The Balanced Scorecard: Avoid Pitfalls to Gain Maximum Benefit
Introduced by Harvard academician Robert S. Kaplan and management consultant David P. Norton in 1992, the concept of the Balanced Scorecard (BSC) has revolutionized how management evaluates and manages strategy performance.
Voted one of the most influential business ideas ever presented in the Harvard Business Review, it’s a management system (although it also measures) that, by tracking four distinct “legs,” or business perspectives, enables critical business goals and objectives to be established, monitored and accomplished.
While the traditional financial metrics comprise one of those legs, its more comprehensive view is gained by also monitoring the Customer (satisfaction and performance requirements); Internal Business Processes (those that are critical-to-customer) and Knowledge, Education and Growth (how knowledge is gained, shared and turned to competitive advantage).
In one form or another, the BSC has been adopted by an estimated 60 percent of businesses around the world, not to mention entities in the public sector along with non-profit organizations. The thing is, setting up and managing the BSC is complex. How many are doing it right – and getting full benefits from their efforts – is the issue.
In fact, Kaplan and Norton themselves find the high adoption rate estimates worrisome. As they put it in an interview last year with Thinkers50, a compendium of the world’s best management thinking: “Another estimate is that 50% are doing it wrong. When we say the balanced scorecard, we mean a system for managing strategy which uses the balanced scorecard as the organizing framework.
“Fifty percent or so of the companies that say they’re using a balanced scorecard are trying to do that, but 50% are doing it in some other way. Our worst nightmare is…[waking up] some day and seeing an article that says 70% of balanced scorecard users fail, because that’s what happened to re-engineering.”
Experts have identified various pitfalls that managers should keep in mind and avoid if they intend to create the most effective BSC for their needs. These include:
- Vague strategy: Some high-level strategies may be too vague to translate well into a BSC. Experts suggest translation in terms of financial targets, markets and customer segments, and aspirational brand and customer value positioning, all in the context of where the organization wants to be in the coming five to ten years.
- Overcomplicating the execution: There are a lot of details and technicalities to putting a BSC in place, enough so that many organizations can get bogged down and confused. By phasing in stages from the simplest to the more sophisticated aspects, managers can ensure clarity and reduce failure. For example, the best start is to articulate the BSC across the four legs/business perspectives via the strategy map that spells out objectives with cause and effect relationships. This sets the stage, the action plan and other facets, such as strategy themes and an approach for “cascading” the BSC through the organization.
- Ill-defined metrics: Relevancy and clarity are key for metrics to have value. When they’re sloppy or not defined consistently, they open the door to criticism of the system by those who would avoid accountability for results.
- Inefficient data collection, reporting: When metrics data collection requires too much effort, the job will fall by the wayside and so will results. The solution is to be selective in defining and prioritizing the most vital and relevant metrics for improved performance, and ensure the resources are behind automating their collection and reporting.
- Poorly structured metric review process: A slapdash approach to monitoring scorecards is problematic. Reviews should be appropriate to the changes the metrics exhibit and the extent to which the variables within the metrics can be influenced by management – daily, if necessary. It’s also key to establish a cross-functional review committee whose members share responsibility for process results and have well-defined roles.
There are many examples of BSCs to be found today, some 20 years after the concept’s introduction. It’s in the design process itself, many experts assert, where much of the benefit of the scorecard is yielded. Being mindful of the pitfalls will ensure that processes run more smoothly and that optimal performance improvements follow.
