Ten Keys to a Successful Balanced Scorecard
The Difference between a Weak Scorecard and an Effective One Often Rests on a Few Critical Factors
The Balanced Scorecard has become a widely used method for translating strategy into action. Since its development in 1991 by Robert Kaplan and David Norton, the Balanced Scorecard has been adopted by approximately 36% of the Fortune 500 companies in the United States as a key tool for strategy implementation.
These implementations of course vary in their effectiveness. Often the difference between a successful implementation with impressive results, and an ineffective one with little long-term impact, rests on a few key lessons learned from others. Here is our list of the top ten keys to a successful Balanced Scorecard:
1. Scorecards Do Not Come in a Can: While you can certainly buy Balanced Scorecard software, do not assume that once you implement such an application, you will have an effective scorecard – nothing could be further from the truth. Successful scorecard implementations are the result of an entire team fully understanding the key scorecard concepts and applying them to their business or functional area. Training and engagement are essential, because the real value of a Balanced Scorecard process lies in forcing a group of people to think deeply about the drivers of their business and to establish clear linkages between the four levels of a Balanced Scorecard (financial results, customer value proposition, internal processes and resource development). Once the scorecard is built, Balanced Scorecard applications can facilitate the collection and reporting of measures, but there is no short cut or canned solution to building a scorecard.
2. Don’t Build a Scorecard Unless You Have a Strategy: The Balanced Scorecard is a very effective tool for translating strategy into action, but to develop an effective scorecard, one must start with a clear strategy. Organizations that jump into a Balanced Scorecard effort before they have completed the necessary work of developing their strategy invariably lose momentum and become disillusioned with the scorecard process.
3. The Value of a Scorecard is Directly Related to the Engagement of the Team: Staff organizations that are chartered with developing scorecards often make the mistake of developing the measures and having them reviewed by the business stakeholders. This is completely backwards, as the business owners need to be deeply engaged in the development of the scorecard. The role of a staff organization is to facilitate the process and to intellectually challenge and probe the executives so that they develop a deeper understanding of their business and gain real insights that might otherwise not have been achieved. Senior management sponsorship and appropriate stakeholder participation are essential components of scorecard success.
4. Be Explicit about the Relationships Among the Four Components of a Scorecard: A common mistake is to place too much emphasis on traditional financial measures as the basis for a scorecard. Doing so gives short shrift to the other three scorecard levels, each of which captures requirements and opportunities for effective strategy implementation. Even worse, an excessive focus on any one level interferes with the searching examination of the relationships among all four levels that is key to a successful scorecard implementation; e.g., “How must we change our business processes to align them with our customer value proposition?;” “Do our financial measures support the investments in training and technology that are essential to our long-term success, or do they encourage an unhealthy focus on short-term results?” The Balanced Scorecard can help an organization achieve the systematic alignment needed to ensure that its strategy is actually implemented, but only if the organization is willing to leave its existing “comfort zone” of familiar perspectives and measures.
5. Measure the Right Things: The underlying management premise for the scorecard is that “what gets, gets managed.” Andy Grove, the Chairman of Intel Corporation, uses the adage, “If you measure it, it will improve.” This truth highlights the importance of being careful what you measure. Too often, we gravitate to measures that are easy to obtain or that already exist. Do not fall into this trap. The key is to focus on measuring the right things. Anything can be measured. Sometimes it’s a bit harder to figure out what we should measure, and how to do so.
6. Less is More: Remember that scorecards are intended to change behavior, which is most easily accomplished when people can focus on execution in a few key areas. In building a scorecard, we often tend to want to be too complete, which results in including marginal measures that dilute the overall impact of the scorecard. Be disciplined and be focused, because less is truly more.
7. Have a Balance Between Lead and Lag Measures: Just as it is important to have a balance among the four levels of the scorecard, it is equally important to have a balance between the mix of “lead” and “lag” measures. Lag measures are the traditional ones that report past results, such as sales revenue, margin and costs. Lead measures provide early indicators of future performance. For example, the number of catalogs requested could be a leading indicator of future sales for a mail-order business. Both lead and lag measures provide valuable management information, and a proper mix between the two is an essential element of a successful scorecard.
8. Use the Measures as the Basis for Decision-Making: The measures you identified when you developed the scorecard were identified for a reason. If you find that you are not basing your decisions on these measures, then you might want to assess whether you have identified the wrong measures or whether you are focusing on the wrong decisions. Scorecard measures can be a powerful basis for making decisions and taking action, but only if you use them.
9. Ensure the Scorecard is Used As the Basis for an Ongoing Process, Not a One-Time Event: For the Balanced Scorecard to have traction and to facilitate change, the management team must take the time to review the selected measures against their targets on an ongoing basis. The discussion resulting from such reviews can be invaluable, because the management team will be probing, questioning, and gaining insights they would not have had if they were not regularly reviewing these measures. The benefits of a scorecard can be realized only by taking the time and devoting the effort needed to use this tool. There are no shortcuts.
10. Consider Using an Outsider Who will “Push” the Team: By definition, conventional wisdom permeates most companies in most industries. When a company accepts this conventional wisdom as it builds its scorecard, however, it can fall prey to the trap of institutionalizing this perspective and thereby continuing to overlook critical insights into the real drivers of their business. An outsider, experienced in developing Balanced Scorecards and introducing change, can challenge the team on its assumptions, improve the quality of the Balanced Scorecard they produce, and dramatically increase the benefits that result.