Balanced Scorecard: What can it do?

In a world where hierarchies are crumbling, companies do not any longer communicate and implement their strategies by bureaucratic fiat. Modern companies are complex systems in which the knowledge and motivation of all employees are crucial for the overall success of the company. Corporate executives have to be able to communicate compelling messages across several different departments, strategic business units and subsidiaries and make them work together. A recent survey finds that all the companies that have reaped significant benefits from balanced scorecards unanimously agree that communication is the most important raison d’être of implementation of the balanced scorecard while 39% who have not realized significant benefits also agree.

The senior managements and the boards of companies formulate the visions for their companies taking into account larger factors such as economic trends and the resource capabilities of the company. Most employees are preoccupied with the tasks assigned to them and the visions of the company are much too remote to move them. In order to execute their strategies, managements need to translate their strategy into concrete numbers intelligible to employees at all levels. Balanced scorecards help to communicate the larger goals of a company in the language of action plans to a variety of departments in a company. Financial and non-financial metrics are spelt out in the strategic context in which the tasks of the company have to be completed. They help to overcome the “cog in the wheel?mentality of employees that dampens enthusiasm; instead employees are encouraged to share in the excitement of achieving company goals.

Balanced scorecards use a weighted average of both financial and non-financial measures of performance. In the past, financial measures have been predominant and had encouraged managers to focus on short-term performance neglecting the non-financial metrics which are a better gauge of the long-term competitiveness of companies. The American automobile industry, for example, is a classic case where companies lost out to the Japanese car makers who had greater leeway to make investments for the long-term viability of their companies. The financial and non-financial metrics that are a call to action by employees also spells out the causal relationships between the actions the company is taking and the outcomes that can be expected. In the service industry, for example, there would be a close link between customer satisfaction, brand image and the ability to acquire new customers and to retain them. The company managements can set goals in terms of revenue growth and the customer base they would need to achieve them. This can then be translated into objectives product designers and engineers would have to achieve in terms of product quality, call center representatives would have to achieve in terms of the quality of responses to customers and the messages that the marketing staff sends out to the customer base.

One example of communication of company strategy, with the use of balanced scorecard, throughout the company is the case of Franklin Park, Ill.-based metal distributor A.M. Castle. The company began by training six of its senior executives in the balanced scorecard methodology. Thereafter, a core team of eighty people were involved in the project who discussed balanced scorecards with their employees. The company also developed a board game on the Balanced Scorecard that was similar to Monopoly and sent managers to play the game with their business unit. These methods visually demonstrated the value drivers of their financial performance.

Just as communication within an enterprise has taken a subtle twist following the demise of bureaucracies, the control systems have their own nuances. Gone are the days of inter-departmental co-ordination committees which clumsily managed a sprawling enterprise. The company headquarters are disinclined to intervene in the operational strategies of individual units within the company. Instead, they design the strategy of the company, in consultation with the representatives of individual units of the company, and lay down the performance goals for each of them. This is well illustrated by the case of the Nova Scotia Power Inc. which designed the corporate scorecard to manage the individual units within the company. These scorecards describe the company strategy in measurable terms which is then extensively discussed with the employees of the company. In order to encourage the participation and active commitment to the company strategy, each unit within the company is encouraged to design their own cards which are consistent with the corporate scorecard. Each of the strategic business units within the company, such as the generating units, transmission units, etc identify one or more of the objectives, identified in the corporate scorecard, which they can influence and design their scorecard to achieve them.

Companies have to operate in uncertain environments and their knowledge of their business environment is limited. The best they can do is to begin with a hypothesis, based on the knowledge they have, and learn from experience. Balanced scorecards provide a quantifiable way to compare the expected performance and the actual to make sure that the results are not lagging. This can be taken a step further and the expected and actual results at several different points of time. Furthermore, the expected and actual can be measured for individual departments, strategic business units and subsidiaries of the company. Thus, companies receive a broad range of data points on any shortfalls that might have occurred. They can use them to call for any action plans, from those responsible for specific functions in the company that could help to overcome related problems. This can be repeated over and over again and the error rates in decision making lowered over time.

A classic case of the use of balanced scorecard as a diagnostic tool is Sears in 1992 when it was faced with a $4 billion loss. The customer satisfaction levels at Sears?were below the industry average and 16 percentage points behind its leading competitor. After the implementation of the balanced scorecard program, Sears?in 1996 had customer service levels above the industry average. In addition, an independent study of 203 companies found that in 1996 Sears made the second-highest improvement in customer satisfaction. In 1992, the company conducted both consumer and employee surveys to find out the underlying causes of the poor performance. It soon became clear that employee attitudes were an overriding influence on customer satisfaction. At a deeper level, the company recognized that the company culture was much too paternalistic to value its employees who were otherwise inclined to see an improvement in company performance. Also, the performance had to be rewarded more than effort. This data led to a change in corporate culture and to a substantial improvement in its performance.

The non-financial metrics in balanced scorecards are the leading or the predictive variables and the financial metrics are the lagging variables. Companies can use the leading variables to estimate the gains they can expect from strategic initiatives they undertake. The lagging variables, on the other hand, help to measure and confirm the validity of the assumptions made at the outset. They can use the data generated to evaluate the validity of their assumptions and learn to make better judgments in the future. Whereas in the past, bad decisions were shrugged aside as a professional hazard, companies can now use the data to make better decisions in the future.

In today's constantly evolving environment, corporations have to guard against surprises and possible shocks that may do lasting damage to their companies. The balanced scorecard enables companies to keep track of the situation in real time and acquire the information they need to adapt to it.