Causal Modeling: Balanced Scorecard Best Practice

Companies need to ascertain the impact of the strategic initiatives that they take and the outcomes achieved. It is hard to disentangle the effect of any one variable on the overall performance of a company. Company leaders can learn to efficiently deploy resources if they knew with some precision the outcomes of their actions. Most companies have not integrated their databases in their CRM, financial, HR and manufacturing departments and are unable to create statistical models which take into account all the inter-dependence of the variables affecting outcomes. According to Wharton professors, Christopher Ittner and David Larcker found from their research of 157 companies that only 23% of the organizations had done sophisticated causal modeling to single out the non-financial measures that were related to their strategic and financial performance. The organizations that had invested in modeling outperformed their peers, who had not done the same causal modeling, showing, earned an average of 2.9% higher Return on Assets and a 5.14% higher Return on Equity.

A case of the effective use of statistical causal model is the Southeastern Savings and Loan Company, which had a network of 400 branches staffed by 6000 employees offering several different services to a variety of customers, had the daunting task of pinning down the specific causes of poor performance and identify the individual branches that needed improvement. It was not hard to guess that employee attitudes had an impact on the levels of customer satisfaction in the company. The challenge was to identify the initiatives that had to be taken by its employees to improve customer satisfaction.

When a causal model was constructed, it was found that tellers and loan officers need a different set of traits to service customers well. The most important variable for the performance of the tellers was their job training which led to fewer errors in transactions and increase in customer satisfaction. For the loans officers, on the other hand, the performance was influenced by their communication skills and autonomy. The company then used the information from its employee surveys to identify the branches where the employees were weakest in training or communication skills.

Causal models can go beyond simply confirming the contribution that non-financial variables are making to the financial achievements of the company. They can go a step further and uncover patterns that can help to identify strategic initiatives that went unnoticed in the past and considerably improve the financial performance of the company.

A case of how a company found an unconventional source of profit that was found from balance card measurements is that of E-trade. It was able to offer relatively lower rates of interest and compensated customers with greater convenience of on-line banking. Banking customers have indicated that they value on-line images of their checks and statements of their transactions as very important. Customers are less willing to switch when they receive related services also.