As we give public talks and seminars, generally covering the substance of the material in this book, several questions recur about the Balanced Score-card and how it gets implemented in organizations. We thought readers might find it useful to hear our responses to these frequently asked questions.
| FAQ: | Many of your examples come from large companies in mature industries: banking, insurance, oil and petroleum products, and large retailers. Can the Balanced Scorecard be applied to small businesses, new businesses, and rapidly changing businesses? |
The answer is yes for all three questions. Our initial work was with large companies. Their platforms had the largest fires. Many of these companies were doing poorly and clearly most in need of a new strategy and business model. But their size and associated organizational inertia made the deployment of any new strategy more difficult. The scorecard accelerated their turn toward a new strategic direction. Since that time, we have seen many successful implementations in small divisions embedded in larger companies. We mentioned in Chapter 1 the success story of Southern Gardens Citrus with 200 employees. We have assisted Guideposts, a 500-employee, nonprofit Christian magazine and book publishing firm, as well as a small satellite systems design and fabrication company. Of course, several of the nonprofit organizations—New Profit, Inc., Duke Children’s Hospital, and the May Institute—had employees ranging in number from about a dozen up to a couple of hundred. The key issue for any organization, regardless of size, is the alignment of individuals and processes to the strategy. Small companies as well as large benefit from having everyone understand the strategy and implementing it in his or her everyday job.
For new businesses, the example of National Bank Online Financial Services (see Chapter 4) provides a roadmap for applying the Balanced Score-card to an Internet-based company. We are currently working with several e-commerce companies to develop Balanced Scorecards to guide their operations. The benefits arise from having the business founders completely aligned to the strategy. Also, they have a great tool for communicating and educating new hires about the underlying business model, and how they can contribute to rapid growth.
As for companies in rapidly changing environments, Cisco Systems uses a Balanced Scorecard-like measurement system for its operations. Microsoft Corporation in Latin America uses the scorecard to align all country managers to evolving strategies for new product introductions, new services, and new relationships with distributors and end-use customers.1 The Balanced Scorecard for such companies becomes a powerful tool for rapid midcourse changes, as discussed in Chapter 12 in the context of emergent strategies. The entire scorecard does not have to be redone each time a new opportunity is seized or a new threat countered. Rather, the objectives and measures, particularly in the financial and customer perspectives, will be largely unaffected. What changes are the new initiatives launched, existing initiatives curtailed, and perhaps one or two new internal processes becoming critical. The scorecard becomes the language by which the executive team communicates the changes in tactics and direction, enabling changes and new initiatives to be executed that much faster. And the direction is not always top-down, as discussed in Chapter 12. Understanding the current status and direction of the company, employees can identify valuable new opportunities and communicate them to others using the shared language of the scorecard.
| FAQ: | Are there any new issues, such as differences in culture, when the Balanced Scorecard is applied in different parts of the world? |
Our first book on the Balanced Scorecard has already been translated into nineteen languages, suggesting that the issues and principles for the scorecard apply well in cultures around the world. We have consulted and lectured to managers on every continent and have not encountered any cultural barriers to implementing the scorecard. Consulting companies in the major geographic markets have taken the Balanced Scorecard and customized it to the intellectual and business practice traditions in their markets. We haven’t seen major changes from our basic framework as the scorecard has been customized to these local applications.
The scorecard does require some management maturity and sophistication. It requires a participative, not authoritative, style of management. Some companies may have to adapt to the new management style before getting full benefits from the scorecard.
| FAQ: | How can I get senior sponsorship for the Balanced Scorecard project? |
We are reminded of the story about a customer inquiring into the price of a yacht: “If you have to ask, you can’t afford it.” If you have to persuade a reluctant senior executive to support the Balanced Scorecard, you probably aren’t going to get the necessary commitment. As we discussed in Chapter 13, the Balanced Scorecard works best when senior executives are already looking for ways to communicate more effectively the strategy and objectives of their business units. Executives who value vision, communication, participation, and employee initiative and innovation should find, without any persuasion, the scorecard to be a natural and powerful management tool. If they need a little encouragement, the success stories described in Chapter 1 reveal the power of the scorecard for helping to create breakthrough performance.
Executives who manage with financial statements and who want sub-units and employees to follow directions and adhere to centrally formulated plans will not find the Balanced Scorecard a very compatible management tool. We would not spend much energy trying to get such executives to “sponsor” a Balanced Scorecard project. They wouldn’t follow the principles to become a Strategy-Focused Organization, even if they eventually provided the funds and other resources that permitted an initial scorecard to be developed. We would encourage advocates to look elsewhere in the organization rather than solicit sponsorship from such executives. Find a unit with an executive for whom the scorecard represents a more natural complement to his or her management style.
| FAQ: | Can the Balanced Scorecard be applied in a unionized work force? |
The implementations in the petroleum industry (such as Mobil and Texaco) and automobile industry occurred in places where many front-line employees were unionized. Similarly, many applications in the government sector are with unionized employees. The scorecard communicates a more sustainable business model to employees. It challenges employees to search for new ways to do their job to create value for the organization. Resistance likely comes more from front-line supervisors and middle managers—people accustomed to giving orders and being “in control”—than from the front-line workers.
The only aspect of the Strategy-Focused Organization that unions have not embraced is the linkage to compensation. Texaco used the noncash awards described in Chapter 10 to avoid incentive pay for unionized workers. At Mobil, the union was happy to be included in the company’s variable pay plan, but it objected to having its base wages set at 90 percent of the prevailing wage and having the remaining 10 percent at risk. Mobil executives did not want unionized workers to participate in the incentive plan without having some percentage (perhaps as low as 5 percent) of base pay at risk. The union did not agree to this, and hence it has been excluded from the variable pay plan that averaged between 17 percent and 19 percent of payouts from 1996 to 1999.
| FAQ: | Do I need to have a strategy before I build a Balanced Scorecard? |
Strictly speaking, the Balanced Scorecard is a strategy implementation tool. For organizations that already have an explicit strategy, the Balanced Scorecard can help them implement their strategy faster and more effectively by following the principles described in this book.
Some management groups initially believed that all their members concurred with an existing strategy. While building the initial scorecard, however, they discovered that each member of the team had a quite different interpretation about the strategy. They disagreed about who were the targeted customers, what was the differentiated value proposition, and what role would innovation and shared services play in the strategy. The process of building the scorecard forced clarification and consensus about exactly what the strategy was and how it could be achieved.
Organizations without any explicit or shared strategy have used the process of building a scorecard as the mechanism to develop a strategy for the business unit. The scorecard stimulates an intense management dialogue to define the strategy. As described in Chapter 3, the Balanced Score-card provides a common language and architecture for strategy that did not exist before. Strategy maps and templates provide a framework for strategic discussions.
So the answer to the question is that having an explicit strategy that everyone truly understands and agrees to will shorten the time required to build the initial Balanced Scorecard. But organizations don’t have to defer the building of a scorecard until they have achieved consensus about a strategy. They can use the process of building the scorecard as a mechanism for a simultaneous process that creates the strategy.
| FAQ: | What about data security and privacy concerns? Can we share all Balanced Scorecard information with employees on our intranet? |
Privacy and security concerns raise an interesting tension. On the one hand, Strategy-Focused Organizations want employees to have access to the strategy and deep awareness and understanding of the strategy. Communication and awareness stimulates intrinsic motivation as employees see how they can contribute to the organization’s success. It unleashes their creative energies to find new ways to contribute.
On the other hand, such a clear articulation of strategy creates risk. In our first book we told what a division president said when he turned in his first Balanced Scorecard to the company’s president:
In the past, if you had lost my strategic planning document on an airplane and a competitor found it, I would have been angry, but I would have gotten over it. In reality, it wouldn’t have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but, again, it wouldn’t have been that big a deal. This Balanced Scorecard, however, communicates my strategy so well that a competitor seeing this would be able to block the strategy and cause it to become ineffective.
We want scorecards to tell the story of the strategy. That is the ideal outcome from building strategy maps. But the risk from sharing such a strategy scorecard with hundreds and thousands of employees is obvious. People leave the company all the time. Companies cannot count on having 100 percent of its employees 100 percent aligned to the company’s values, mission, and sustained success. As the wartime expression says, “Loose lips sink ships.” To avoid disclosure of sensitive information, companies can index the numbers on the scorecard to avoid the risk of disclosure to competitors. In this way, most employees see directional information but not actual quantities.
Many companies believe, however, that their competitive success does not come from a superior strategy, which is kept secret by members of their senior executive team. They believe their competitive advantage comes from implementing their strategy faster and more effectively than their competitors. And they believe that the scorecard—communicated, understood, and acted upon by all employees—gives them the capability for such rapid and effective strategy implementation. Therefore the secret is not the strategy but the internal leadership and management processes leading to a Strategy-Focused Organization.
We are often asked why Mobil NAM&R was so generous with allowing its strategy to be disclosed and used as a case example. In the first place, Mobil NAM&R must implement its strategy through its retail dealers, who are businesspeople independent from Mobil. Any new strategy communicated to its dealers is soon known by all of Mobil’s competitors. Conversely, Mobil knows the strategy of all of its competitors (most have strategies quite similar to Mobil’s), and the competitors all know Mobil’s strategy. The differentiation comes from how well the company implements the strategy, and that is where the scorecard gave Mobil some sustainable first-mover advantages. Second, by publicizing its strategy, Executive Vice President Brian Baker made all employees understand that success would not flow from a winning strategy dreamed up by geniuses at company headquarters that competitors could not attempt to imitate. It would come from how well employees implemented the strategy. And third, Baker believed that by putting Mobil NAM&R’s initial strategic move into the public domain, managers and employees would have more incentive to find new ways of competing—perhaps developing emergent strategies, as discussed in Chapter 12—that would help Mobil to sustain and extend its first-mover advantages.
The disclosure issue surfaced as a major barrier in one company when the company lawyers reviewed the scorecard and discovered that it contained financial and other projections. They asked, “What if an employee copies and distributes this forward-looking information to analysts? We could be liable for violation of the Securities and Exchange Commission acts on corporate disclosure.” Their objection stopped the deployment of the scorecard in its tracks for two months until a solution could be found. The scorecard was released after the company built two levels of access into its intranet. The executive leadership team could see the actual numbers on the vertical scale for the scorecard measures. All other employees could see the trends and the color coding of red-yellow-green of scorecard measures. They could not see the actual values of the displayed measures.
| FAQ: | Suppose some measures for the scorecard are missing. Should we delay introduction until we have data for all the measures before starting the Balanced Scorecard management system? |
After the initial design of a Balanced Scorecard, many measures are often not yet available for reporting. Chemical Bank was missing about 33 percent of the measures, Mobil was missing 25 percent, and Reuters America was missing 40 percent. The first reaction is predictable: “If we can’t measure what we want, let’s want what we can measure; let’s use some measure for which we already have data!” This is a mistake. If the score-card has been thoughtfully designed, the measures represent the most important information in the company. If measures don’t exist currently, critical management processes are likely not being managed. The organization will be exploring new ground on which management processes and systems have yet to be developed. We advise organizations to be patient and institute new processes to get the new information. Upon learning of his information gap at Chemical Retail Bank, Chief of Staff Lee Wilson recalled, “We invested a tremendous amount of time, energy, and money in the systems and procedures to collect the new information. The process of looking at the new measures gave us the benefits from our strategy.”
| FAQ: | How many measures should be on a Balanced Scorecard, and what should the mix be across the various perspectives? |
From our own experience, we expect strategy scorecards to have twenty to twenty-five measures. Here is a typical allocation across the four perspectives:
| Financial | five measures (22 percent) |
| Customer | five measures (22 percent) |
| Internal | eight to ten measures (34 percent) |
| Learning and growth | five measures (22 percent) |
An independent 1998 study conducted by Best Practices, LLC, analyzed the scorecards of twenty-two organizations that had successfully implemented Balanced Scorecards and found just about the same distribution of measures.2 The higher weighting for the internal perspective reflects the importance of emphasizing the drivers of financial and customer outcomes. Note also that nearly 80 percent of the measures on a Balanced Scorecard should be nonfinancial. Of the best-in-class companies, only Mobil departed from the preceding pattern; it had 50 percent of its twenty-four measures in the internal perspective, reflecting the emphasis on operational excellence and environmental, health, and safety issues in its capital-intense business.
| FAQ: | How does the Balanced Scorecard differ from TQM? |
The Balanced Scorecard is perfectly consistent with TQM principles. Initiatives to improve the quality, responsiveness, and efficiency of internal processes can be reflected in the operations portion of the scorecard’s internal perspective. Extending TQM principles out to the innovation process and to enhancing customer relationships will be reflected in the several other building blocks in the internal business process perspective. Thus companies already implementing the continuous improvement and measurement disciplines from TQM will find ample opportunity to sustain their programs within the more strategic framework of the Balanced Score-card.
Our experience with companies, however, indicates that the Balanced Scorecard does much more than merely recast TQM principles into a new framework. The scorecard enhances, in several ways, the effectiveness of TQM programs. First, the scorecard identifies those internal processes in which improvement will be most critical for strategic success. In many organizations, local TQM programs succeeded, but their impact could not be detected in the financial or customer performance of the organization. The Balanced Scorecard identifies and sets priorities on which processes are most critical to the strategy; it also identifies whether the process improvements should focus more on cost reduction, quality improvement, or cycle-time compression. Bill Allen, executive vice president of Community Services at United Way of Southeastern New England, commented, “The BSC provided a unity and focus to our TQM efforts. We had a lot of teams doing a lot of things, but the efforts were ad hoc. Our TQM experience gave us a strong emphasis on teamwork and on good data gathering and measurement. The BSC brought this all together into a unified systematic approach.”3
The second enhancement from the Balanced Scorecard to TQM programs occurs by forcing managers to explicate the linkage from improved operating processes to successful outcomes for customers and shareholders. While the linkage from quality to financial outcomes does often happen, it doesn’t always happen. In the early 1990s, several companies that were recent winners of the Baldrige Award or apparent exemplars of TQM principles subsequently experienced financial difficulties.4 In his final days as CEO of IBM Corporation, John Akers remarked remorsefully about his visits to IBM manufacturing facilities. Employees proudly showed him charts of dramatic quality and cycle-time improvements but had few answers when he asked them why customer sales were continuing to decline.
Companies focusing only on quality and local process improvement often do not link operational improvements to expected outcomes in either the customer or the financial perspective. These companies are following a Field of Dreams strategy for quality: “If we improve it, financial results will come.” The scorecard requires that linkages be made explicit. One linkage is from quality improvements in the internal perspective to one or more outcome (not process) measures in the customer perspective. A second is from quality improvements that enable companies to reduce costs—an outcome in the financial perspective. The scorecard framework enables managers to articulate how they will translate quality improvements into higher revenues, fewer assets, fewer people, and lower spending.
| FAQ: | What about reengineering? How does that relate to the Balanced Scorecard? |
Reengineering, the discontinuous improvement of existing processes, may be required when continuous process improvement (the TQM approach) will not lead to achieving the desired performance.5 But without the guidance from a strategy scorecard, reengineering, like TQM, can focus on processes that are not critical for strategic success so that improvements in the reengineered processes don’t have a major economic impact. Also, reengineering can become trivialized into cost-cutting and headcount-slashing programs. Without the strategic perspective of the non-financial outcome measures on a Balanced Scorecard, the default measure for reengineering programs ends up being cost savings. The Balanced Scorecard can enhance process-focused strategies by identifying several nonfinancial measures in the value proposition that can be the successful outcomes from reengineering efforts.6
| FAQ: | What is the relationship of the Balanced Scorecard to activity-based costing? Which should be done first? |
At least one of us must admit to a fondness for both approaches and prefers not to have to choose between them. Activity-based costing gives managers a clear picture about the cost drivers in their organization and the opportunity for cost reduction through decisions about product and customer mix, customer relationships and terms, product designs, and activity and process improvements. No cost system, including ABC, however, can measure the value of what an organization does for its customers. The Balanced Scorecard is a complementary approach that specifically identifies targeted customers, what they value, and the processes, capabilities, and competencies that an organization must excel at to deliver unique value propositions to its targeted customers. Thus, the two systems work well together. ABC identifies an organization’s cost drivers and the actions it can take to reduce costs, while still delivering the same value to customers. BSC identifies the value drivers of an organization’s strategy and a new management system to align the organization to the strategy. The two systems intersect in several places. In the customer perspective, customer profitability can be measured only if a well-designed ABC system calculates the costs of serving individual customers. For the operational excellence theme in the internal perspective, an ABC system measures costs for critical activities and processes. And an ABC system can help in the strategy-formulation stage of building a Balanced Scorecard by identifying the costs of serving different customer segments, facilitating the choice of which segments should become the targets for a company’s strategy.
Both approaches are valuable to organizations. Companies that need to gain clarity about their strategy and to align their organization to a new customer-focused strategy would likely find the Balanced Scorecard a higher immediate priority. Companies that need to focus immediately on escalating costs, proliferating products and customers, and cost competitiveness could start with an activity-based costing system. We believe, however, that organizations benefit by using both systems so that they can measure and manage their value drivers and their cost drivers.
| FAQ: | We are already implementing an EVA/value-based management approach. Why do we need a Balanced Scorecard beyond these enhanced financial measures? |
Companies that have adopted shareholder value strategies, using EVA or other value-based management metrics, can certainly place such high-level financial metrics at the top of the scorecards.7 The financial drivers of shareholder value such as revenue growth, operating margin, sales to assets, working capital ratios, and financial leverage are also represented within the financial perspective as value drivers. But value-based management implementations often stop with these financial drivers.
The scorecard framework enhances financial-based strategies by making explicit the specific customer outcomes and performance drivers that enable the financial targets to be achieved. Without the balance of the score-card, value-based management strategies may pick the low-hanging fruit of cost reduction and increased asset intensity but miss the opportunity to create additional value by a longer-term revenue growth strategy through investments in customers, innovation, process enhancements, information technology, and employee capabilities.
FAQ (related question to the preceding): Why can’t I achieve the same results by communicating and rewarding people on the financial targets we want to achieve?
Attempting to drive strategy by communicating and rewarding financial outcomes alone is a lot like teaching people to play tennis by explaining how to keep score. The class starts with “love” (the tennis term, not the intimate feeling or act); proceeds quickly through “15, 30, 40”; pauses for an advanced lesson on “deuce”; and then explains “game.” For students who get this far, the class continues by explicating “sets” and “tie-breakers.” The instructor then tells the students, “OK, now you know what outcome you must achieve. Go out and win!” The students soon find their opponents’ shots whizzing past them, while most of their attempts at returns end up hitting the net or flying out of bounds. At the end of the exercise, the students know the score—6-0, 6-0—and understand that this may not have been the desired outcome, but they have no idea how to improve their performance in future periods.
Obviously, good tennis classes require that students understand not only how to keep score but also what performance drivers—backhands, forehands, overheads, volleys, lobs, chips, and serves—will generate the desired outcomes, along with the successful court management that ties the components together into a winning strategy. Similarly, beyond adopting a good set of financial metrics to keep score, managers must help employees understand the components—customer relationships, value proposition, innovation, process management, employee capabilities and motivation, and information technology—and the strategy that links these together for the desired financial outcome. This is how the Balanced Scorecard incorporates financial-based strategies into its framework and enhances pure shareholder-value strategies by explicating the logic of how shareholder value will be improved.
| FAQ: | Should the Balanced Scorecard be shared with financial analysts and shareholders? |
Few companies have Balanced Scorecards at the corporate level and for all their business units. Financial measures have this wonderful property that you can sum them up across completely diverse business units to obtain overall corporate financial performance. Customer measures and value propositions are not additive, particularly when business units have different strategies. It’s still unclear whether corporate-level Balanced Score-cards have much meaning, except when companies operate within a single industry segment. In addition, the confidentiality of strategic scorecard measures becomes even more sensitive if the data are included in public reports and statements.
Having said this, we must note that some divisional company executives—for instance, Brian Baker at Mobil and Michael Hegarty at Chemical Bank—did use the scorecard framework in their briefing sessions with analysts. They convinced analysts that their recent excellent performance was not due to luck or one-time events by communicating the underlying logic and structure of an integrated strategy. They explained targeted segments, value propositions, and the role for technology. The analysts left with renewed enthusiasm for the company’s stock and future prospects. We believe that the scorecard, by structuring executives’ communication about strategy, can enhance their credibility and, over time, encourage analysts and shareholders to focus on critical nonfinancial variables that are either the drivers or the outcomes from a successful strategy.
1. A. Ballvé, A. Davila, and R. S. Kaplan, “Microsoft Latin America: Measuring the Future,” 100-040 (Boston: Harvard Business School, 2000).
2. Best Practices Benchmarking Report, Developing the Balanced Scorecard (Chapel Hill, NC: Best Practices, LLC, 1999).
3. R. S. Kaplan and E. L. Kaplan, “United Way of Southeastern New England,” 9-197-036 (Boston: Harvard Business School, 1996), 7.
4. R. E. Kordupleski, R. T. Rust, A. J. Zahorik “Why Improving Quality Doesn’t Improve Quality (Or Whatever Happened to Marketing?),” California Management Review (April 1993).
5. J. Champy and M. Hammer, Reengineering the Corporation: A Manifesto for Business Revolution (New York: HarperBusiness, 1993).
6. Michael Hammer, Beyond Reengineering: How the Process-Centered Organization Is Changing Our Work and Our Lives (New York: Harper Collins, 1997).
7. R. Myers, “Metric Wars,” CFO Magazine (October 1996); “Measure for Measure,” CFO Magazine (November 1997); and “Valuing Companies: A Star to Sail By?” The Economist, 2 August 1997: 53-55.