Introduction to the Balanced Scorecard

Why Balanced Scorecard - A Business Case

Common challenges for senior managers

When talking to senior managers they often comment on the following challenges that appear to limit organisational effectiveness...

1. Driving in the Dark

Whilst senior executives hold clear pictures of organisational strategy in their heads, these are often not shared at other levels. Research shows less than 5% of line employees understand the business strategies and how they will be executed. Without clear understanding, it is not difficult to understand why change initiatives so often are not successfully implemented.

In a separate survey, 82% of corporate executives reported an experience of one unsuccessful change initiative in their careers, whilst 47% reported experiencing 2 major change failures.

These failed changes have an opportunity cost associated with them, since the initial strategy was linked to an anticipated business benefit. As well, there is a 'cultural'cost of failed change, due to inefficiencies created as well as the mental and emotional energy drain that accompanies it.

Differing assumptions of Cause and Effect

The assumptions managers make about how financial outcomes will be achieved appears to vary considerably within an organisation.

If these are not discussed and explicitly stated, people end up pulling in quite different directions even though they are working toward common financial goals.

Two friends who were engaged to be married finally settled on a wedding date. Naturally an unspoken goal shared by all their families was to have a happy, fulfilling and memorable day. As preparations were enacted, conflict and tensions arose. Underlying these were different pictures people held about how the goal would be arived at. One family member's approach was to have a low key preparation within a tight budget, whilst another wanted every minor detail taken care of and no expense spared.

Whilst all parties were striving for common goals, they held different assumptions about how the goal would be achieved. Without discussion and articulation of these differences, they ended up pulling against each other.

2. Fixation on final scores

Financial performance is a hard-wired indication of performance in business. This is reinforced by the proliferation of financial measures, which account for 60% or more of performance indicators across all organisations.

However, fixation on financial indicators can limit the balanced consideration of what drives financial performance. These drivers include customer activities and perceptions, effectiveness of internal processes, staff capabilities and attitudes and the ability to adapt and innovate. People understand intuitively that a bunch of other stuff determines the financial results, yet this is often not reflected in what is most consistently reported and focused on.

Evaluating history

Another limitation of financial indicators is that they tell the story of progress only after the event, so learning and refinement are often too late.

Most management teams have a regular (at least monthly) meeting involving review of financial performance. However it is rare to see teams with a regular discipline of performance review against a balance of financial lag indicators and non-financial lead indicators.

If the group were coaching a sporting team, this would be likened to spending their half time break reviewing the score, rather than reflecting on the data available about what has been happening on the field of play.

3. Using a putter off the tee

Many current performance measurement processes are inadequate tools to create an innovative performance management culture. In a number of cases, what is claimed to be a Balanced Scorecard is nothing more than a re-work of existing performance measures into a few different categories and colours.

Management of operations, not strategy

Many performance measures have evolved from operational sources. This enables managers greater insight into the day to day performance of their functional areas. However this also leads them to spend up to 80% of their time on operational, day to day issues. This means there is very little collective energy being focused on driving the strategy of the business. Many regular management meetings are an example of this with tactical and short-term considerations dominating a large proportion of the time spent.

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