Measure for Measure.

Realizing the power of the balanced scorecard 

The adage, "If you can't measure it, you can't manage it" is well established in the general management literature. The Conference Board, reporting on strategic performance measurement, concluded that organizations using well designed performance measurement systems are more likely to be successful. A field study of organization use of key performance indicators concluded that organizations implementing a clear strategy using a focused performance measurement system tend to be regarded as leaders in their respective industries (Armitage and Atkinson. 1990). The 1997 Report of the Auditor General of Canada considered a wide range of issues related to performance measurement and concluded that "it is important to develop a limited but complete set of key indicators that will assist management to manage." James Collins and Jerry Porras, in their best selling book Built to Last, argued that companies that have a clear understanding of who they are and what they are trying to achieve enjoy the greatest long-term success.

The idea that performance measurement should be focused, driven by strategy, and reward behavior that contributes to strategy has been around for a long time. Over twenty years ago Steven Kerr summarized many companies' practices in a path-breaking article (Kerr, 1975, 1995). The article described how many companies' performance measurement systems were rewarding different behaviors than the ones they hoped to obtain from their employees.

In 1992, in the first of three Harvard Business Review (HBR) articles on the subject, Robert Kaplan and David Norton proposed the balanced scorecard to support the translation of strategy into action (See Kaplan and Norton 1992, 1993, 1996c). The balanced scorecard summarizes a strategically oriented set of leading and lagging performance indicators grouped into four different perspectives: financial, customer, internal processes, and learning and growth. The following diagram summarizes the four perspectives of the Kaplan and Norton balanced scorecard.

Some organizations have expanded the basic model suggested by Kaplan and Norton to include other perspectives. For example, Nova Chemical of Calgary uses the four Kaplan and Norton perspectives and an additional perspective, called the society perspective, to reflect community issues.

The idea of having a balanced picture of company perfonnance is not new. For years many companies have tacked and reported multiple indicators of organization performance using executive information systems. In France, for example, companies have been using a related tool called "Tableau de Bord" for over fifty years (Epstein and Manzoni, 1998). In the Scandinavian countries, attention has often focused on employee and social issues. However, Kaplan and Norton's balanced scorecard represents an important contribution that goes further than what most companies and countries were doing by focusing performance measurement on, and linking it with, strategy. This innovation has changed the way many managers think about managing organizations. They now develop and articulate strategy more carefully, think of the organization as an integrated and co-ordinated set of activities, link the strategy to performance metrics, and tie the strategy and metrics to compensation.

Why business needs the balanced scorecard

Field studies of practice support the widely held belief that operating managers think of, and manage, their operations in terms of physical flows and non-financial measures of performance. Production managers think of maintaining smooth production flows, achieving on-time production, meeting quality targets, minimizing rework, and eliminating waste. Logistics managers think of balancing inflows and outflows through warehouses and keeping inventory moving through the value chain to the final consumer. Sales managers think of market potential, market share, and customer satisfaction. Managers, who often manage visually, have some intuition of how these different physical measures translate into financial performance. However, often this intuition is crude and well-intentioned tradeoffs are made between different elements of performance (for example sacrificing quality for on-time delivery) that impair overall organization performance.

One of the most important roles of balanced performance measurement, which links results to the operating activities and characteristics that drive those results, is that it makes a systematic attempt both to measure those relationships and communicate them to operating managers, and provides a basis for organizations learning about those relationships.

By managing the operations and strategy of an organization with an expanded family of financial and non-financial measures, managers create a new system that helps top executives to align action, change, and innovation at every level with the strategy set at the top.

The development of various models

In the early 1990s, managers, academics, and consultants proposed new models for developing systems of strategic performance measurement defined as measurement systems that simultaneously reflect, support, and evaluate strategy. They posed the question "how can managers choose measures, financial and non-financial, that will guide them in delivering consistent value for the enterprise over the course of months and years?"

From the results of a research project conducted in 1990 with twelve companies, Robert Kaplan, of Harvard Business School, and David Norton, of Renaissance Worldwide, answered that question in their article introducing the balanced scorecard (Kaplan and Norton, 1992). One of the most significant contributions of the Kaplan and Norton model was to stress that executives should use the measures to translate vision and strategy into concrete directions for action by people throughout the organization. In their later work, Kaplan and Norton showed managers how to use the balanced scorecard as a strategic management system (Kaplan and Norton 1996a and 1996c). The measures in the balanced scorecard were not to be a wish list for continuous improvement; they prescribe a plan for strategic execution.

Meanwhile, in Sweden, at Skandia Group, a team led by Leif Edvinsson, corporate director of intellectual capital, operated under the belief that to succeed as an insurer, the company had to build value through "intellectual capital." That is, to deliver reliable financial results, Skandia had to build and leverage the value of intangible assets like solid customer relationships and unique computer software. In 1990, Skandia pioneered new ways to value intellectual capital and created measures for managing a firm that relies on intellectual capital to build value. Skandia created a balanced scorecard called the "navigator" (Edvinsson and Malone, 1997), separating corporate performance into five categories, or "focuses": financial, customer, human, process, and renewal and development. As with the Kaplan and Norton model, performance in the latter four contribute to financial performance. Edvinsson, like Kaplan and Norton, stressed the importance of learning and renewal as a root source of financial results.

At about the same time, other organizations were experimenting with a third approach to the balanced scorecard. In Canada, at the Bank of Montreal, a team led by Robert Wells, the vice-president of finance, believed that success required the bank to recognize and manage its relationships with its key stakeholder groups. In the Bank of Montreal's case, these included shareholders (who required a target return on invested capital), customers (who wanted good service and competitive rates), employees (who wanted good working environments and competitive pay), and communities (who wanted the bank to provide social leadership in their communities).

The stakeholder approach conceives of the set of relationships between the organization and its stakeholders as an articulated set (or nexus) of explicit and implicit contracts. Each of these contracts specifies what the organization expects to receive from and give to each stakeholder group in exchange for that group's continued contribution toward the organization's pursuit of its objectives. For example, employees might demand competitive wages, good working conditions, and an appropriate management style in return for the application of their effort, skill, and knowledge in making decisions that advance the organization's objectives. The role of performance measurement is to monitor the give and take expressed or implied by each of these contracts. (Atkinson et al., 1997 and Epstein and Birchard, 1999).

Implementing the balanced scorecard

Because the balanced scorecard affects perspectives, rewards, and relationships in organizations, managers must take into account not only organizational structure and systems when implementing the balanced scorecard; they must consider their organization's history, management style, and culture. The approach to implementation that suits one organization will not always suit the next. This is especially true of nonprofit organizations, whose missions vary dramatically.

For example, in December of 1999, the Ontario Hospital Association released Hospital Report '99, a comprehensive report on hospital performance that announced the implementation of a balanced scorecard. The purpose of implementing the balanced scorecard was to further enhance public accountability, to help strengthen hospital performance, and to improve patient care.

"For far too long our health care system has been measured from the narrow perspective of cost management alone, with less regard to clinical outcomes and patient satisfaction," said David MacKinnon, president and chief executive officer of the OHA, with the release of the report. "To truly understand the overall efficiency of our health care system, we need to assess not only financial performance, but also the quality of patient care and how patients perceive that care."

The scorecard developed by the OHA measures and reports on the following areas: financial performance; patient satisfaction; clinical use and outcomes (how hospitals deal with some of the most common conditions requiring hospital care); and system integration and change. The last area includes the hospitals' efforts to invest in the future by improving linkages with other providers of care, investing in better information for decision-making, and improving co-ordination of care. The release of this report was followed immediately by strong complaints raised by Mark Ortlieb, president of the Service Employees International Union Local 204, which represents over 10,000 nurses, support staff, and housekeeping workers in hospitals across South Central Ontario. Mr. Ortlieb claimed that the report was prepared without the input of those directly involved in patient care and was, therefore, both an incomplete and a potentially biased picture of the state of affairs in health care. Mr. Ortlieb concluded, "If the OHA were really interested in improving the quality of care it should have asked the people who provide the care."

Whether Mr. Ortlieb's comments are fair or even accurate, the issue remains that implementing a balanced scorecard without the input and participation of those who implement the organization's strategies and plans will doom the balanced scorecard to being a source of controversy rather than an integrating and focusing force in the organization.

The balanced scorecard is a detailed representation of the organization's strategy and includes target and actual performance measures. Therefore, it provides an absolute basis for accountability, a characteristic that many observers claim retards its implementation because of the fear that senior executives have of such a comprehensive basis for accountability. Balanced scorecard advocates must recognize that this facet of the balanced scorecard can increase the level of perceived risk in the organization and lead to resistance of its implementation.

In practice, the notion of leading versus lagging should be thought of as a continuum. Customer satisfaction is a leading indicator of financial performance, and also a lagging indicator of on-time delivery. Toxic emissions are a leading indicator of environmental costs, and also a lagging indicator of process efficiency. Managers should think of measures as data points in a complex flow of causes and effects. They will then better understand that they have to pinpoint the drivers of corporate performance to succeed with their scorecard effort. (For a review of current work on this, see Epstein, Kumar, and Westbrook, 2000.)

Companies also must refrain from adding too many measures. Research in cognitive psychology suggests that people generally can handle no more than seven elements simultaneously. Another longstanding tradition is that a performance measure must be complete (includes all the facets of the individual's job that affects overall organization objectives), measurable (to ensure that the object of measurement is meaningful and well defined), and controllable (meaning that the individual can control the level of performance measure).

Further insights on implementation can be found in an early Canadian experience. During the early 1990s, BC Rail in North Vancouver developed business-unit scorecards that managers incorporated into the monthly corporate financial package. Although useful, the measures were never integrated into the company's management process. Alan Owen, the BC Rail controller, argued that the reason for this lack of adoption was the measures never connected directly to corporate goals. When BC Rail introduced a formal balanced scorecard in 1996, the measures came directly from the strategic plan and the performance measurements system became much more effective (Owen, 1997).

Experience has shown that top management must remain intensively involved with the scorecard. Rarely do balanced scorecards succeed when the chief executives and their teams withdraw their support before completion of the initial rollout, or play only a token role in the process (Kaplan and Norton, 1996).

Once top managers have devised a balanced scorecard for the organization as a whole, their next job is to move the concept down the organization hierarchy to devise complementary scorecards. This process, referred to as cascading the

scorecards or drilling down the organization hierarchy, calls on team, division, and functional managers to craft measures that contribute to furthering the strategic objectives prescribed in the organization's scorecard.

By involving many managers at many levels, the cascading process enlists the energy, engenders the commitment of a broad cross-section of people to meet ambitious goals, and focuses and co-ordinates decision-making attention on the organization's objectives. When properly done, the scorecards at each level align everyone's effort because they are relevant, understandable, and controllable at the local level.

Best Foods Canada provides an illustration of the process of drilling down the organization hierarchy. Once Best Foods Canada had developed a corporate-level balanced scorecard, which specified its core values and core strengths, the twelve divisional managers were expected to develop scorecards that were consistent with the organization's overall objectives.

Another Canadian implementation demonstrates the importance of communicating the balanced scorecard throughout the organization. Weyerhaeuser Company's Prince Albert Pulp and Paper unit, in northern Saskatchewan, developed four scorecards -- one for the pulp mill, one for the paper mill, one for the site activities, and one for the overall unit. Managers publish much of the information in the scorecards -- on safety, productivity, quality, and environmental performance -- either daily or weekly. The company believes the information gives employees more frequent feedback on how to better manage the mill, and gives managers feedback on the success of their strategies (Hribar et al., 1997). Managers at other firms should encourage such openness, reporting financial and non-financial numbers, and providing means for employees to communicate ideas backup the chain of command.

Some insights from practice

Many organizations have considered implementing the balanced scorecard. At the moment there is considerable interest among public sector organizations, including health services and policing groups, in developing and implementing scorecards.

The public sector organizations interested in the balanced scorecard believe that it not only provides a systematic way of representing and communicating strategy, but also that it provides a way of communicating their priorities to important stakeholder groups such as principals, the community, and clients. Preliminary work in these organizations has identified an interesting reversal of the roles of the financial and customer perspectives in the Kaplan and Norton balanced scorecard framework. The objectives of profit-seeking organizations are usually captured in the financial perspective box in the Kaplan Norton framework, and meeting the objectives for customers reflects one of the primary means for achieving those objectives. An emerging view in many of the not-for-profit organizations considering the balanced scorecard in Canada is that Kaplan/Norton's customer perspectives serve as a proxy for the organization's objectives and the financial perspective serves as a measure of efficiency with which the o rganization pursues its objectives.

In a survey of the use of balanced scorecards in Canadian hospitals, it was found that hospital executives believed that while financial performance measures were important, they needed to be supplemented by non-financial measures -- particularly relating to customer-related measures such as patient satisfaction (Chan and Ho, 1999). Interestingly, many executives noted that a major requirement was to replace a system of ad hoc and unrelated performance measures with ones that were focused on hospital strategy and initiatives. The survey noted that, among hospitals that have implemented the balanced scorecard, there is a major gap between expectations and achievements relating to employee-related learning and growth elements, which is consistent with the complaints mentioned above relating to the OHA implementation of the balanced scorecard.

AT&T Canada implemented a balanced scorecard during a major turnaround engineered by Bill Catucci after its creditors brought him in to save the failing company. The balanced scorecard was used as part of a process to implement major cultural changes, which included an increased focus on customers, with quality and service the priorities, and a move from a functionally-oriented hierarchical organization to one that was decentralized and empowered. Using the balanced scorecard as away to implement and support a major cultural change in organizations that are performing poorly was found to be a common trait in a small study of organizations implementing the balanced scorecard (Kaplan and Norton, 1999).

Many organizations find that the balanced scorecard is an invaluable tool for implementing strategy and co-ordinating the decisions made in organizations. The following comment from BC Hydro's 1999 Triple Bottom Line Report is an excellent example of this perspective:

We are using a management tool, the balanced scorecard, to help us implement the business plan. The scorecard translates our mission into specific strategic priorities, performance measures and targets. Once these are developed, initiatives and activities can be aligned to focus all employees on achieving the same goals. Traditionally, performance at BC Hydro has been based exclusively on financial results. The scorecard offers us a more holistic approach, reinforcing our view that a triple bottom line approach to performance measurement provides management with more comprehensive and useful information for planning and decision-making.

The measures chosen by outstanding organizations of the future must be a balanced set, a mixture of familiar financial figures and, to many organizations, unfamiliar non-financial ones. These measures must reflect the complexity of business today, and the heightened requirement for world-class performance in far more aspects of corporate operations -- from emphasizing innovation to fostering diversity.

At a minimum, measures should reflect financial performance along with two to four non-financial categories, such as customer, employee, internal business process, or learning and growth. They should be tailored to meet the needs of each company's business and they should be expanded when necessary to take into account the critical stakeholder relationships the firm depends on to prosper -- whether with suppliers, customers, community, lenders or others.

The measures should link one to the other in a web of logic that, in a sort of shorthand, shows the core cause-and-effect relationships and integrates and focuses devolved decision-making on organization objectives. The balanced scorecard highlights the drivers of company profits in much the same way that activity-based costing elucidates the drivers of costs. In many companies, the critical success factors are poorly defined and poorly communicated. Many people just don't understand them. With the balanced scorecard, the key performance indicators can be crisply defined, crisply communicated, and easily monitored to evaluate success.

Today, companies of all sizes, centralized and decentralized, local and global, have adapted the balanced scorecard to run at a much higher level of performance. They have cascaded scorecards down the corporate hierarchy to make strategy clear to everyone in the company. They have linked employees' compensation to the scorecard to motivate action that co-ordinates individual decision-making behavior by focusing attention on company goals. They have even begun to incorporate their measures into the accountability model described by Epstein and Birchard (1999), an integration of enlightened board governance, financial, operational and social measures, management planning and control systems, and internal and external reporting systems.

Realizing the full power of the balanced scorecard calls on top managers to first make a commitment to introduce the new measures that will guide decision-making away from a single-minded focus on financial figures and functional level performance. As they learn to manage with a dashboard of new dials, they will align themselves, and their organizations, behind their organization-wide strategies with a precision they have never before experienced. And they will position themselves to generate the profitability and demonstrate the accountability demanded by customers, shareholders, employees, and the communities around them.

Editor's note: This article draws heavily on "Applying the Balanced Scorecard," published by CMA Canada, 2000. A complete bibliography for this article is available on CMA Management's Web site (www.managementmag.com).

Anthony A. Atkinson, FCMA, is a Society of Management Accountants of Ontario professor, School of Accountancy, at the University of Waterloo in Waterloo, Ontario. Marc J. Epstein is a distinguished research professor of management, Jones Graduate School of Management, Rice University, in Houston, Texas.

CMA Canada's Applying the Balanced Scorecard: creating value for customers

The balanced scorecard is used as a comprehensive framework to translate strategy into action and act as a bridge between strategic goals and performance monitoring. Applying the Balanced Scorecard, one of the leading-edge publications in CMA Canada's Strategic Management Series, provides you with an overview of the scorecard model and the new variations that have developed, such as value creation for customers and enhancement of internal processes. It also provides a discussion of the practical issues related to the implementation and barriers that often develop.