after the buy-in and learning has occurred.)

Scorecard or Report Card? The Impact of Senior Management's Attitude

Regardless of which technique or any other method is used to identify the KPIs, the KPIs ideally should reflect the executive team's strategic intent and not be disconnected, as typically the budget is disconnected from the strategy - a topic to discuss on another day. This is the peril of the balanced scorecard. Its main purpose is to communicate the executive team's strategy to employees in a way they can understand it and the impact of their contribution to attaining it. But starting with KPI definition denies this important step.

Research from Professor Raef Lawson of the State University of New York in Albany suggests that a major differentiator of success from failure in a balanced scorecard implementation is the senior management's attitude. Scorecard or report card? Do we work for bosses we must obey or coaches and mentors who guide and counsel us?

As an example, is senior management anxiously awaiting those dashboards so they can follow the cascading score meters downward in order to micro-manage the workers under their middle managers, acting like Darth Vader to see which of their minions may need to be cut off from their air supply? Or will the executives appropriately restrict their primary role and responsibility to define and continuously adjust strategy (which is dynamic, not static, always reacting to new insights) and then allow the empowerment of employee teams to select KPIs from which employees can actively determine the corrective interventions to align with the strategy?

The superior strategy map and scorecard systems embrace employee teams communicating among themselves to take actions rather than a supervisory command-and-control, in-your-face style from senior managers. An executive team micro-managing the KPI score performance of employees can be corrosive. If the strategy map and cascading KPI selection exercise is done well and subsequently maintained, then higher-level managers need only view their own score performance, share their results with the employee teams below them, and coach the teams to improve their KPI scores and/or re-consider adding or deleting KPIs. For the more mature scorecard users using commercial software, they can readjust the KPI weighting coefficients to steer toward better alignment with the strategic objectives.

Failures Due to Ignorance or Inexperience?

Some proposed management improvement methodologies, such as the lights-out factory touted in the 1980s, are fads that come and go. But the strategy map and its companion, the feedback balanced scorecard, are most certain to be a sustained methodology in the long term - perhaps forever. It only makes common sense that executive teams provide direction-setting and employee teams then take the actions to "get there." Are these early 21st century missteps and misunderstandings in implementing the balanced scorecard due to ignorance or inexperience? I suggest it is the latter.

It takes time to stabilize what ultimately is a behavioral measurement mechanism of cause-and-effect KPIs and to then master their use in navigating, powering, and steering as an integrated enterprise. As stated by the author Peter Senge, a thought leader in the field of organizational change management, the differentiator between successful and failing organizations will be the rate, and not just the amount, of organizational learning. Those intangible assets - employees - will increasingly matter.

...............................................................................

For more information on related topics visit the following related portals...
Business Performance Management and Metrics/KPI/BSC.

Gary Cokins is a strategist for SAS, a market leader in data management, business intelligence and analytical software. He is an internationally recognized expert, speaker and author on advanced cost management and performance improvement systems. He is the author of four previous books, An ABC Manager's Primer, Activity-Based Cost Management: Making It Work, Activity-Based Cost Management: An Executive's Guide (Wiley) and Activity-Based Cost Management in Government. You can contact him at gary.cokins@sas.com.

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