George wishes to thank Michael Contrada for his contributions to this month's column.

Scorecards, also called strategy, performance or balanced scorecards, are now ubiquitous. Scorecards are a primary means of translating strategy into action. They define, through measurement, the intent and purpose of strategic objectives and provide clarity to managers, staff and external observers on the meaning of performance for an organization.

 In this column, I review scorecards, a fundamental part of strategy management. Organizations can improve their performance through the intentional application of strategy management, operational analytics and resource management. Together, they constitute a discipline of strategy execution.

For decades, companies focused solely on financial numbers to keep score. This worked fine in stable environments when "making the numbers" simply meant doing a little better this year than last year. Those days are gone and, as Robert Kaplan and Thomas Johnson argued in their history of management accounting, Relevance Lost, performance reporting designed for external financial disclosure and constrained by Financial Accounting Standards Board (FASB) standards is wholly inadequate to the task of modern business management.1 Written at the end of the 1980s, Relevance Lost marked the beginning of an urgent search for better measurement approaches that has been underway ever since. Ultimately, this search led to the balanced scorecard, created by Kaplan and David Norton.2

The term balanced comes from the fact that the scorecard strives to measure performance in both financial and nonfinancial terms - using the four perspectives of financial, customer, internal process and enablers of organizational learning and growth (see Figure 1).3 These four perspectives are often misunderstood to imply that results for different stakeholders are all equally important. This is not the case. As Kaplan and Norton explain in each of their books, the source of these different categories of measures is the business strategy which clarifies how an organization intends to create sustainable profits and growth.

Figure 1: The Elements of a Balanced Scorecard


The strategy map, which was reviewed in my column last month, is the tool for determining which measures should be included in the scorecard. Once the strategic objectives are clearly articulated in a one-page strategy map, an organization has the basis for sorting through all of the potential measures that could be considered and selecting the critical few for management review. The secret ingredient is focus. Measures are the most powerful means of communicating what is important. The scorecard tells everyone what the outcomes need to be tomorrow and which internal and organizational drivers are the priorities that must be worked on today to achieve those future results.

Moreover, each scorecard measure requires a target - the level of performance that represents achieving this element of the strategy. The gap between targets and current performance highlight where resources must be applied to successfully execute the strategy. These are strategic initiatives. Understood in this way, with measures, targets and initiatives directly related to the strategic objectives on the strategy map, the scorecard represents an entire action plan for implementing the strategy and, therefore, becomes the backbone of a management process to ensure its execution. Ultimately, the scorecard measures become the "tail that wags the dog."

Scorecards support strategy execution by providing organizations with leverage, visibility and responsiveness - the key enablers of consistent strategy execution. If the scorecard truly measures the internal and organizational drivers of financial and customer outcomes, then by definition it is shining a spotlight on the leverage points of the strategy - the process, people and information priorities that are most important to create significant change.

Tracking the performance of internal processes as well as learning and growth drivers and analyzing their cause-and-effect relationship with key outcomes are powerful mechanisms to enhance visibility. Current driver performance will predict longer-term results, both positive and negative, if the strategic assumptions are correct. First, it shows how tomorrow's performance is shaping up based on today's. Second, it provides insight into the assumptions of the strategy and the need for either midcourse corrections or wholesale reformulation of the strategy.

Responsiveness is also supported by the scorecard. Alignment represents the first type of responsiveness that the scorecard sustains. Measures, together with the objectives on the strategy map, provide a clear framework for aligning the various units and departments of the organization. Increasingly, individuals on the front lines as well as the board of directors in the executive suite are using the scorecard framework to create alignment.4

Dynamic resource allocation represents the second type of responsiveness supported by the scorecard. Resetting targets and modifying initiatives in support of the execution of strategy are triggers for reallocating resources. The scorecard identifies these key linkages that must be integrated into planning processes. The scorecard is a key enabler of a more dynamic planning process, responsive to change as it happens - not just to the calendar.   


References:

  1. Robert S. Kaplan and H. Thomas Johnson. Relevance Lost: the Rise and Fall of Management Accounting. Boston: Harvard Business School Press, 1987.
  2. Robert S. Kaplan and David P. Norton. The Balanced Scorecard: Translating Strategy into Action. Boston: Harvard Business School Press, 2004.
  3. Kaplan and Norton. "Strategy Maps." Strategic Finance, March 2005.
  4. Kaplan and Norton. Alignment: Using the Balanced Scorecard to Create Corporate Synergies. Boston: Harvard Business School Press, 2006.

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