Making Scorecards Actionable: Balancing Strategy and Control / Edition 1 available in Hardcover
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Making Scorecards ActionableBalancing Strategy and Control
By Nils-Göran Olve Carl-Johan Petri Jan Roy Sofie Roy
John Wiley & SonsISBN: 0-470-84871-5
Chapter OneScorecards 10 Years On - Fading Fad or Maturing Management?
SCORECARDS AS EMERGING BEST PRACTICE IN MANAGEMENT CONTROL?
The concept of the balanced scorecard (BSC) was first presented in the early 1990s. By 2000 some surveys indicated that a majority of firms in the United States, the United Kingdom and Scandinavia used scorecards - or at least intended to do so soon. Others, like Bain's management tools survey, indicated a slight drop in usage to 36%, but with a high average satisfaction with the tool. The number of software packages for scorecards on the market is growing and now exceeds 100. In only 10 years, the idea of the BSC has certainly made its mark.
At the same time there are reports of high failure rates. We have seen firms abandon their scorecard efforts. Others are struggling against the perception of the BSC as 'just another three-letter fad' propagated by consultants such as TQM, BPR, and ABC. But were these failures? There are probably fewer BPR or ABC projects started now than 10 or 15 years ago. Still, important parts of their philosophy have been integrated into standard practices in modern management.
There is also another danger. Many such projects were not for 'real'. Managers used the terms because it was the current thing to do, but did not givethe concepts a chance by applying them as intended. The same may be happening to the BSC: the ideas are rejected because they are not applied properly.
There are indications that the literature about scorecards has 'peaked' (Figure 1.1). Even after 10 years of the BSC we are aware of very few companies with more than a few years of successful and ongoing scorecard use. Some may see Figure 1.1 as a 'hype curve', indicating inflated expectations among those who take an interest in methods of management. To have lasting effects, the hype has to be followed by action. Organizations introducing scorecards need to work patiently for several years before they can claim to have reformed their control systems. With diminishing hype, the BSC will need to start producing tangible effects - at a time when it is still in need of continued support and experimentation.
Yet during our research for this book we found that several important corporations are only now launching major BSC initiatives. We met enthusiastic managers convinced that they will avoid the pitfalls encountered by companies who have discontinued their projects. They usually claim that others have laid too much emphasis on performance measurement, and too little on strategic control. Maybe after a period of trial-and-error the BSC is now emerging as a natural and necessary part of management?
So it seems time to make up our minds about the BSC. What can we learn from the past 10 years of the BSC? What should organizations using scorecards take note of in order to make their projects successful? These are the questions that prompted the present book. We build on the experiences reported in our previous book Performance Drivers (1999). But here we take a much more careful look at the experiences people have had in introducing and using scorecards. We do this through cases from business and government. A few of them are told in some detail, because we believe that success with scorecards hinges on how they enter into the everyday life of organizations. Others are used as building blocks for a discussion of challenges and issues facing firms using the BSC. But first this chapter and the next provide a brief introduction to the range of different varieties of BSCs, and how they are used.
WHAT A SCORECARD IS, AND WHY
A BSC is a format for describing the activities of an organization through a number of measures for each of (usually) four perspectives. A simplified BSC may resemble Figure 1.2. Some business activity is described from four different perspectives, using a small number of measures for each. The description may refer to the business's current performance, or to its goals for the next period.
Some would say that this is just another performance report, combining financial and non-financial metrics. But there is more to the scorecard than immediately meets the eye:
The scorecard is balanced: the four perspectives aim for a complete description of what you need to know about the business. First, there is a time dimension going from bottom to top. Current profitability, etc. may largely be a consequence of what was done last quarter or last year; if new skills are added now it should have consequences for next year's efficiency and finance.
The scorecard is balanced in another way also: it shows both internal and external aspects of the business. It is obvious that a 'well-oiled machinery' of internal processes is important in any business, and may not always correlate with external perceptions. On the other hand, customers' views and the contacts that have been established in the market-place are obviously important too. The scorecard shows both.
Finally, the scorecard is linked through cause-and-effect assumptions. Among its most important uses is to reflect on how strong these linkages are, what time delays they involve, and how certain we can be about them in the face of external competition and change. In Figure 1.2, links are indicated just between perspectives; it is, of course, advisable to discuss links also between individual measures.
In Figure 1.2 we use four perspectives, as originally proposed by Robert S. Kaplan and David P. Norton in their initial article, published in 1992 in the Harvard Business Review (Kaplan and Norton, 1992). In practice, the names and identities of these perspectives have come to vary. The 'development' perspective was Innovation and Learning in Kaplan and Norton's first article, and became Learning and Growth in their later writings. The 'process' perspective is sometimes called Internal Business Processes. We tend mainly to use 'development' and 'process' for their brevity, but readers will find that the organizations we have studied have introduced their own names for these.
Organizations whose long-term goals are not financial may prefer to reorder the perspectives, and regard the financial perspective not as an objective but as a means to providing customer services. Or they can change it into the fulfilment of the organization's goal. We will discuss this in Chapter 2.
Since its first appearance, the concept of the BSC has been widely adopted as a new approach to management control both in business and government. A scorecard is an easy-to-understand generic format for describing the ambitions and achievements of an organization. It has proved useful for:
Communicating strategic intentions, enabling managers and employees to realize intended strategies.
Discussing activities that are motivated by strategic aims rather than current necessities, such as the development of competencies, customer relationships, and IT, and how these will pay off in the future.
Monitoring and rewarding such activities.
These aims are equally important in business firms pursuing long-term profitability and in non-profit organizations such as government agencies. Some of the most enthusiastic advocates of scorecards are to be found in public administration. Behind them is one important common theme: essential qualities of modern organizations - their resources as well as their performance - are poorly reflected in traditional accounting and control. Managers need tools to communicate about intangible or immaterial assets: to agree on targets for, and to monitor, their organization's performance in dimensions other than the traditional monetary ones.
GETTING A GRIP ON INTANGIBLES
In Performance Drivers, we argued that the interest in scorecards reflects the increasing dependence of both business and government on their intangible assets, and the need to engage employees in the pursuit of strategies where the long-term development of such assets is a key to business success. This need will be most apparent in organizations where many employees have customer contacts, and where long-term success is highly dependent on the interaction with customers and other external contacts. Such organizations need to spend time and effort learning about their environment, improving databases and systems, and creating positive attitudes towards the organization among all stakeholders. Scorecards will guide and focus these activities.
The idea of a BSC for business emerged from consultations with companies to identify a planning and performance control process suitable for the 1990s. Increased dependence on immaterial resources was a major reason why a quest for control tools using metrics other than traditional, financial ones seemed necessary. The time was ripe for a concept integrating several ideas that had gained importance during the 1970s and 1980s, and would develop in parallel with the BSC:
Customer satisfaction indices, and the general idea that value as perceived by customers was important to monitor.
'Network' ideas of customer and supplier relationships as assets that a company should maintain and develop over time, important for future earnings and consequently an important part of the value of a business. Terms such as customer base, partnerships, alliances, virtual and imaginary organizations, emerged at about the same time.
Process orientation and quality as critical for business success were promoted through acronyms such as TQM and BPR.
Human resource accounting provided the roots for other types of 'intellectual capital' reporting, with ambitions to provide both internal and external parties with an improved understanding of the most important assets of a company.
These ideas could be integrated into the customer and process perspectives. For the development (learning and growth) perspective, there were comparatively fewer suggestions.
Using non-financial measures, of course, had a history going much further back. Local information systems (in a production unit or a sales department) attracted the attention of accounting research in the 1980s, but had, of course, always existed. Large corporations have used non-financial numbers in a systematic way for at least 50 years. And, as Kaplan and Norton have pointed out, there will always be hundred of numbers which are used in a company that should not be included in scorecards. The scorecard idea was essentially to articulate strategy through a particular format, integrating a highly restrictive selection of metrics.
Brand recognition, competences, processes, etc. are all part of an organization's intangible assets. The benefits of scorecards will be greatest in organizations where these are especially important, and particularly when many organization members are involved in maintaining and utilizing them. Assets such as customer relations, procedures, brand names, databases, etc. used to show up only as costs in planning documents and reports. Gradually, new metrics have been introduced such as customer satisfaction, cycle times, and brand recognition. A well-designed scorecard provides a unifying perspective for these, showing the intended relation between them and future revenues.
During the 1990s, interest in intangibles grew. Research in the European Union and the United States focused on how companies could manage and report immaterial assets, and the title of a Brookings Institute report (2001) summarizes the hopes attached to these efforts: Unseen Wealth. Through most of the decade, stock markets did see wealth in intangible assets. In the United States, the ratio between share prices and book values for large companies on average rose from a little more than 2 in 1990 to a high of more than 7 at the end of the decade. It then declined, but not to its previous low. Obviously, this development was partly about asset-less 'new economy' firms. But also 'bricks and mortar' companies are increasingly focusing on their 'intellectual capital', rather than the material assets that are visible in their balance sheets. With the current emphasis on shareholder value, few will find it sufficient to base internal controls only on Return on Investment (RoI) or similar concepts which reflect traditional accounting concepts.
The link we see between intangibles and scorecard use may also explain why the idea seems to have attracted interest especially in industries and countries where 'knowledge-based' companies are common. But also other types of firms can benefit. A recent report describes scorecard use in a carpet company in Mongolia!
USES OF SCORECARDS
Scorecards are tools for communication. They can be used in many different dialogues about almost any kind of activity. All organizations strive to please their customers, clients, or recipients in general; we all have our internal processes and routines; we all reap rewards from what we did earlier, at the same time as we need to prepare for the future; and we all have to think about causation over time. Introducing BSCs, however, also means designing a customized management control system. Scorecards are used to align business activities to the vision and strategies of a firm, monitoring performance in the dimensions used in the scorecards, and taking action appropriate for realizing the intended strategy.
Compared with other ways of describing what an organization does or should do, BSCs have two distinguishing features. One is the almost simplistic format of the scorecard itself, where a restricted number of measures are used for each of four perspectives on a business activity: its financial performance; its customer interface; its internal processes; and its learning and development.
The other is the insistence that perspectives and measures should be 'linked'. A good scorecard documents a strategic logic: cause-and-effect relationships between current activities and long-term success. Scorecards aim to change behaviour through communication in order to realize the intended strategy. The particular efforts an organization makes in order to learn, or improve its processes, or make its customers happier, must be based on its conviction that these efforts constitute the best path to future success. The links in a good scorecard will visualize a 'business logic': how doing the right things now is expected to produce long-term rewards. In this way, scorecards translate strategy into terms that are meaningful for organization members in their everyday activities.
Excerpted from Making Scorecards Actionable by Nils-Göran Olve Carl-Johan Petri Jan Roy Sofie Roy Excerpted by permission.
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Table of ContentsPreface.
Scorecards 10 Years On–Fading Fad or MaturingManagement?
Scorecards in Use.
Skandia's Experience from Navigating into the Future.
Visualizing Strategies in Maps.
Using Scorecards to Boost a Strategy-Grounded Dialogue.
Assigning Roles and Responsibilities for OperatingScorecards.
Connecting Strategic Intent: Designing Interfaces BetweenScorecards.
How to Balance the Incentive System.
Using IT to Leverage the Scorecard.
Prospects: BSC as a Tool for Modern Management.