C H A P T E R T H I R T E E NC H A P T E R T H I R T E E NTHE PROCESS TO INITIATE THE BALANCED SCORECARD management system starts with a leader creating the sense of urgency for change. The urgency can come from reversing recent underperformance, responding to a changing competitive environment, or stretching the organization to be much better than it currently is. Leaders who want to create dramatic change in their organization will find the Balanced Scorecard a highly effective management tool to motivate and accomplish the desired change.
Often the change is stimulated by poor organizational performance: Current performance is so dismal that new directions are clearly needed. At other times, the senior executive sees that future challenges will be very different from those of the past. The organization must adopt new ways of doing business even though no obvious crisis currently exists. Yet another trigger occurs when the senior executive wants to motivate employees to perform beyond current performance, which is adequate but not outstanding. In all of these cases, the executive recognizes the need to change, but then he or she must find ways to communicate the urgency to all managers and employees and provide a vision of what the change can accomplish.1
Several of the CEOs of adopting organizations clearly sensed the need for urgent change because of current terrible performance. Bob McCool at Mobil NAM&R recalled that “expenses had doubled, capital had doubled, margins had flattened, and volumes were heading down. You didn’t need an MBA to know we were in trouble.”2
Gerry Isom of CIGNA was hired to turn around the Property & Casualty Division at a time when its combined ratio—the ratio of expense dollars going out to premium revenues coming in—exceeded 130, as compared with an industry average of 108.
Bill Catucci, the newly hired CEO of AT&T Canada, noted, “When I arrived in December 1995, the company was close to bankruptcy. The only core competence we had was losing money. We were good at that, losing C$1 million every day.”
For Chemical Retail Bank, competition in its traditional retail deposit business had become very tough. Revenue growth had slowed because of lower interest rates on core deposits; deposits were leaving the bank for non-banking service providers, such as mutual funds and money market funds; core operating expenses for real estate and personnel in the expensive New York region were increasing; and heavy funding was required for expensive new electronic delivery systems. While the bank was still marginally profitable, President Michael Hegarty also saw the threat from electronic banking to Chemical’s historic reliance on brick and mortar branches.
Each of these business leaders saw the need for dramatic change. Whatever their organizations had been doing in the past, it either was not working any more or would not work in the future.
Launching major organizational change need not be done just out of fear. Effective leaders can also motivate change by providing inspiration about the future. Pam Syfert, Charlotte’s city manager, drove the development of Balanced Scorecards because she believed they would help the city’s departments and employees deliver on the vision to become the number one city in the United States for people to live, work, and take their leisure activities. Similarly, in the State of Washington, Balanced Scorecard projects were launched at a meeting when Governor Gary Locke challenged his senior officials to think about what they wanted to be remembered for after their years of state service: “Do you want to be remembered for incremental improvement, and no major scandals on your watch, or do you want to look back and appreciate that something truly significant and revolutionary happened under your leadership that made the lives of citizens in the state demonstrably better?”
Douglas Newell, head of the fledgling Internet banking division of National Bank Online Financial Services, set a goal to become the number one Internet banking company in the world. The OFS division already enjoyed first-mover advantages and seemed to be doing well. But in the extremely dynamic Internet marketplace, Newell knew that continuous improvement was far from sufficient. He motivated the development of the Balanced Scorecard by setting stretch targets: triple the customer base in less than three years to become the first Internet bank with one million customers; increase the revenue per customer by more than 50 percent; and reduce the cost per customer served by more than 35 percent. At Reuters Americas, the president launched the Balanced Scorecard program by challenging the organization to double shareholder value within five years. The founder/CEO of a major apparel retailer challenged his senior executive team to develop plans that would raise sales from $8 billion to $20 billion during the next five years.
Stretch targets to inspire and drive change have been described in a best-selling book as “Big Hairy Audacious Goals” (BHAG). “A BHAG engages people—it reaches out and grabs them in the gut. It is tangible, energizing, and highly focused.”3
Jack Welch, shortly after becoming CEO of the already successful and respected General Electric Company, energized the company by declaring a BHAG: Every division should become number one or number two in every market we serve and revolutionize this company to have the speed and agility of a small enterprise.
BHAGs must fall outside the comfort zone, must be almost unreasonable. They require a total organizational commitment to achieve them. Senior executives can energize even their currently successful companies for innovation and breakthrough performance by setting stretch targets or BHAGs that cannot be achieved by business-as-usual operations. The stretch targets break employees out of their complacency that current performance is both good and adequate.
Steve Kerr, the chief learning officer of General Electric, identified problems, however, if stretch targets are viewed as just a rhetorical or inspirational exercise: “Most organizations don’t have a clue about how to manage stretch goals. It’s popular today for companies to ask their people to double sales or increase speed to market threefold. But then they don’t provide their people with the knowledge, tools, and means to meet such ambitious goals.”4
In order to achieve the stretch target, managers and employees must find ways to both expand revenues and improve productivity. A well-constructed Balanced Scorecard provides the roadmap for such dramatic change. It decomposes high-level stretch targets into ambitious targets for the linked objectives and measures on the scorecard. The organization can then define the strategic initiatives designed to close the planning gap between the stretch targets and the organization’s current performance. In this way, the organization provides the knowledge, tools, and means to achieve the stretch targets, overcoming the barriers that Steve Kerr identified. The Balanced Scorecard helps the organization mobilize for change by focusing and aligning all of its resources and activities on the strategy for breakthrough performance. Employees are more willing to sign up to the stretch targets because they can see the linkages, integration, and initiatives that make achievement possible.
People often ask us where they should build their first Balanced Scorecard. There is no simple answer to this question. The answer depends on organizational structure, corporate strategy, and leadership.
FMC Corporation started by identifying six “volunteer” operating companies to develop prototype scorecards for their organizations. This enabled the scorecard concept and process to be validated at these six pilot sites. This acceptance provided the internal support for deploying scorecards to all of the corporation’s other operating companies. The main role of the corporation in this process was a corporate requirement for each operating company to formulate a growth strategy that could be expressed in its Balanced Scorecard—a strategy that would subsequently serve as the accountability document between the operating company and corporate.
FMC followed a highly sensible approach. As a conglomerate, it did not have an overarching corporate strategy that could be captured in a corporate-level scorecard. Attempting to start by building a corporate-level strategic scorecard would have led to frustration and, likely, to failure. At FMC, strategy existed at the individual operating companies, and these were the appropriate levels at which to construct the initial Balanced Scorecards. Few if any synergies or opportunities for integration existed across the diverse operating units. Consequently, little was lost by having each operating company formulate its own growth strategy and scorecard to represent its new strategy.
Mobil Corporation would seem to be just the opposite of FMC. It is a vertically integrated company with three large sectors: exploration and production (E&P), marketing and refining (M&R), and chemicals. Given the high degree of vertical integration, one would expect the initial Balanced Scorecard to be developed at the corporate-headquarters level of Mobil. In fact, however, the initial scorecard, as described in Chapter 2, was developed at an M&R division, not at the corporate level. We believe that this was fine, even better than attempting to build the initial scorecard at the corporate level.
Mobil, while vertically integrated, transferred mostly commodity products between its three sectors. These products could be bought and sold in highly competitive markets. The existence of active markets for crude oil provided a natural buffer between the operating strategies of the E&P and the M&R sectors. And similarly, the active markets for processed feedstocks enabled the M&R sector to operate largely independently from the chemicals sector. So the M&R sector could plausibly develop its own strategy without detailed consultations and integration with its upstream E&P divisions and its downstream chemicals divisions. Of course, if no unifying strategy existed across the three major sectors, observers could reasonably question whether Mobil was receiving significant benefits from its vertical integration. How did the corporation add value, beyond the independent performance of its E&P, M&R, and chemicals sectors? Eventually, as Mobil (now ExxonMobil) answers that question, it will define a corporate-level strategy that can then be translated into a corporate Balanced Scorecard.
Mobil’s first Balanced Scorecard, however, was not even done at the sector level. It was done in a division representing a geographic region—the United States (subsequently extended to include Mexico as well). Mobil M&R included not only North America but also operations in South America, Europe, Asia, Australia, and Africa. The development of a Balanced Scorecard at an important but still local region, such as the United States, had the potential for suboptimizing the entire M&R sector.
As with the corporate level, however, the opportunities for integration and synergies across Mobil’s worldwide M&R operations were not compelling. The U.S. market—both its consumers and its independent dealers—were almost completely separated from marketing operations in the rest of the world. Strategies for the U.S. market could be developed and implemented without affecting the strategies for consumers in other parts of the world—people who did not watch advertising messages delivered in the U.S. media or purchase gasoline and snacks at U.S. gasoline stations. Also, dealer organizations did not cross national boundaries, so that quite different dealer strategies could be required for each region. So for the M&R sector, natural geographic boundaries enabled each region to develop strategies, customized to local conditions, that did not have to be coordinated internationally. We believe, therefore, that no loss occurred by developing the first Balanced Scorecard at the NAM&R level, without having formulated a worldwide M&R strategy. Of course, as at the corporate level, if a global M&R strategy does not exist, it raises the question of the benefits from having a worldwide M&R organization. The answer for why it makes sense for Mobil to have a global M&R division—rather than selling off each geographical unit as a freestanding and independent company—will create a sector-level strategy that could then be translated into a global M&R scorecard.
As a company like Mobil works through the logic of where to construct Balanced Scorecards, it confronts the rationale for its existence. If clear corporate- or sector-level synergies cannot be identified, the corporation may not be adding value to its collection of divisions and business units. Some corporate-level benefits arise from consolidating financial and tax reporting and establishing banking relationships. But there are also the costs of operating the corporate headquarters and, more important, those from slowing down or inhibiting decision-making in the operating units where value is being created. Often corporations encounter difficulty in constructing corporate-level scorecards, because corporate-level strategies and opportunities for integration do not exist. These companies are receiving a diagnostic signal that the whole may be worth less than the sum of its parts.
Mobil’s NAM&R divisional scorecard established the common themes and strategies that lower-level business units incorporated when they constructed their Balanced Scorecards. The high-level scorecard explicated the synergies, the rationale, for how value could be created by having business units, in their individual strategies, reinforce the common themes. Building the initial scorecard at too low a level loses the opportunity for value-creation from integrating and coordinating business unit strategies. But attempting to build the initial scorecard at too high a level (e.g., at Mobil Corporation) may be difficult and frustrating because a comprehensive integrated strategy may not exist at that level. In such a case, better results will occur when the initial scorecard is built at levels below that of the corporation or sector.
The initial Balanced Scorecard can even be launched at a shared services unit. An excellent example occurred at GTE Service Corporation, where the initial Balanced Scorecard was created for the human resources organization. At first, we were skeptical about launching the Balanced Score-card from the HR group. It seemed unlikely that such a group would be able to understand the skills, knowledge, and competencies required from their hiring, training, retention, and promotion decisions without having explicit guidance from the strategies communicated in business unit, division, and corporate scorecards. But the HR scorecard at GTE was, in fact, constructed with just those strategies in mind. GTE had recently completed an extensive strategy exercise to reposition itself in the rapidly evolving telecommunications industry. The new strategy was communicated to everyone in the organization with extensive documentation (but no new measurement system). The strategy included “people imperatives,” specific requirements for what the business strategy required of GTE employees. Recognizing the existing skill base in network management, customer support, international capabilities, and voice product expertise, the strategy required enhanced capabilities for leadership, union relationships, customer support, learning and innovation, and teaming. And it required entirely new skills in marketing and distribution, data management, partnering and managing alliances, and integration. With such an explicit strategy and demands for enhanced and new skills and capabilities, the HR group could embark on a project to produce a highly informative and credible Balanced Scorecard for the HR function.
Another unconventional evolution occurred at General Motors Corporation. GM was in the midst of a massive transformation program in its worldwide operations. As one manager noted, the company, in the past, made and designed products that consumers did not want, and did it inefficiently. Under CEO Jack Smith’s leadership, GM was transforming itself from a product-oriented “make and sell” philosophy to a customer-driven “sense and respond” strategy. Such a transformation in an organization with nearly $200 billion in worldwide operations and sales involved massive changes in process, organization, and incentives.
While, in principle, a corporate-level Balanced Scorecard might have facilitated such a massive transformation, senior corporate executives would likely not have had much share of mind available to launch such a project in the midst of all the other transformations occurring simultaneously. Also, with such a complex, diverse, and dispersed organization, doing the first scorecard at corporate would have been an extraordinarily challenging task.
The Balanced Scorecard was introduced for GM in its European information technology organization, a shared service function. The IT group had a charter to “be the engine and turbocharger of change in systems and processes.”
This charter gave the IT group access to the entire breadth of activities—marketing, design, concept engineering, manufacturing, vehicle sales, and after-market sales—in the organization. The IT project team built its initial Balanced Scorecard by aligning with the business units’ strategies. This gave the team experience and credibility in how to measure a broad set of performance indicators related to a strategy. With this initial success, the team was then asked to transfer knowledge and facilitate the development of scorecards for all of GM Europe. This encompassed eight business units (Germany, Vauxhall, Belgium, Spain, Austria, Hungary, Poland, and National Sales Centers) and eleven functional units (e.g., engineering, manufacturing, sales/marketing, quality, financial, personnel, and purchasing). Based on the experience with building the initial IT scorecard, the IT group then helped the project teams in the various business and functional units choose measures and locate data for the measures—particularly the lead indicators. The IT team also taught the project teams about cause-and-effect linkages to ensure that the scorecards related to strategic objectives, not just to operational improvements.
By the end of 1998, Balanced Scorecards had been developed for most of GM Europe’s business units and functional units, and the management system based on the scorecards was operating. At that point, the General Motors corporate office asked the Europe IT group to assist in developing and deploying scorecards worldwide. The project started with the IT group in North America (just as in Europe), and from that experience it was migrated upwards to GM’s North American operations. As of mid-1999, plans have been formulated to roll the scorecard process out to GM Latin American and Asia/Pacific.
Thus a project that had started in a shared services department in a region far from the U.S. headquarters eventually led to a corporate, worldwide implementation. At least in this large, somewhat traditionally centralized and bureaucratic company, implementing the new idea in a local “skunk works” environment enabled it to develop and subsequently seed the rest of the organization in an incremental way, allowing experience, visibility, and credibility to develop from within the organization.
Arguably, the specific objectives and measures of the first IT scorecard might have been better if General Motors had previously established a comprehensive worldwide and European strategy. But waiting for such a revelation would have delayed the local project—perhaps for many years. The Europe IT group did not let “the best be the enemy of the good.” They got the process under way in an area where it had local support. The project demonstrated feasibility and provided an experienced base of implementers who could subsequently be deployed to coach and facilitate the development of scorecards throughout the organization. At some point, after the GM Europe and GM corporate scorecards had been developed, the Europe IT group could update its own scorecard to reflect new strategic insights. Scorecard development is not a single event. It is a process that enables continual improvement and enhancement. Better to start and improve than to wait for perfect guidance. As Jim Noble, the global head of IT strategy, reflected on this evolution of the scorecard at GM, “If you succeed, you are at first base on a Dynamic Resource Management process.”
We were reminded of the importance of the principle of building a score-card where a strategy exists when talking about a relatively unsuccessful Balanced Scorecard project with a senior executive of a large international corporation. The executive told us how the CEO and the board had added several nonfinancial measures to the compensation system for senior corporate executives. The performance of the nonfinancial measures had improved, but financial results had not improved. The company was paying out substantial salary bonuses without any improvement in financial performance.
The conversation proceeded, and we asked how the nonfinancial measures had been chosen. The response was that the new measures represented certain stakeholder interests, such as environmental and safety performance and hiring practices, for which the organization wanted to increase emphasis. But the measures had not been chosen as elements of an integrated, comprehensive strategy in which improvements in nonfinancial measures were hypothesized to lead to improved financial performance. In effect, the company had created a checklist of measures—a KPI score-card—but not a strategy scorecard.
We pressed on with the company executive, asking about the strategy at the corporate level, and learned that an integrated corporate strategy did not really exist. We recommended that the initial Balanced Scorecard would have been, as was the case at FMC and Mobil, better developed at the divisional level, below the corporate level, as divisional strategies did exist. In this organization, the initial Balanced Scorecard had been built at too high a level. A clear strategy did not exist at the corporate level, so the scorecard was constructed by adding an ad hoc collection of nonfinancial measures to the existing financial measures. We were not surprised to learn that improvement in the nonfinancial components of the scorecard did not lead to improvements in financial performance.
Contrast this experience with that of Mobil NAM&R, where safety and environmental measures were incorporated into the cause-and-effect relationships of the Balanced Scorecard. Brian Baker, NAM&R’s executive vice president, noted that safety and environmental performance were usually leading indicators of future financial performance. He had observed that an increase in incidents that were harmful to safety and the environment indicated that operators were not paying attention. And if they were not paying attention when their own well-being was at stake, they certainly were not paying attention to how well company assets were being operated and maintained. So for Mobil, the nonfinancial indicators, chosen as part of an integrated strategy, were correlated with future improvements in financial performance.
Companies have been attempting to implement change for decades. Why do we advocate that change initiatives now be accompanied by a change in the measurement system to the Balanced Scorecard? Adapting the organization’s measurement system to the change agenda is critical for success. When addressing an audience of financial managers and executives, we suggest to them that if they object to changes being advocated in their organizations, they should not stand up and express their concerns. They don’t have to write memoranda or send e-mail with their objections. Just continue to measure performance and provide reports as they have been doing. Eventually, the change initiative will be choked off. In a famous article entitled “On the Folly of Rewarding A, While Hoping for B,” Steve Kerr described how management espoused its desire for long-term growth but rewarded quarterly earnings performance.5 Not surprising, managers delivered quarterly earnings performance but did not invest for long-term growth. Managers evaluated by short-term financial measures will manage to those measures, and likely shortchange new initiatives for growth, customer focus, innovation, and employee empowerment.
The CEOs who adopted the Balanced Scorecard for their new strategies understood the need for a new measurement framework. They saw it as a powerful tool for driving the new change initiatives. Bob McCool commented on why he changed Mobil NAM&R’s measurements:
We were in a controller’s mentality, reviewing the past not guiding the future. The functional metrics didn’t communicate what we were about. I wanted metrics to be part of a communication process by which everyone in the organization could understand and implement our strategy. We needed better metrics so that our planning process could be linked to actions, to encourage people to do the things the organization was now committed to doing.
The executive leadership that creates the Balanced Scorecard becomes the guiding coalition for driving change in the organization. The process of building the scorecard builds both the team and its commitment to the strategy. And the scorecard provides the means for making the vision and the strategy operational. Words are not sufficient to communicate the change initiative. The same words mean different things to different people. It is only when word statements are translated into measures that everyone understands clearly what the vision and the strategy are about.
The CEOs of adopting organizations all had strategies that included a strong growth component. They did not want to increase profits just by cutting costs, downsizing, and eliminating unprofitable business units. While cost and productivity improvements were certainly part of their change agenda, they were only a part; they were mainly intended to deliver the strategy’s short-term component. The implementing CEOs also wished to improve profitability through expanding revenues—a longer-term growth strategy. That these companies found the Balanced Scorecard useful for a growth strategy is not surprising. Organizations that have identified cost leadership as their strategy, or that wish to regain competitiveness by cost reduction and productivity enhancements, may not find the Balanced Scorecard that helpful. Financial measurements, especially when enhanced by activity-based costing, do a fine job in motivating cost reduction and productivity.6 Financial measurements also provide good feedback as to whether costs have actually been reduced and productivity improved. By themselves, however, financial measurements may not be adequate for communicating how the top line—revenues—can be increased.
Anyone can build a business plan on a spreadsheet to meet specified growth objectives. If the current assumptions for growth do not meet corporate objectives, managers can easily increase assumed percentage growth rates in their spreadsheet programs. Eventually, the estimated growth rate will satisfy corporate planning objectives. This analytic part is easy. The hard part is identifying how the assumed growth rate will be achieved. Which new customers will the company acquire and retain? How much must be sold to each new customer? Which of the existing customers will purchase more products and services, and at higher margins? Which new regions, new applications, or new products must be launched for the growth assumptions to be realized? The Balanced Scorecard helped the adopting organizations specify in detail the critical elements for their growth strategies:7
Targeted customers where profitable growth would occur
Value propositions that would lead customers to do more business and at higher margins with the company
Innovations in products, services, and processes
Investments in people and systems to enhance processes and deliver differentiated value propositions for growth
Without such a clear specification, employees could not reinforce one another’s efforts to implement the new growth and effectiveness strategy.
Financial measurements cannot even communicate and monitor a true operational excellence strategy, in which success with customers involves not only low costs and prices but also defect-free quality and short lead times from customer request to order fulfillment. Differentiating strategies that can lead to sustainable competitive advantage will require a much broader set of measurements than purely financial ones.
The CEO and senior leadership team also recognized that they could not implement the new strategy by themselves. They required the active contributions of everyone in the organization. For their new strategy to be successful, they had to move it from the boardroom to the back room, and to the front lines of daily operations and customer service as described in Part Three. The measurement system in the Balanced Scorecard provided a simple, clear message about the new strategy that all employees could understand and internalize in their everyday operations.
The dynamics of the Executive Leadership Team frequently determines whether the Balanced Scorecard can be sustained so that the strategy can be successfully executed. Most executive teams consist of functional specialists, each with intense specialist knowledge. Such functional executives often have surprisingly little awareness of how other functions work. Strategy-Focused Organizations must transform their collections of functional specialists into cross-functional, problem-solving teams.
Some functions seem to be more segregated than others. From our experience, we have determined that many executive teams have low levels of shared understanding about marketing and human resources management. Yet these two areas are often critical for today’s strategies. The executive team, as it goes through the process of building a scorecard, frequently realizes that it does not have the required understanding of market segments, customers, or employees. To remedy this lack, it adds marketing and human resources executives to the team, who now have a higher platform to educate others on their disciplines and contributions.
At Mobil, the finance and the operations disciplines had historically dominated the executive team. Brian Baker, the executive vice president of Mobil NAM&R, remarked, “We were a company with a lot of engineers—analytical people—and pretty introspective. We hadn’t looked outside the business at the customer, and we hadn’t understood the importance of the customer.”
Mobil’s executive team had no consensus on customer issues. As the senior managers tried to become consumer-driven and sell products other than petroleum to customers, they had to elevate the role for the marketing executive. Five years later, every executive understood the nuances of the market segments, how Mobil differentiated itself, and the drivers of consumer behavior. The cultural transformation occurred by putting the customer on the agenda and getting an intelligent spokesperson to help bring the rest of the team along.
The creation of the shared vision and strategy was an effective way to build an executive leadership team from the previous collection of individual business unit heads. The framework of the Balanced Scorecard provided a structured way for the team to work together to guide the development of a new vision and strategy. A tremendous amount of cross-fertilization took place as each element of the strategy was translated to the scorecard format. The strategic issues surrounding customer segments (marketing), yield optimization (manufacturing), cost of capital (finance), and supply-chain management (transportation, pipeline) now became the shared issues of the executive team. Historically, each of these issues had been considered the domain of a single functional executive.
The creation of an effective Leadership Team requires the breaking of many traditions. Management by silos is deeply entrenched. As noted earlier, AT&T Canada CEO Bill Catucci disbanded his monthly management meetings with individual department heads and replaced them with meetings about the most important business processes, including the management of strategy. According to Catucci, “At the Strategic Management meeting, the entire leadership team would get together and talk about the company in its totality—a holistic approach to the business. Instead of the chimneys, we would focus on what was happening throughout the company.”
Catucci went a step further in signaling a new approach to teamwork and culture by appointing four women to strategic leadership roles on the formerly male-dominated executive team: “The mindset that there are certain people for certain jobs was another barrier to performance that had to be eliminated.” The real message was that, in a performance culture, it’s performance, not gender, that matters.
A functional or technical culture is frequently at odds with creating a Strategy-Focused Organization. The U.S. National Reconnaissance Office (NRO) existed for decades as a super-secret spy organization, with three completely isolated and segregated operating programs.8 Each program came from a very different culture (Air Force, Central Intelligence Agency, and Navy) with little communication and, in fact, high competition among them. Senior executives were engineers with strong records of technical accomplishments. “Soft” managerial tasks, such as strategic planning and implementation, were considered less interesting than solving new technical problems.
In response to a changed external environment, NRO had been reorganized into directorates such as Imaging, Communications, and Space Launch. People from previously highly competitive programs were expected, in each directorate, to cooperate and agree on a unified approach to space reconnaissance. NRO, like many public sector (and private) organizations, initially established a staff level group, the Office of Plans and Analysis, to develop strategic plans. This staff-driven process faltered and plans were never implemented.
In 1996, a new NRO director led a strategy planning exercise, based on the Balanced Scorecard, to actively engage his senior executive team in formulating and modifying the organization’s strategy. After a briefing on the Balanced Scorecard to the director and key senior staff, the executive team got engaged by changing the scorecard to their situation—they moved the customer perspective to the top of the diagram9 and renamed the learning and growth perspective to employee satisfaction. Modifying the labels and rearranging the scorecard gave a sense of ownership to the executives. As the project facilitators noted, “By changing boxes, labels, and arrows, the executives had begun the process of understanding the cause and effect relationships unique to the NRO…. The Balanced Scorecard provided a common, structured environment and vocabulary for executives and employees to learn how to ‘do strategy.’”10 These discussions were the first in which the senior executive team discussed a comprehensive, shared NRO strategy, rather than a strategy for each executive’s individual unit.
Once the ice had been broken for senior-level discussions of NRO strategy, the director established monthly strategy meetings in which executives provided continued updates and reports. At quarterly off-site meetings, the executive team considered the impact of new issues and requirements on the NRO strategy. As the details and assumptions in the strategic model became clearer, conflicts and contradictions arose that required the senior executives to expand the dialogue to include other members of their organizations. The process gave organizational members the opportunity to learn more about the strategy model, test their ideas, and explore how to talk among themselves about strategy. The director had used the Balanced Scorecard model to create an executive leadership team that could think beyond the mission and strategy of each individual directorate. They could now work together to formulate and implement new organizationwide strategies.
The City of Charlotte example described in Chapter 5 also showed how the leader, Pam Syfert, used the scorecard to break down functional barriers and create a culture of teamwork and cross-functional problem-solving. Execution of the five strategic themes, such as “city-within-a-city,” required integrated teamwork from each city department. Syfert introduced a new structure, a cabinet, for each of the five strategic themes. Membership on the team came from many city departments and also included representatives from the private sector. The cabinets had their own scorecards and held monthly meetings to discuss how to integrate specialist department activities toward meeting the holistic citywide goals.
One final set of concepts is important for leaders who want to embed the Balanced Scorecard in organizations. Robert Simons11 has articulated a powerful framework for viewing the multiple control systems used by senior executives to implement organizational strategy (see Figure 13-1). The beliefs system in the upper left-hand quadrant of Figure 13-1 is the explicit set of documents, communicated to employees, that provides the basic values, purpose, and direction for the organization. Documents such as credos, mission statements, vision statements, and statements of purpose or values are examples of how the organization communicates its most fundamental values and goals to its employees.
In addition to communicating the grand purpose of the organization, managers also need to communicate what behavior and actions are unacceptable in pursuit of the mission. Companies need boundary systems that describe the actions that must never be taken. Boundary systems include legal constraints and codes of conduct that clearly identify forbidden actions. They are intended to constrain the range of acceptable behavior.
Figure 13-1 Levers of Control
Source: Adapted from Robert Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal (Boston: Harvard Business School Press, 1995), 159. Reprinted by permission of Harvard Business School Press.
Organizations also need strong internal control systems to safeguard critical assets, such as cash; equipment; information, such as databases; accounting; and customer records. Performance measurement systems in many organizations relate to such internal control tasks. These are important, but focusing only on internal control confuses adherence to rules and regulations with accomplishing mission and outcomes.
The diagnostic systems in Figure 13-1 are what many people think about when they describe performance measurement systems. Diagnostic systems provide signals about organizational health; they represent important dimensions of performance in the same way that body temperature and blood pressure (the body’s vital signs) provide signals about the personal health of individuals. Organizations may have hundreds or thousands of variables that are vital for success, but none of these may be a driver of strategic success. Some of these variables may be called “critical success factors.” They indicate that operations are “in control.” Diagnostic variables should be measured, monitored, and controlled. But their reporting to higher management is on an exception basis only, when a value falls outside a normal control limit and corrective actions need to be taken.
The interactive system, which is the fifth major control system, focuses on the relatively few measures that drive breakthrough performance. Interactive systems are the formal information systems that senior managers use to engage in active dialogue with their subordinates about strategy and strategy implementation. Interactive control systems focus attention and force dialogue throughout the organization. Such systems serve as catalysts for the continual challenge and debate of underlying data, assumptions, and plans that will drive learning and improvement. The questions asked in a diagnostic system start with “how much” and “what.” The questions with an interactive system are designed for interpreting, discussing, and learning; managers ask “why,” “how will,” “what if,” and “suppose that.”
Diagnostic systems, boundary systems, and internal control systems are all necessary, but they do not create a learning organization aligned to a focused strategy. Some Balanced Scorecard implementation failures occurred because organizations used their scorecard only diagnostically, and failed to get the learning and innovation benefits from an interactive system. The CEOs of successful Balanced Scorecard adopters, such as those described in Chapter 1, succeeded because they used the scorecard interactively, for communication and to drive learning and improvement. They set overall strategy and then encouraged people within their organization to identify the local actions and initiatives that would have the highest impact for accomplishing the scorecard objectives.
Perhaps the most critical ingredient for scorecard success, however, is not the analytic, structural explanations already provided. It is the leadership style of the senior executive. The individuals who led the successfully adopting organizations felt that their most important challenge was communication. These leaders knew that they could not implement the strategy without gaining the hearts and minds of all of their middle managers, technologists, sales force, frontline employees, and back-office staff. The leaders did not know all of the steps required to implement the strategy. They did have a good vision about what success would look like and the outcomes they were trying to achieve. But they depended on their employees to find innovative ways to accomplish the mission.
At first we were surprised to learn that two of the most successful early adopters, Bob McCool at Mobil and Michael Hegarty at Chemical Retail Bank, were ex-Marine officers. Military officers are stereotyped as command and control managers. But the best military officers, particularly in the Marines, recognize that when the battle is taking place, the generals are far from the front lines. In the uncertain environments where Marine battles occur, whatever has been planned is almost surely not going to occur. Frontline officers may have been killed; equipment may have been dropped off at the wrong location or destroyed before it could be deployed; and the enemy may have appeared in unexpected places and in different strengths and resources. At that point, the mission depends on frontline troops reorganizing and adapting to the local situation. In the heat of battle, the intangible assets that the troops can draw upon are a clear knowledge of the mission and objectives they are expected to accomplish and an ability to improvise and work together to achieve the mission and objectives.
Senior Marine officers communicate, educate, and train their troops with the goal “that every private can become a general.” Every member of the corps must be able and prepared to lead. Our casual observation was reinforced by a study conducted by McKinsey & Company and the Conference Board about the organizations that were the most successful in engaging the emotional energy of their frontline workers. The study examined many exemplary organizations in the private sector but finally concluded that the Marine Corps “outperformed all other organizations when it came to engaging the hearts and minds of the front line.”12 Given this culture, it is not at all surprising that Marine officers leading organizations in the private sector constantly look for ways to communicate mission and objectives and to inspire employees to find innovative ways to help the organization succeed.
In our initial interview with him, Bill Catucci of AT&T Canada described his management style of communication, team-building, and empowerment. It sounded very much like what we had heard from McCool and Hegarty. When we asked him whether he had been a military officer, he was initially surprised by our question but then replied that he had been an army officer, and concurred that his business leadership style had been influenced by his military officer’s background.
The Balanced Scorecard strategic management system works best when used to communicate vision and strategy, not to control the actions of subordinates. This use is paradoxical to those who think that measurement is a control tool, not a communication tool. Excellent leaders recognize that the biggest challenge they face in implementing change and new strategies is getting alignment throughout the organization. Gerry Isom of CIGNA Property & Casualty expressed this well:
How do you get 6,000 people’s minds aligned to the strategy? How do you get the functions people are performing aligned with the businesses they were supporting? The Balanced Scorecard became my key communicating vehicle for reporting, planning, and budgeting processes. It shifted us from a bureaucratic, autocratic, top-down company with people working within organizational silos to one that was streamlined and participatory, had top-down and bottom-up communication, and with people that worked across organizational boundaries.
So when people ask us where they should start to build a Balanced Scorecard in their organization, we often give the “left-brain” analytic answer articulated at the beginning of this chapter: Choose a level in the company at which an integrated, holistic strategy exists that requires alignment and integration from organizational subunits and employees. But we always follow by providing the “right-brain” answer: Make sure that the head of that organizational unit has a management style that emphasizes vision, communication, participation, and employee initiative and innovation. Avoid organizational units in which the leader likes to be completely in control. Avoid leaders who use management control systems to ensure that all subunits and employees are following directions and adhering to plans determined at the top of the organization. And when the left-brain and the right-brain recommendations conflict, follow the right-brain rule. The choice of initial implementation should be determined more by leadership style than by the analytics of where strategy is ideally formulated. If this rule leads to the initial scorecard being built at a business or shared service unit rather than a division, that’s all right. The Balanced Scorecard can subsequently be updated to reflect interactions and potential synergies initially unrecognized. It is much harder to modify and update the leadership and management style of a recalcitrant senior executive.
The Balanced Scorecard is most effective when it is part of a major change process in the organization. Often the need for change is obvious: The unit is underperforming, or major shifts are occurring in the unit’s competitive and technological environment. Even if the need for change is not obvious, leaders frequently motivate their organization to higher performance by setting ambitious targets. Whatever the initiating set of circumstances, adopting the new measurement and management system of the Balanced Scorecard helps organizational leaders to communicate the vision for change and empower business units and all employees to devise new ways of doing their day-to-day business to help the organization accomplish its strategic objectives.
Scorecard projects can be launched from different organizational units. Ideally, the project should be initiated at an organizational level where a comprehensive strategy exists or can be formulated. The scorecard provides the mechanism for translating that strategy into linked cause-and-effect objectives and measures for communication to organizational sub-units and individuals. But scorecards can also be started in shared service units. The most important criterion is that the initiating unit have a senior executive whose leadership and management style emphasizes communication, participation, and employee initiative and innovation.
Finally, the Balanced Scorecard should be viewed as the organization’s interactive system, a system to provoke questions, discussions, debate, and dialogue. The scorecard is most powerful not to explain the past but to stimulate learning and to guide questions and discussion about how to proceed into the future.
Ultimately, however, the ability to create a Strategy-Focused Organization depends less on such structural and design issues and much more on the leadership of the organization’s senior executive. The lead executive creates the climate for change, the vision for what the change can accomplish, and the governance process that promotes communication, interactive discussions, and learning about the strategy.
1. John P. Kotter, in Leading Change (Boston: Harvard Business School Press, 1996), has similarly described the critical role of the senior executive for galvanizing organizational change.
2. R. S. Kaplan, “Mobil USM&R (A): Linking the Balanced Scorecard,” 9-197025 (Boston: Harvard Business School, 1996), 2.
3. James C. Collins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994), 94.
4. S. Sherman, “Stretch Goals: The Dark Side of Asking for Miracles,” Fortune, 13 November 1995, 231.
5. S. Kerr, “On the Folly of Rewarding A, While Hoping for B,” Academy of Management Executive (February 1995); originally published in 1975.
6. Robert S. Kaplan and Robin Cooper, Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance (Boston: Harvard Business School Press, 1997).
7. Government agencies or nonprofit organizations, for which the growth option may not be a viable strategy, may interpret the “growth” theme as emphasizing effectiveness, not just efficiency.
8. The NRO experience is drawn from the more extensive description in J. A. Chesley and M. S. Wenger, “Transforming an Organization: Using Models to Foster a Strategic Conversation,” California Management Review (Spring 1999): 54-73.
9. Recall from Chapter 5 that this re-arrangement to place the customer at the top was done, independently, by several other government and nonprofit organizations.
10. Chesley and Wenger, “Transforming an Organization,” 65.
11. Robert Simons, Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal (Boston: Harvard Business School Press, 1995), and “Control in an Age of Empowerment,” Harvard Business Review (March-April 1995): 80-88.
12. J. R. Katzenbach and J. A. Santamaria, “Firing up the Front Line,” Harvard Business Review (May-June 1999): 108.