12.6 Tools: The Balanced Scorecard

If you want to understand state-of-the-art measurement practice, you need to turn the clock back to the early 1990s. Rapid technological advancement and globalization called for new ways of doing business. Many managers, however, felt that measurement was holding them back, keeping them from making decisions that would better create customer value. Short-term, financially oriented measures discouraged (even penalized) change. Larry Brady, executive VP at FMC, makes this point, saying, “If you are going to ask a division or the corporation to change its strategy, you had better change the system of measurement.”

A Holistic Approach to Measurement

Robert Kaplan and David Norton agreed and argued that a more holistic and strategic approach was needed. Their remedy: The balanced scorecard—a management approach that changed the way we perceive and use measurement. The balanced scorecard integrates four distinct measurement dimensions—Customer Expectations, Operational Excellence, Future Capability Development, and Financial Performance—into a holistic dashboard (see Figure 12.2). Using a balanced scorecard helps you obtain four key benefits, each of which is critical to building a continuous improvement culture.

Communicates Top Management’s Vision

Research has shown that when a scorecard is not in use, up to 95% of your workforce can’t articulate the company’s strategy. Members of your team cannot support a strategy they don’t understand.

Links Behavior to Strategy

Because what gets measured gets done, scorecards translate vision into actionable behavior. Scorecards derive functional, day-to-day measures directly from strategy-driven goals.

Promotes Future Capability Development

Your balanced scorecard invites managers to ask, “What capabilities do we need to build to meet customer needs and improve shareholder returns?” Naturally, the follow-up question is, “How do we invest in and build these capabilities?”

Imposes Discipline

Combined, all four dimensions of your balanced scorecard should only consist of about 20–25 metrics. You need discipline to focus on what’s important.

Developing Your Own Balanced Scorecard

You may be wondering, “If balanced scorecards are so powerful, why doesn’t everyone use them?” The answer is simple: You need a rare combination of vision and discipline to make the balanced scorecard-driven process work. Specifically, you must recognize that you need to measure differently. If you—and your team—don’t buy off on the need for a scorecard, you won’t invest the time and effort to do it right. Remember, measurement is powerful because it communicates strategy and motivates behavior. A bad scorecard is worse than no scorecard. Once the members of your team agree that you need a scorecard, you must ask—and rigorously answer—three questions (See Figure 12.3).

Question #1: What Are Our Goals?

Ask yourself, “If my vision succeeds, how will I look different to my shareholders, to my customers?” Never forget, goals matter! Goals set your direction and define what you need to measure. To make sure you get your goals right, you should consult the following sources of information:

• Environmental Scan (aka, Strengths, Weaknesses, Opportunities, and Threats analysis). Take a close look at your competitive environment to spot things or trends that might change the rules of the competitive game. What are your rivals doing? How is the industry changing? Are new technologies emerging? And, do you see any new government regulations on the horizon?

• Best-in-Class Benchmarks. Benchmarking is the formal process of comparing the attributes of one organization to those of another. Your quest is to find the very best ways to do the things that matter to your customers. Your motto should be, “Good practice is good practice, wherever it is found.”

• Customer Feedback. If you look at the mission statements of winning companies, you will consistently find five essential words, “meet or exceed customer expectations.” To get the real skinny on what your customers expect, you need to talk to them and earn their trust.

Question #2: What Skills Do We Need?

Now, ask, “What are the things that I need to do to achieve my goals—i.e., what are my critical success factors?” Your real goal is to define the capabilities you need to invest in so you can create superior value—most likely in the areas of low cost, high quality, fast and consistent delivery, leading-edge innovation, and agility. The good news: You’ll likely find the insight as you scan the environment, benchmark best practice, and seek customer feedback.

Question #3: What Metrics Do We Need?

Your last question is simple: What KPIs (key performance indicators) will help you create the understanding and drive the behavior you need to win? Simply put, now that you know what you are trying to accomplish, you are ready to derive the metrics that make up the heart of your scorecard. Begin by looking at your current measures. Then, conduct brainstorming sessions to ideate new measures. You should look to the following for inspiration.

• Industry Standards. In most industries, a set of standard metrics exists for key value-added activities. Professional associations/consortiums, consultants, and textbooks are good places to look to make sure you don’t miss the obvious.

• Best-in-Class Benchmarks. Some companies are known for using creative and effective measures. Check out what they are doing and see how their metrics fit your needs.

• Customer Feedback. Ask customers how they evaluate your service. Request a copy of their supplier scorecard and go over it with them to find out exactly how they define and calculate their measures.

Now, all you have to do is integrate your scorecard into your information system. Simply put, make sure that your information systems collect and analyze all of the required information. Don’t forget to run a pilot test to make sure everything works. GIGO (garbage in, garbage out) can destroy the credibility of your newly launched scorecard. Following a successful pilot test, roll out your scorecard with proper training. People need to understand why you developed the scorecard, what specific measures mean and how they are calculated, and how the scorecard will be used. With your scorecard in place, you accelerate learning, motivating everyone to work together for the long-term success of your company.