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What is it?

  • A collection of numbers covering each component of success: financials, people, operations, suppliers, customers, and support systems.
  • The process of involving people in the distillation of the organization's strategy and in the selection of indicators.

Benefits

  • Clarification of strategy throughout the organization
  • Central source of key information
  • Attention directed to vital issues
  • Advance warning of problems
  • Alignment of organization around strategy - which yields higher control and flexibility
  • Prioiritizes initiatives - reduces initiative overload
  • Organizes information - reduces information overload

Key success factors

  • Stick to the process
  • Involve people

Useful tools

How do balanced scorecards fit with organizational development?

Used properly, balanced scorecards are a tool for changing organizational culture, and for modifying reward systems to support desired "future states."

Integrated measurement systems:
Balanced scorecards and organizational development

One of the hot trends in management today is the balanced scorecard. Though empirical research and many success stories show that strategic measurement can work wonders, there are also many cases where scorecards simply did not work. The most balanced perspective is that these tools work well, when they are well implemented.

Even if you decide that a balanced scorecard is not for you, knowing about scorecard tools can be helpful, since some of the tools can be used independently.

What is a balanced scorecard?

A balanced scorecard is a central list of numbers, which show each key part of an organization's success, such as financials, people, operations, suppliers, customers, and support systems. The numbers should measure not just important outcomes, but also the factors which influence, or drive, those outcomes.

For example, profits are often high at 3M, but that is largely due to an innovative, high-quality product line. Those products are derived through strong organizational support for innovation and motivated, hard-working employees. A traditional measurement approach would only measure profits, and it would be easy for cost-cutters to trim back a rather high research and development budget - or force employees to stop wasting their time on frivolous ideas. Using an integrated system, leaders would know (as 3M's leaders know) that R&D and employee involvement in innovation are key to 3M's long and well-earned success.

The basic philosophy of the balanced scorecard is that people will focus on what you measure - more because it shows you care about it than because of financial incentives. Most organizations, when you look at their actual behaviors rather than their words, focus on a few financial measures, but that doesn't help them to improve their results, because if you tell your employees to increase shareholder value - what should they do? But if you know what determines shareholder value - high customer loyalty, high quality or low price products, etc. - then you have some ground to stand on, especially if you can work back to the key issues managers and employees should focus on.

Thus, the balanced scorecard does its magic by focusing the organization on the issues which the leadership team decides are key to its success. It does this more through the process of implementing the scorecard than through the actual paper or numbers - so a human solution is the key. Simply buying expensive software won't provide the full benefit.

There are other benefits - stronger communication (through the cascading and measurement tracking processes), warning of strengths and opportunities ahead (from watching key indicators), less "information overload" (from focusing only on the most important measures), and greater alignment (from agreement on key objectives), to name a few.

A sheet of paper with numbers on it can be created by one person and implemented by sheer force of authority. However, the point of a balanced scorecard is to:

  • Align all members of an organization around common goals and strategies
  • Link initiatives to the strategy, making prioritization easier
  • Provide feedback to people on key issues - notably, areas where they can have an impact
  • Be an essential decision-making tool for everyone in the organization

If a single person tries to force a system into place, chances are it will not reflect the organization's key strategies, goals, strengths, and weaknesses. It is also very unlikely to assure buy-in from the people who need to use it.

The best process is to first create a clear business model, and then to select measurements based on that model. This increases commitment, brings more agreement on the direction of the organization, builds accountability to company goals, and increases the speed of change.

Creating the balanced scorecard model

The first part of the process is creating a model for the scorecard. First, review and clarify strategies; this often requires some facilitated arguments and discussions, so that broad disagreements can be dealt with.

Many organizations do not adequately resolve their strategic differences, so people work separately towards different visions. For example, one automaker's strategies for selling cars were split by group: the CEO believed in forming alliances with exotic makers, the sales executive leaned on rebates, and the product group, with limited budgets, souped up existing economy cars. The result was an ineffectual, expensive hodgepodge.

When one leader with a clear vision worked with others to develop strategies, they were able to transform the culture and organizational structure to produce vehicles that eventually saved the company.

The next step is agreeing on what capabilities are needed within the company to actually pursue the strategy.

At the automaker, they needed to innovate without access to capital. They created a new design process that included as many people as possible, from suppliers to factory workers and mechanics, so that everyone shared the same strategic goals, and worked together to pursue them. Lead time was cut in half, costs were slashed, and the products gained immediate critical acclaim; sales went up as costs went down.

As if to show that this was not simply an issue of new technology, the same automaker changed their leadership style and methods, abandoning their principles of involvement - and suffered higher costs and lower sales.

The final part of creating a model for the balanced scorecard is making the actual model. This is where you set up a simple diagram that reflects how you think the business works - a very basic example:

balanced scorecard flowchart

These steps are usually done at a two-day off-site meeting, where the leadership team must agree on key goals and drivers, values, and their competitive situation. They must build the map which will be used as the basis of the scorecard - not the measures themselves, but what concepts will be measured. Third, most important, they must gain personal involvement in and ownership of the process.

To speed up the process, the off-site is preceded by a survey of the leadership team.

Once that is done, you can move to the second step, which is designing or selecting measures for the scorecard. This is where the process and the paper come together. One way to do this is to assign teams to come up with appropriate measures. There are several benefits to this approach:

  • It involves more people in the process
  • It is a process check to ensure that the issues chosen are clear and well understood
  • It takes away some of the time demands from the senior leaders

The measurement teams normally present their conclusions to the senior leaders, who then either use them, or ask for changes or clarifications. The measurement teams can also be used to help with implementation.

As with any change, champions and constant communication are be essential to success. Employee surveys can be not only a source of measures, but also a tool to judge whether people understand the process and are prepared for it; and how well the scorecard is being implemented in each area.

Cascading the scorecard

For larger organizations, a balanced scorecard is first installed at the top, where commitment is most vital to success. It is then cascaded throughout the organization, to focus departments' goals with the overall company goals. For single stores or small companies, this step might be unnecessary.

It helps to run a linkage analysis on each segment of the scorecard (where possible) so that you can support its relationships and models. Linkage analysis may also point to potential improvements.

If you’re interested in scorecard software, try Compiere, a free (support available for a price) open-source program.

Making the scorecard useful

The final step is getting people to use the scorecard as a routine matter - making it part of the culture. This is where most management initiatives go wrong, leading to this sage advice: If you want something to be a useful tool, make it the only initiative you try this quarter, give it your full attention, and don't take any shortcuts. Otherwise, an initiative becomes a fad and eventually appears in the Dilbert cartoons.

Once created, the scorecard should become a part of your business' daily life; it should be embedded into a company's operations as a standard decision-making tool. The scorecard makes the results of changes measurable, so stores or companies can learn what business models yield the best long-term results - in short, what works and what does not work. If it is updated regularly, the scorecard can give warnings of problems ahead, or signal opportunities. It can (and should) also be used as the focus of continuous improvement.

The balanced scorecard requires a rigorous process and commitment, but its benefits are worth the costs. Even if you only adopt a few of the elements of the balanced scorecard, the research suggests you will have a competitive advantage. Best of all, much of the scorecard is simple common sense: getting agreement on strategy, strengths, and weaknesses; measuring essential business numbers; and focusing not just on financial outcomes, but also on the issues that will affect those outcomes in the future. The balanced scorecard, and all its pieces, leverage common sense into a substantial competitive advantage.

Contact Toolpack Consulting for more information on how you can implement a balanced scorecard - or make better use of the one you have.

If you are interested in balanced scorecard software, try the open-source Compiere.

 

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Balanced scorecards