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Scorecards: moving from concept to reality can be hard.

Nearly two-thirds of typical companies have some type of balanced scorecard program in place or in development, but fewer than 20 percent of them have mature balanced scorecard implementations that are generating business value, according to research from The Hackett Group.

At their most effective, balanced scorecards can be powerful tools, providing concise, predictive and actionable information about how a company is performing and may perform in the future. World-class companies are 159 percent more likely than typical companies to have mature balanced scorecards in place, according to Hackett's 2004 Finance Book of Numbers research.

But the full benefits of effective balanced scorecards are not being realized for more than 80 percent of typical companies examined by Hackett. Primary reasons include too many metrics and overweighting the scorecards with historical financial information. The research found, for instance, that companies report an average of 132 measures to senior management each month--nearly nine times the number of measures in most effective balanced scorecards.

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More specifically, Hackett argues that balanced scorecards should focus on a mix of internal and external measures. Yet its research concluded that 50 percent of the measures companies currently use are keyed to internal financial data, placing far too much weight on historical performance and not enough emphasis on forward-looking measures such as external financial and operating performance. Other measures are incorporated, including internal operating statistics (33 percent), external financial data (13 percent) and external operating (4 percent). But clearly, internal finance data is too heavily weighted to make the scorecards truly balanced, Hackett says.

"Given the way the concept of the balanced scorecard has evolved in practice, it is no wonder that many financial executives look on the concept as an expensive, bloated and useless substitute for the traditional paper reports. Most companies get very little value out of balanced scorecards, because they haven't followed the basic rules that make them effective," says Hackett Senior Business Advisor John McMahan.

Adds Hackett Finance Practice Leader Cody Chenault, "If you're tracking nine times the recommended number of metrics, you're confusing detail with accuracy, and it's going to be almost impossible to see indicators that might emerge from the data. Companies make the mistake of relying heavily on historical internal finance data. It's what they understand best, and are the most comfortable with.

"But by putting little weight into forward-looking internal and external metrics, such as sales forecasts, market share, competitor pricing and broad economic indicators, companies sabotage their own balanced scorecard efforts. They create a system that's about as effective as driving with the windshield covered while looking in the rearview mirror."
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Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:businessBRIEFS
Author:Heffes, Ellen M.
Publication:Financial Executive
Geographic Code:1USA
Date:Dec 1, 2004
Words:434
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