Balanced Scorecard - A question of balance

Robert Kaplan is everything you would expect of a Harvard professor.

When he talks, his whole body becomes animated. He speaks with great energy and enthusiasm, without pausing for breath and without ever referring to notes.

This man is in huge worldwide demand as a keynote speaker. In Austria, where event organisers find it hard to persuade business people to attend seminars, he attracted a full house. And last month in Prague, over 750 executives from all over Europe came to a conference organised by IT giant SAS Institute to hear Kaplan talk about his invention, the balanced scorecard. He also regularly holds seminars across North and South America, Europe, Asia and Israel.

Kaplan holds the title of Marvin Bower Professor of Leadership Development at Harvard Business School. He is one of the world’s leading thinkers on management accountancy and has written several textbooks on the subject: the third edition of ‘Advanced Management Accounting’ was issued at the start of this year.

He is also a highly regarded teacher, lecturing at Harvard Business School since 1984, and in 1988 he was awarded the Outstanding Accounting Educator Award by the American Accounting Association. Four years ago, his talents were recognised by CIMA in the UK for ‘outstanding contributions to the accountancy profession’.

On top of all this, he is a respected researcher and consultant, advising companies on the design of performance and cost-management systems. His primary interest is in identifying what value certain activities bring to the business process. It was this which led him to devise, with David Norton, the balanced scorecard.

Every decade seems to produce a business theory that is adopted with almost religious zeal. Total-quality management, downsizing and discontinuity theories have all had their day. But while the balanced scorecard may not be brand new – it was first devised in 1990 – executives are beginning to realise the impact it could have on their companies.

The concept is simple. Kaplan and Norton described it as being ‘like the dials in an airplane cockpit: it gives managers complex information at a glance’, in the original Harvard Business Review paper.

Like many business strategies to emerge from the academic world, this one started as a case study. In 1989, consultants from Harvard were called into semiconductor company Analogue Devices. They found that the vice-president in charge of quality improvement had developed a series of measures to quantify the subjective data which most organisations possess, but cannot easily use – customer satisfaction, staff morale and so on.

Kaplan explains: ‘He came out of the total-quality management movement.

When he joined the corporation, he asked what its customers cared about. They told him – on-time delivery. So he developed a corporate scorecard to measure factors which affected this and put them alongside the financial controls.’

The idea that companies should be trying to take non-financial measurements into account when developing corporate strategy intrigued Kaplan and Norton. They were already working on a research project with a group of 12 large corporations. The two decided to share their initial thoughts and found they had the makings of a new business theory.

‘Traditional financial measuring techniques tell us about the past,’ says Kaplan. ‘They’ve worked well for centuries. But over the last ten years, companies have begun to realise they were successful not just because they were investing in tangible assets, but because they were investing in relationships with customers, suppliers and employees.

‘If they are to develop new products and services which match new customers’ needs, they need to invest as much again in people and information. Those are the keys to success in today’s competitive environment. But the financial system does a miserable job of reporting on these intangible intellectual assets. We needed new measures which could reflect the value creation going on in companies today – future value not just past.’

The balanced scorecard is one way of identifying the factors that create long-term economic value in organisations. It still retains the traditional financial measures as a key indicator of performance.

But it now gives equal weight to other factors – customer satisfaction, the effectiveness of the internal business process and staff skills.

Each of these topics is separately identified and laid out on a grid.

The company then establishes the objectives it wants to achieve under each heading and identifies the way it will measure progress. In Kaplan’s original theory, this was all worked out on paper: today, there are several software packages designed to automate the process.

Whichever package is used, the result is the same. Senior executives now use the concept to develop new visions of what they want their business to be and where they want it to go. The balanced scorecard gives them a tool to turn this vision into strategies which benefit everyone in the organisation.

‘Previously,’ says Kaplan, ‘companies talked a lot about formulating strategies. We found they had great difficulty implementing them. Fewer than 10% could do so. There were four barriers in their way.

‘Top people failed to communicate their vision to every part of the company. Rewards were unlinked to the strategy, and the allocation of resources was aimed at budgetary rather than strategic considerations. Finally, the measurement performance was based on short-term tactical results alone. The balanced scorecard helps break through those barriers.’

While on the surface, the approach appears to work best in the private sector, its inventors deny this. They insist that it is just as effective for government bodies and not-for-profit organisations. All that needs to be changed is the focus and emphasis of the strategy.

The police force in Belgium, for instance, have been using the approach to deal with a recent crisis in public confidence. The problem they faced was quite simple. The service had been organised into three competing divisions. There were the municipal forces in local communities; the federal police, dealing with national issues; and the judicial service, which investigated serious crimes.

Since 1991, the three separate forces have been merged into one and organised into 200 local zones, each of which is accountable to its own community.

All commanders are required to produce a strategic plan based on the principles of the scorecard.

This means they can measure the realisation of their security plans.

Security objectives are set at many different levels within the service.

But at every stage, the police force is accountable and needs to demonstrate its results.

Although Kaplan and Norton designed the scorecard approach to put numeric values against factors like customer satisfaction, they admit that, in the early stages of any project, it may be impossible to put a number into the relevant boxes. But, says Kaplan, that is not necessarily important.

‘How do you calculate a measurement for subjective variables?’ he asks.

‘There does not need to be a figure so long as there is a report on progress. The human resources director, for example, could talk about the reskilling activity which has taken place over the last quarter and what benefit the company has gained from this. It’s a marker for discussion in executive meetings.

‘Eventually, it would be better to have some kind of number,’ acknowledges Kaplan. ‘But don’t think like accountants. They say: “if I can’t measure what I want, then I’ll want what I can measure.” You should decide what you want to achieve, agree a strategy and focus the activities of everyone in the organisation on that. Manage your business according to your vision and you should succeed, even if it takes a year to get there.’

David Calder is a freelance journalist

MOBIL BALANCES THE BOOKS

Kaplan cites the dramatic change in the results of oil company Mobil as an example of what the balanced-scorecard approach can achieve. In 1993, the company was languishing at the lower end of the US oil industry league table. In terms of its profitability, it was ranked seventh.

Within 12 months of adopting the balanced-scorecard approach, its situation improved dramatically, rising to number one and holding that position for three years.

The explanation offered for the transformation is that it analysed its customer base and identified target groups. Previously, Mobil had as its philosophy ‘never lose a sale’. If a lower-cost operation opened a filling station nearby, the company would match its prices. As Kaplan points out, this was simply ‘a recipe for being the lowest-profitability supplier’.

There were, however, other groups of people less interested in price and more concerned about the quality of service. Take the ‘road warriors’ – professional drivers who buy fuel two or three times a week. But they also use the other facilities provided on the premises, such as the shop, restaurant or business communications.

Then there was the group that Mobil dubbed the ‘F3 Generation’ – young, upwardly mobile individuals who placed convenience and speed above all else. They wanted ‘fuel and food – fast’.

What the company realised was that, if they provided these groups with the range of services they required, they could charge premium prices and could also differentiate themselves from other large firms in the sector, something which they knew was difficult to achieve in such a mature market.