Balanced Scorecard -
Putting the Balanced Scorecard to Work - Sun and Planets Spirituality AYINRIN
Effective
measurement, however, must be an integral part of the management
process. The balanced scorecard, first proposed in the January-February
1992 issue of HBR (“The Balanced Scorecard—Measures that Drive
Performance”), provides executives with a comprehensive framework that
translates a company’s strategic objectives into a coherent set of
performance measures. Much more than a measurement exercise, the
balanced scorecard is a management system that can motivate breakthrough
improvements in such critical areas as product, process, customer, and
market development.
The
scorecard presents managers with four different perspectives from which
to choose measures. It complements traditional financial indicators
with measures of performance for customers, internal processes, and
innovation and improvement activities. These measures differ from those
traditionally used by companies in a few important ways:
Clearly,
many companies already have myriad operational and physical measures
for local activities. But these local measures are bottom-up and derived
from ad hoc processes. The scorecard’s measures, on the other hand, are
grounded in an organization’s strategic objectives and competitive
demands. And, by requiring managers to select a limited number of
critical indicators within each of the four perspectives, the scorecard
helps focus this strategic vision.
In
addition, while traditional financial measures report on what happened
last period without indicating how managers can improve performance in
the next, the scorecard functions as the cornerstone of a company’s
current and future success.
Moreover,
unlike conventional metrics, the information from the four perspectives
provides balance between external measures like operating income and
internal measures like new product development. This balanced set of
measures both reveals the trade-offs that managers have already made
among performance measures and encourages them to achieve their goals in
the future without making trade-offs among key success factors.
Finally,
many companies that are now attempting to implement local improvement
programs such as process reengineering, total quality, and employee
empowerment lack a sense of integration. The balanced scorecard can
serve as the focal point for the organization’s efforts, defining and
communicating priorities to managers, employees, investors, even
customers. As a senior executive at one major company said, “Previously,
the one-year budget was our primary management planning device. The
balanced scorecard is now used as the language, the benchmark against
which all new projects and businesses are evaluated.”
The
balanced scorecard is not a template that can be applied to businesses
in general or even industry-wide. Different market situations, product
strategies, and competitive environments require different scorecards.
Business units devise customized scorecards to fit their mission,
strategy, technology, and culture. In fact, a critical test of a
scorecard’s success is its transparency: from the 15 to 20 scorecard
measures, an observer should be able to see through to the business
unit’s competitive strategy. A few examples will illustrate how the
scorecard uniquely combines management and measurement in different
companies.
Rockwater: Responding to a Changing Industry
Rockwater,
a wholly owned subsidiary of Brown & Root/Halliburton, a global
engineering and construction company, is a worldwide leader in
underwater engineering and construction. Norman Chambers, hired as CEO
in late 1989, knew that the industry’s competitive world had changed
dramatically. “In the 1970s, we were a bunch of guys in wet suits diving
off barges into the North Sea with burning torches,” Chambers said. But
competition in the subsea contracting business had become keener in the
1980s, and many smaller companies left the industry. In addition, the
focus of competition had shifted. Several leading oil companies wanted
to develop long-term partnerships with their suppliers rather than
choose suppliers based on low-price competition.
With
his senior management team, Chambers developed a vision: “As our
customers’ preferred provider, we shall be the industry leader in
providing the highest standards of safety and quality to our clients.”
He also developed a strategy to implement the vision. The five elements
of that strategy were: services that surpass customers’ expectations and
needs; high levels of customer satisfaction; continuous improvement of
safety, equipment reliability, responsiveness, and cost effectiveness;
high-quality employees; and realization of shareholder expectations.
Those elements were in turn developed into strategic objectives (see the
chart “Rockwater’s Strategic Objectives”). If, however, the strategic
objectives were to create value for the company, they had to be
translated into tangible goals and actions.
Rockwater’s Strategic Objectives
Rockwater’s strategic objectives had to be translated into tangible goals and actions.
Rockwater’s
senior management team transformed its vision and strategy into the
balanced scorecard’s four sets of performance measures (see the chart
“Rockwater’s Balanced Scorecard”):
Rockwater’s Balanced Scorecard
Financial Measures:
The
financial perspective included three measures of importance to the
shareholder. Return-on-capital-employed and cash flow reflected
preferences for short-term results, while forecast reliability signaled
the corporate parent’s desire to reduce the historical uncertainty
caused by unexpected variations in performance. Rockwater management
added two financial measures. Project profitability provided focus on
the project as the basic unit for planning and control, and sales
backlog helped reduce uncertainty of performance.
Customer Satisfaction:
Rockwater
wanted to recognize the distinction between its two types of customers:
Tier I customers, oil companies that wanted a high value-added
relationship, and Tier II customers, those that chose suppliers solely
on the basis of price. A price index, incorporating the best available
intelligence on competitive position, was included to ensure that
Rockwater could still retain Tier II customers’ business when required
by competitive conditions.
The
company’s strategy, however, was to emphasize value-based business. An
independent organization conducted an annual survey to rank customers’
perceptions of Rockwater’s services compared to those of its
competitors. In addition, Tier I customers were asked to supply monthly
satisfaction and performance ratings. Rockwater executives felt that
implementing these ratings gave them a direct tie to their customers and
a level of market feedback unsurpassed in most industries. Finally,
market share by key accounts provided objective evidence that
improvements in customer satisfaction were being translated into
tangible benefits.
Internal Processes:
To
develop measures of internal processes, Rockwater executives defined
the life cycle of a project from launch (when a customer need was
recognized) to completion (when the customer need had been satisfied).
Measures were formulated for each of the five business-process phases in
this project cycle (see the chart “How Rockwater Fulfills Customer
Needs”):
How Rockwater Fulfills Customer Needs
- ; number of hours spent with prospects discussing new work
- ; tender success rate
- ; project performance effectiveness index, safety/loss control, rework
- . : length of project closeout cycle
The
internal business measures emphasized a major shift in Rockwater’s
thinking. Formerly, the company stressed performance for each functional
department. The new focus emphasized measures that integrated key
business processes. The development of a comprehensive and timely index
of project performance effectiveness was viewed as a key core competency
for the company. Rockwater felt that safety was also a major
competitive factor. Internal studies had revealed that the indirect
costs from an accident could be 5 to 50 times the direct costs. The
scorecard included a safety index, derived from a comprehensive safety
measurement system, that could identify and classify all undesired
events with the potential for harm to people, property, or process.
The
Rockwater team deliberated about the choice of metric for the
identification stage. It recognized that hours spent with key prospects
discussing new work was an input or process measure rather than an
output measure. The management team wanted a metric that would clearly
communicate to all members of the organization the importance of
building relationships with and satisfying customers. The team believed
that spending quality time with key customers was a prerequisite for
influencing results. This input measure was deliberately chosen to
educate employees about the importance of working closely to identify
and satisfy customer needs.
Rockwater’s executives wanted a metric that would communicate the importance of building relationships with customers.
Innovation and Improvement:
The
innovation and learning objectives are intended to drive improvement in
financial, customer, and internal process performance. At Rockwater,
such improvements came from product and service innovation that would
create new sources of revenue and market expansion, as well as from
continuous improvement in internal work processes. The first objective
was measured by percent revenue from new services and the second
objective by a continuous improvement index that represented the rate of
improvement of several key operational measures, such as safety and
rework. But in order to drive both product/service innovation and
operational improvements, a supportive climate of empowered, motivated
employees was believed necessary. A staff attitude survey and a metric
for the number of employee suggestions measured whether or not such a
climate was being created. Finally, revenue per employee measured the
outcomes of employee commitment and training programs.
The
balanced scorecard has helped Rockwater’s management emphasize a
process view of operations, motivate its employees, and incorporate
client feedback into its operations. It developed a consensus on the
necessity of creating partnerships with key customers, the importance of
order-of-magnitude reductions in safety-related incidents, and the need
for improved management at every phase of multiyear projects. Chambers
sees the scorecard as an invaluable tool to help his company ultimately
achieve its mission: to be number one in the industry.
Apple Computer: Adjusting Long-Term Performance
Apple
Computer developed a balanced scorecard to focus senior management on a
strategy that would expand discussions beyond gross margin, return on
equity, and market share. A small steering committee, intimately
familiar with the deliberations and strategic thinking of Apple’s
Executive Management Team, chose to concentrate on measurement
categories within each of the four perspectives and to select multiple
measurements within each category. For the financial perspective, Apple
emphasized shareholder value; for the customer perspective, market share
and customer satisfaction; for the internal process perspective, core
competencies; and, finally, for the innovation and improvement
perspective, employee attitudes. Apple’s management stressed these
categories in the following order:
Customer Satisfaction:
Historically,
Apple had been a technology- and product-focused company that competed
by designing better computers. Customer satisfaction metrics are just
being introduced to orient employees toward becoming a customer-driven
company. J.D. Power & Associates, a customer-survey company, now
works for the computer industry. However, because it recognized that its
customer base was not homogeneous, Apple felt that it had to go beyond
J.D. Power & Associates and develop its own independent surveys in
order to track its key market segments around the world.
Once a technology- and product-focused company, Apple has introduced measures that shift the emphasis toward customers.
Core Competencies:
Company
executives wanted employees to be highly focused on a few key
competencies: for example, user-friendly interfaces, powerful software
architectures, and effective distribution systems. However, senior
executives recognized that measuring performance along these competency
dimensions could be difficult. As a result, the company is currently
experimenting with obtaining quantitative measures of these
hard-to-measure competencies.
Employee Commitment and Alignment:
Apple
conducts a comprehensive employee survey in each of its organizations
every two years; surveys of randomly selected employees are performed
more frequently. The survey questions are concerned with how well
employees understand the company’s strategy as well as whether or not
they are asked to deliver results that are consistent with that
strategy. The results of the survey are displayed in terms of both the
actual level of employee responses and the overall trend of responses.
Market Share:
Achieving
a critical threshold of market share was important to senior management
not only for the obvious sales growth benefits but also to attract and
retain software developers to Apple platforms.
Shareholder Value:
Shareholder
value is included as a performance indicator, even though this measure
is a result—not a driver—of performance. The measure is included to
offset the previous emphasis on gross margin and sales growth, measures
that ignored the investments required today to generate growth for
tomorrow. In contrast, the shareholder value metric quantifies the
impact of proposed investments for business creation and development.
The majority of Apple’s business is organized on a functional
basis—sales, product design, and worldwide manufacturing and
operations—so shareholder value can be calculated only for the entire
company instead of at a decentralized level. The measure, however, helps
senior managers in each major organizational unit assess the impact of
their activities on the entire company’s valuation and evaluate new
business ventures.
While
these five performance indicators have only recently been developed,
they have helped Apple’s senior managers focus their strategy in a
number of ways. First of all, the balanced scorecard at Apple serves
primarily as a planning device, instead of as a control device. To put
it another way, Apple uses the measures to adjust the “long wave” of
corporate performance, not to drive operating changes. Moreover, the
metrics at Apple, with the exception of shareholder value, can be driven
both horizontally and vertically into each functional organization.
Considered vertically, each individual measure can be broken down into
its component parts in order to evaluate how each part contributes to
the functioning of the whole. Thought of horizontally, the measures can
identify how, for example, design and manufacturing contribute to an
area such as customer satisfaction. In addition, Apple has found that
its balanced scorecard has helped develop a language of measurable
outputs for how to launch and leverage programs.
Apple uses the scorecard as a device to plan long-term performance, not as a device to drive operating changes.
The
five performance indicators at Apple are benchmarked against
best-in-class organizations. Today they are used to build business plans
and are incorporated into senior executives’ compensation plans.
Advanced Micro Devices: Consolidating Strategic Information
Advanced
Micro Devices (AMD), a semiconductor company, executed a quick and easy
transition to a balanced scorecard. It already had a clearly defined
mission, strategy statement, and shared understanding among senior
executives about its competitive niche. It also had many performance
measures from many different sources and information systems. The
balanced scorecard consolidated and focused these diverse measures into a
quarterly briefing book that contained seven sections: financial
measures; customer-based measures, such as on-time delivery, lead time,
and performance-to-schedule; measures of critical business processes in
wafer fabrication, assembly and test, new product development, process
technology development (e.g., submicron etching precision), and,
finally, measures for corporate quality. In addition, organizational
learning was measured by imposing targeted rates of improvements for key
operating parameters, such as cycle time and yields by process.
At
present, AMD sees its scorecard as a systematic repository for
strategic information that facilitates long-term trend analysis for
planning and performance evaluation.
Driving the Process of Change
The
experiences of these companies and others reveal that the balanced
scorecard is most successful when it is used to drive the process of
change. Rockwater, for instance, came into existence after the merger of
two different organizations. Employees came from different cultures,
spoke different languages, and had different operating experiences and
backgrounds. The balanced scorecard helped the company focus on what it
had to do well in order to become the industry leader.
Similarly,
Joseph De Feo, chief executive of Service Businesses, one of the three
operating divisions of Barclays Bank, had to transform what had been a
captive, internal supplier of services into a global competitor. The
scorecard highlighted areas where, despite apparent consensus on
strategy, there still was considerable disagreement about how to make
the strategy operational. With the help of the scorecard, the division
eventually achieved consensus concerning the highest priority areas for
achievement and improvement and identified additional areas that needed
attention, such as quality and productivity. De Feo assessed the impact
of the scorecard, saying, “It helped us to drive major change, to become
more market oriented, throughout our organization. It provided a shared
understanding of our goals and what it took to achieve them.”
Analog
Devices, a semiconductor company, served as the prototype for the
balanced scorecard and now uses it each year to update the targets and
goals for division managers. Jerry Fishman, president of Analog, said,
“At the beginning, the scorecard drove significant and considerable
change. It still does when we focus attention on particular areas, such
as the gross margins on new products. But its main impact today is to
help sustain programs that our people have been working on for years.”
Recently, the company has been attempting to integrate the scorecard
metrics with hoshin
planning, a procedure that concentrates an entire company on achieving
one or two key objectives each year. Analog’s hoshin objectives have
included customer service and new product development, for which
measures already exist on the company’s scorecard.
But
the scorecard isn’t always the impetus for such dramatic change. For
example, AMD’s scorecard has yet to have a significant impact because
company management didn’t use it to drive the change process. Before
turning to the scorecard, senior managers had already formulated and
gained consensus for the company’s mission, strategy, and key
performance measures. AMD competes in a single industry segment. The top
12 managers are intimately familiar with the markets, engineering,
technology, and other key levers in this segment. The summary and
aggregate information in the scorecard were neither new nor surprising
to them. And managers of decentralized production units also already had
a significant amount of information about their own operations. The
scorecard did enable them to see the breadth and totality of company
operations, enhancing their ability to become better managers for the
entire company. But, on balance, the scorecard could only encapsulate
knowledge that managers in general had already learned.
The scorecard enables managers to see the breadth and totality of company operations.
At Advanced Micro Devices, the scorecard only encapsulated knowledge that managers had already learned.
AMD’s
limited success with the balanced scorecard demonstrates that the
scorecard has its greatest impact when used to drive a change process.
Some companies link compensation of senior executives to achieving
stretch targets for the scorecard measures. Most are attempting to
translate the scorecard into operational measures that become the focus
for improvement activities in local units. The scorecard is not just a
measurement system; it is a management system to motivate breakthrough
competitive performance.
Implementing the Balanced Scorecard at FMC Corporation: An Interview with Larry D. Brady
FMC
Corporation is one of the most diversified companies in the United
States, producing more than 300 product lines in 21 divisions organized
into 5 business segments: industrial chemicals, performance chemicals,
precious metals, defense systems, and machinery and equipment. Based in
Chicago, FMC has worldwide revenues in excess of $4 billion.
Since
1984, the company has realized annual returns-on-investment of greater
than 15%. Coupled with a major recapitalization in 1986, these returns
resulted in an increasing shareholder value that significantly exceeded
industrial averages. In 1992, the company completed a strategic review
to determine the best future course to maximize shareholder value. As a
result of that review, FMC adopted a growth strategy to complement its
strong operating performance. This strategy required a greater external
focus and appreciation of operating trade-offs.
To
help make the shift, the company decided to use the balanced scorecard.
In this interview conducted by Robert S. Kaplan, Larry D. Brady,
executive vice president of FMC, talks about the company’s experience
implementing the scorecard.
Robert S. Kaplan: What’s the status of the balanced scorecard at FMC?
Larry D. Brady: Although
we are just completing the pilot phase of implementation, I think that
the balanced scorecard is likely to become the cornerstone of the
management system at FMC. It enables us to translate business unit
strategies into a measurement system that meshes with our entire system
of management.
For
instance, one manager reported that while his division had measured
many operating variables in the past, now, because of the scorecard, it
had chosen 12 parameters as the key to its strategy implementation.
Seven of these strategic variables were entirely new measurements for
the division. The manager interpreted this finding as verifying what
many other managers were reporting: the scorecard improved the
understanding and consistency of strategy implementation. Another
manager reported that, unlike monthly financial statements or even his
strategic plan, if a rival were to see his scorecard, he would lose his
competitive edge.
It’s
rare to get that much enthusiasm among divisional managers for a
corporate initiative. What led you and them to the balanced scorecard?
FMC
had a clearly defined mission: to become our customers’ most valued
supplier. We had initiated many of the popular improvement programs:
total quality, managing by objectives, organizational effectiveness,
building a high-performance organization. But these efforts had not been
effective. Every time we promoted a new program, people in each
division would sit back and ask, “How is that supposed to fit in with
the six other things we’re supposed to be doing?’’
Corporate
staff groups were perceived by operating managers as pushing their pet
programs on divisions. The diversity of initiatives, each with its own
slogan, created confusion and mixed signals about where to concentrate
and how the various programs interrelated. At the end of the day, with
all these new initiatives, we were still asking division managers to
deliver consistent short-term financial performance.
“The diversity of initiatives, each with its own slogan, created confusion and mixed signals.”
What kinds of measures were you using?
The
FMC corporate executive team, like most corporate offices, reviews the
financial performance of each operating division monthly. As a highly
diversified company that redeploys assets from mature cash generators to
divisions with significant growth opportunities, the
return-on-capital-employed (ROCE) measure was especially important for
us. We were one of the few companies to inflation-adjust our internal
financial measures so that we could get a more accurate picture of a
division’s economic profitability.
At
year-end, we rewarded division managers who delivered predictable
financial performance. We had run the company tightly for the past 20
years and had been successful. But it was becoming less clear where
future growth would come from and where the company should look for
breakthroughs into new areas. We had become a high return-on-investment
company but had less potential for further growth. It was also not at
all clear from our financial reports what progress we were making in
implementing long-term initiatives. Questions from the corporate office
about spending versus budget also reinforced a focus on the short-term
and on internal operations.
But
the problem went even deeper than that. Think about it. What is the
value added of a corporate office that concentrates on making division
managers accountable for financial results that can be added up across
divisions? We combine a business that’s doing well with a business
that’s doing poorly and have a total business that performs at an
average level. Why not split the company up into independent companies
and let the market reallocate capital? If we were going to create value
by managing a group of diversified companies, we had to understand and
provide strategic focus to their operations. We had to be sure that each
division had a strategy that would give it sustainable competitive
advantage. In addition, we had to be able to assess, through measurement
of their operations, whether or not the divisions were meeting their
strategic objectives.
If
you’re going to ask a division or the corporation to change its
strategy, you had better change the system of measurement to be
consistent with the new strategy.
“If you’re going to ask a division or the corporation to change its strategy, you had better change the system of measurement.”
How did the balanced scorecard emerge as the remedy to the limitations of measuring only short-term financial results?
In
early 1992, we assembled a task force to integrate our various
corporate initiatives. We wanted to understand what had to be done
differently to achieve dramatic improvements in overall organizational
effectiveness. We acknowledged that the company may have become too
short-term and too internally focused in its business measures. Defining
what should replace the financial focus was more difficult. We wanted
managers to sustain their search for continuous improvement, but we also
wanted them to identify the opportunities for breakthrough performance.
When
divisions missed financial targets, the reasons were generally not
internal. Typically, division management had inaccurately estimated
market demands or had failed to forecast competitive reactions. A new
measurement system was needed to lead operating managers beyond
achieving internal goals to searching for competitive breakthroughs in
the global marketplace. The system would have to focus on measures of
customer service, market position, and new products that could generate
long-term value for the business. We used the scorecard as the focal
point for the discussion. It forced division managers to answer these
questions: How do we become our customers’ most valued supplier? How do
we become more externally focused? What is my division’s competitive
advantage? What is its competitive vulnerability?
How did you launch the scorecard effort at FMC?
We
decided to try a pilot program. We selected six division managers to
develop prototype scorecards for their operations. Each division had to
perform a strategic analysis to identify its sources of competitive
advantage. The 15 to 20 measures in the balanced scorecard had to be
organization-specific and had to communicate clearly what short-term
measures of operating performance were consistent with a long-term
trajectory of strategic success.
Were the six division managers free to develop their own scorecard?
We
definitely wanted the division managers to perform their own strategic
analysis and to develop their own measures. That was an essential part
of creating a consensus between senior and divisional management on
operating objectives. Senior management did, however, place some
conditions on the outcomes.
First
of all, we wanted the measures to be objective and quantifiable.
Division managers were to be just as accountable for improving scorecard
measures as they had been for using monthly financial reviews. Second,
we wanted output measures not process-oriented measures. Many of the
improvement programs under way were emphasizing time, quality, and cost
measurements. Focusing on T-Q-C measurements, however, encourages
managers to seek narrow process improvements instead of breakthrough
output targets. Focusing on achieving outputs forces division managers
to understand their industry and strategy and help them to quantify
strategic success through specific output targets.
Could you illustrate the distinction between process measures and output measures?
You
have to understand your industry well to develop the connection between
process improvements and outputs achieved. Take three divisional
examples of cycle-time measurement, a common process measure.
For
much of our defense business, no premium is earned for early delivery.
And the contracts allow for reimbursement of inventory holding costs.
Therefore, attempts to reduce inventory or cycle times in this business
produce no benefit for which the customer is willing to pay. The only
benefits from cycle time or inventory reduction occur when reduction in
factory-floor complexity leads to real reductions in product cost. The
output performance targets must be real cash savings, not reduced
inventory levels or cycle times.
In
contrast, significant lead-time reductions could be achieved for our
packaging machinery business. This improvement led to lower inventory
and an option to access an additional 35% of the market. In this case,
the cycle-time improvements could be tied to specific targets for
increased sales and market share. It wasn’t linear, but output seemed to
improve each time we improved throughput times.
And
in one of our agricultural machinery businesses, orders come within a
narrow time window each year. The current build cycle is longer than the
ordering window, so all units must be built to the sales forecast. This
process of building to forecast leads to high inventory—more than twice
the levels of our other businesses—and frequent overstocking and
obsolescence of equipment. Incremental reductions in lead time do little
to change the economics of this operation. But if the build cycle time
could be reduced to less than the six-week ordering time window for part
or all of the build schedule, then a breakthrough occurs. The division
can shift to a build-to-order schedule and eliminate the excess
inventory caused by building to forecasts. In this case, the benefit
from cycle-time reductions is a step-function that comes only when the
cycle time drops below a critical level.
So
here we have three businesses, three different processes, all of which
could have elaborate systems for measuring quality, cost, and time but
would feel the impact of improvements in radically different ways. With
all the diversity in our business units, senior management really can’t
have a detailed understanding of the relative impact of time and quality
improvements on each unit. All of our senior managers, however,
understand output targets, particularly when they are displayed with
historical trends and future targets.
Benchmarking has become popular with a lot of companies. Does it tie in to the balanced scorecard measurements?
Unfortunately,
benchmarking is one of those initially good ideas that has turned into a
fad. About 95% of those companies that have tried benchmarking have
spent a lot of money and have gotten very little in return. And the
difference between benchmarking and the scorecard helps reinforce the
difference between process measures and output measures. It’s a lot
easier to benchmark a process than to benchmark an output. With the
scorecard, we ask each division manager to go outside their organization
and determine the approaches that will allow achievement of their
long-term output targets. Each of our output measures has an associated
long-term target. We have been deliberately vague on specifying when the
target is to be accomplished. We want to stimulate a thought process
about how to do things differently to achieve the target rather than how
to do existing things better. The activity of searching externally for
how others have accomplished these breakthrough achievements is called
target verification not benchmarking.
Were the division managers able to develop such output-oriented measures?
Well,
the division managers did encounter some obstacles. Because of the
emphasis on output measures and the previous focus on operations and
financial measures, the customer and innovation perspectives proved the
most difficult. These were also the two areas where the balanced
scorecard process was most helpful in refining and understanding our
existing strategies.
But
the initial problem was that the management teams ran afoul of both
conditions: the measures they proposed tended to be nonquantifiable and
input- rather than output-oriented. Several divisions wanted to conduct
customer surveys and provide an index of the results. We judged a single
index to be of little value and opted instead for harder measures such
as price premiums over competitors.
We
did conclude, however, that the full customer survey was an excellent
vehicle for promoting external focus and, therefore, decided to use
survey results to kick-off discussion at our annual operating reviews.
Did you encounter any problems as you launched the six pilot projects?
At
first, several divisional managers were less than enthusiastic about
the additional freedom they were being given from headquarters. They
knew that the heightened visibility and transparency of the scorecard
took away the internal trade-offs they had gained experience in making.
They initially interpreted the increase in visibility of divisional
performance as just the latest attempt by corporate staff to meddle in
their internal business processes.
To
offset this concern, we designed targets around long-term objectives.
We still closely examine the monthly and quarterly statistics, but these
statistics now relate to progress in achieving long-term objectives and
justify the proper balance between short-term and long-term
performance.
We
also wanted to transfer quickly the focus from a measurement system to
achieving performance results. A measurement orientation reinforces
concerns about control and a short-term focus. By emphasizing targets
rather than measurements, we could demonstrate our purpose to achieve
breakthrough performance.
But
the process was not easy. One division manager described his own
three-stage implementation process after receiving our directive to
build a balanced scorecard: denial—hope it goes away; medicinal—it won’t
go away, so let’s do it quickly and get it over with; ownership—let’s
do it for ourselves.
In the end, we were successful. We now have six converts who are helping us to spread the message throughout the organization.
I understand that you have started to apply the scorecard not just to operating units but to staff groups as well.
Applying
the scorecard approach to staff groups has been even more eye-opening
than our initial work with the six operating divisions. We have done
very little to define our strategy for corporate staff utilization. I
doubt that many companies can respond crisply to the question, “How does
staff provide competitive advantage?’’ Yet we ask that question every
day about our line operations. We have just started to ask our staff
departments to explain to us whether they are offering low cost or
differentiated services. If they are offering neither, we should
probably outsource the function. This area is loaded with real potential
for organizational development and improved strategic capability.
My
conversations with financial people in organizations reveal some
concern about the expanded responsibilities implied by developing and
maintaining a balanced scorecard. How does the role of the controller
change as a company shifts its primary measurement system from a purely
financial one to the balanced scorecard?
Historically,
we have had two corporate departments involved in overseeing business
unit performance. Corporate development was in charge of strategy, and
the controller’s office kept the historical records and budgeted and
measured short-term performance. Strategists came up with five- and
ten-year plans, controllers one-year budgets and near-term forecasts.
Little interplay occurred between the two groups. But the scorecard now
bridges the two. The financial perspective builds on the traditional
function performed by controllers. The other three perspectives make the
division’s long-term strategic objectives measurable.
In
our old environment, division managers tried to balance short-term
profits with long-term growth, while they were receiving different
signals depending on whether or not they were reviewing strategic plans
or budgets. This structure did not make the balancing of short-term
profits and long-term growth an easy trade-off, and, frankly, it let
senior management off the hook when it came to sharing responsibility
for making the trade-offs.
Perhaps
the corporate controller should take responsibility for all measurement
and goal setting, including the systems required to implement these
processes. The new corporate controller could be an outstanding system
administrator, knowledgeable about the various trade-offs and balances,
and skillful in reporting and presenting them. This role does not
eliminate the need for strategic planning. It just makes the two systems
more compatible. The scorecard can serve to motivate and evaluate
performance. But I see its primary value as its ability to join together
what had been strong but separated capabilities in strategy development
and financial control. It’s the operating performance bridge that
corporations have never had.
How often do you envision reviewing a division’s balanced scorecard?
I
think we will ask group managers to review a monthly submission from
each of their divisions, but the senior corporate team will probably
review scorecards quarterly on a rotating basis so that we can review up
to seven or eight division scorecards each month.
Isn’t
it inconsistent to assess a division’s strategy on a monthly or
quarterly basis? Doesn’t such a review emphasize short-term performance?
I
see the scorecard as a strategic measurement system, not a measure of
our strategy. And I think that’s an important distinction. The monthly
or quarterly scorecard measures operations that have been configured to
be consistent with our long-term strategy.
“I see the scorecard as a strategic measurement system, not a measure of our strategy.”
Here’s
an example of the interaction between the short and the long term. We
have pushed division managers to choose measures that will require them
to create change, for example, penetration of key markets in which we
are not currently represented. We can measure that penetration monthly
and get valuable short-term information about the ultimate success of
our long-term strategy. Of course, some measures, such as annual market
share and innovation metrics, don’t lend themselves to monthly updates.
For the most part, however, the measures are calculated monthly.
Any final thoughts on the scorecard?
I
think that it’s important for companies not to approach the scorecard
as the latest fad. I sense that a number of companies are turning to
scorecards in the same way they turned to total quality management,
high-performance organization, and so on. You hear about a good idea,
several people on corporate staff work on it, probably with some
expensive outside consultants, and you put in a system that’s a bit
different from what existed before. Such systems are only incremental,
and you don’t gain much additional value from them.
It
gets worse if you think of the scorecard as a newmeasurement system
that eventually requires hundreds and thousands of measurements and a
big, expensive executive information system. These companies lose sight
of the essence of the scorecard: its focus, its simplicity, and its
vision. The real benefit comes from making the scorecard the cornerstone
of the way you run the business. It should be the core of the
management system, not the measurement system. Senior managers alone
will determine whether the scorecard becomes a mere record-keeping
exercise or the lever to streamline and focus strategy that can lead to
breakthrough performance.
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