Balanced Scorecard: The Benefits

Balanced scorecards are meant to create a culture of fact based decision making which scrutinizes processes at a much greater detail than is possible simply with financial data. When several departments of the company are involved, the data is visible to all of them and they all get to learn how their individual contribution is related to the overall company performance. Comprehensive measurement of process efficiency, productivity, human resources quality, customer satisfaction and financial returns are all quantified to uncover opportunities for efficiency gains. Kaplan and Norton, who pioneered balance scorecards, liken them to “the dials and indicators?of an airline cockpit. The continuous feedback with numbers helps companies align their strategies with their operational tactics and take corrective action before too much damage is done to their companies. A recent survey finds that two-thirds of the respondents who have used the balanced scorecard have reported a positive experience with them.

Above all, a pervasive culture of measurement helps to communicate better and to overcome the resistance to change that comes from a blinkered view of reality. Information technology investments have commonly been a black box in many companies and the IT staff has resisted any rigorous accounting of its costs and benefits. This was also the experience at BNSF Railway till 2002; at the time the company's IT continued to grow while business was flat. When the company began to implement its balanced scorecard methodology, BNSF's cost per million instructions per second (MIPS) was reduced to $29 compared with $42 earlier. The company attributes this achievement to the improvement in the quality of communication that the balanced scorecard facilitated.

Companies using balance scorecards can evolve and adapt to their circumstances with greater ease. Equally, the visibility gained from measurement lifts the cloud of uncertainty that induces the insecurity in people. Instead, the numbers help people to see the scenarios evolving ahead of them with a degree of clarity to venture ahead with creative solutions. The shared information helps them to work together with a greater collaborative spirit which mitigates some of the resistance to change. Finally, the consciousness that external developments drive organizational evolution rather than managerial diktat from the top helps to understand change in a perspective that is conducive to problem solving. A recent survey finds that all the companies that have realized significant benefits from balanced scorecards agree that their use has helped to tie their strategies with their operational strategies while 43% among those who did not realize significant benefits. From the employees?perspective, the survey confirmed that there is a closer link between reward and performance among those companies realizing significant benefits from balanced scorecards.

The success of the balanced scorecard is contingent on the precision and detail of the financial and other numbers that are available to the company. Unsurprisingly, the companies that report significant benefits from balanced scorecard are also more likely to have used activity based costing (ABC) and rate its value to be high while those who have not realized significant benefits are also less likely to have used ABC and also rate its value to be low. The reported figure for the first group is 60% likelihood of using balanced scorecards and 36% in the second.

A case of successful use of balanced scorecards for change management is CIGNA, an insurance company. In 1993, it lost a staggering $275 million and its combined ratio, i.e., the ratio of claims to premiums earned, was 1.40 or the claims were in excess of the earnings. When the management examined the work processes, the details showed that the company had poor relationships with its customers, with the distribution channel and the staff was not equipped with the technology it needed to perform well. CIGNA announced a new strategy of becoming a specialist insurance company instead of spreading itself thin over numerous businesses. It chose an electronic version of a balanced scorecard which communicated any weakness by sending out a red signal. If in any work process progress was lagging, the company identified the source of the problem and worked with the concerned employee to improve matters. By 1998, CIGNA turned around with high levels of profitability.

The mindset for change presupposes that the management and the employees are able to look outside of their companies at the macro events that shape their destiny. All too often, employees and managements have an ostrich like attitude and remain oblivious to the larger context till they are shocked into changing their ways. Modern managements increasingly expect their companies to remain resilient in the face of adverse course of events. FMC, a Chicago based conglomerate, was a typical cash cow with $4 billion in revenues in 1992 and a relatively high return of 15% with little prospect for rapid long-term growth. The performance of each of the businesses in the conglomerate was judged based on financial metrics but the actual experience showed that external factors such as market evolution and competitive factors were the critical factors influencing performance. FMC decided to change course and increasingly incorporated factors such as customer satisfaction, market position and the share of revenues contributed by new products in the metrics incorporated in the balanced scorecard. This was to ensure that the company would be fortified against adverse events.

The ability of employees to actively participate in the decision making process adds to the diversity of perspectives and the energy that they are able to contribute within the overall strategic context defined by their management. One instance of this is the success that was achieved by Crown Castle International, one of the largest cellular tower companies in the world. The key problem with the company was the customer churn rate of the company which added up to 24% for the entire year. By 2004, the company had reduced the cycle time of installation by 70%, entirely made possible by the initiative of its local employees, to be credible among clients. A variety of metrics allowed each of them to select the variables that they could best influence. The best practices from each of the regions are then communicated to others to accelerate the rate of improvement.

The combination of financial and non-financial measures of performance is also a means to weigh both the short-term and the long-term goals of a company. In the past, the bias was in favor of financial goals which persuaded companies to meet short-term quarterly goals which lead to a decline in the long-term competitive strength of the company. A mind-set which sees the non-financial metrics as leading indicators of the financial performance also encourages a consideration of the long-term strengths companies need in order to achieve their financial goals.