Balanced Scorecard: Issues of Implementation

The implementation of the balanced scorecards involves several challenges in embedding the information systems and the culture that helps to receive, process, analyze performance information and to implement action plans in time to respond to unexpected turn of events. They have to select the relevant metrics, decide on their relative importance and take decisions on delegating resources and responsibilities to specific individuals in the company. In addition, they have to assign responsibility to individuals that is consistent with the overall strategy of the company. Companies have to be also rid of the command and control systems that adapt slowly, at best, to external challenges.

In the early years, companies experienced frustrations as they collected far more data than was financially viable or even to interpret meaningfully. This was not a trivial issue since companies had to spend time collecting the information, checking for its quality and then aggregating it as a single scorecard. According to one survey conducted by Towers Perrin, 25% of the respondents reported problems with the time and expense in implementing the balanced scorecard while another 44% encountered problems with building the information systems required to support balanced scorecards.

The challenge before companies is to choose a few strategic variables that are the most important contributors to their financial performance. They have to do this to economize on the effort involved in gathering data and to choose those variables which can be interpreted meaningfully. The best variables are those that incorporate several other determinants of performance. One classic instance was that of British Airways which selected on-time arrival and departure as the only key performance indicator which could also be conveniently communicated to the senior most executives. This single variable had an impact on all the four categories of variables that the balanced scorecard considers. Any delay in the arrival or departure of an aircraft affects the financial performance as extra costs of accommodation and food have to be incurred as courtesy to harried passengers besides additional costs on the staff. Similarly, customer satisfaction levels are affected by delays, employees have to spend extra time on the plane and internal resources are stretched as more time has to be spent to service each aircraft.

In some cases, the non-financial variables are hard to quantify or their impact is hard to ascertain. A clear case of an intangible variable is the notion of core competence which plays a critical role in the competitive strengths of companies but is hard to measure. The state-of-the-art in measuring these variables, however, has been lagging behind their increasing significance. In one study, 63 percent of firms rated innovation as highly important, but only 22 percent measured it; 76 percent rated morale and corporate culture as important, but only 38 percent measure them; and 76 percent of firms considered core competencies as important, but only 36 percent measure them. The knowledge that is uncovered from the measurement of these intangibles throws a great deal of insight on competitive dynamics.

Once the relevant variables have been identified, companies experience difficulty in determining the weights to use to arrive at averages. Companies have problems deciding on the relative importance of these variables. They have to consider the risks of a formulaic approach to weights against the more subjective alternative of a judgment call in order to adapt to changing circumstances. Managers are predisposed to game the system by using subjective weights to slant the numbers in their favor and help batten their chances of promotions and compensation. According to the Towers Perrin survey, 38% of the companies had problems with their decisions on the weights.

By its very nature, the balance scorecards work best when they are implemented across the enterprise especially when they are used for strategic purposes. As performance measures, they can be used in individual departments within relatively small companies. For large companies or those with several inter-dependent departments, performance parameters are hard to delineate for each department and have to be designed for the company as a whole. In any case, senior managements are rarely at the scene when problems or crisis occur and have to be addressed as they happen. Consequently, senior managements have to take into account the aspirations and motivation of each group of stakeholders in the company (defined broadly as the customers, employees and suppliers) and build a coalition to achieve the goals of the company.

The implication of the stakeholder approach is that the non-financial measures of performance for the company have to be so defined that tasks can be assigned to every group in the company in order to ensure their commitment to the overall goals of the company. Additionally, companies have to also ensure that each of these groups receive commensurate awards to motivate them to perform.

One classic case of the effective use of balanced scorecards, customized for each stakeholder, is the story of Southwest Airlines and the way it managed its ground crew to achieve shorter turnaround times for its planes. It recognized that its financial goals could best be achieved by working with fewer planes while keeping their idle time on the ground low. Like other airlines, ground crew in Southwest Airlines is unionized and is reluctant to accept management demands for raising productivity. In order to gain their loyalty, Southwest Airlines agreed to vest stock to its ground crew as reward for lower turnaround times for aircraft between flights.

Mobil US Marketing and Refining is the storied case of a company which achieved early success in the implementation of the balanced scorecard. Like other refineries, it has a sprawling network of gas stations which were hard to manage from its headquarters in Fairfax especially because market and business conditions vary between the Midwest, Northeast, central states and the West Coast. Mobil had a find a way to execute its corporate strategy consistently across regions yet grant enough autonomy to individual units to contribute. Mobil's strategic issue was to find a way to differentiate its service stations in an industry where price competition was the norm. It came to the conclusion that it needed to differentiate its offerings such that each type of customer received service valuable enough to disregard price differentials. Mobil's market research indicated that road warriors and true blues were potentially the customers who were willing to pay a relatively higher price for friendly service, superior coffee and better snacks.

The company's challenge was to incorporate, in its performance criteria of its service units, measures that reflected the corporate strategy of improving service quality and responsibility to shareholders. The employees were given a choice of the parameters they could use to influence overall satisfaction with the Mobil brand. This exercise helped the employees to look beyond their service station world into the larger issues of company strategy as a whole.