2011 Ranking: #14
The dilemma of what to measure is as old as business itself. From Frederick Taylor’s scientific management at the turn of the twentieth century to contemporary notions of shareholder value, managers have sought re-assurance and motivation in measurement. The trouble is that measurement tends to be one dimensional. Enter the balanced scorecard which links strategic objectives to comprehensive indicators. Stuart Crainer interviews David Norton, the balanced scorecard’s co-creator.
The balanced scorecard first saw the light of day early in the 1990s. David Norton, co-founder of the consulting company, Renaissance Solutions, and Robert Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, developed the concept in research sponsored by KPMG. The result was an article in the Harvard Business Review (“The balanced scorecard,” January/February 1993). This had a simple message for managers: what you measure is what you get.
Kaplan and Norton compared running a company to flying a plane. The pilot who relies on a single dial is unlikely to be safe. Pilots must utilise all the information contained in their cockpit. “The complexity of managing an organisation today requires that managers be able to view performance in several areas simultaneously,” said Kaplan and Norton. “Moreover, by forcing senior managers to consider all the important operational measures together, the balanced scorecard can let them see whether improvement in one area may be achieved at the expense of another.”
Kaplan and Norton suggested that four elements need to be balanced:
- The customer perspective. Companies must ask how customers perceive them.
- The internal perspective. Companies should ask what it is that they must excel at.
- The innovation and learning perspective. Companies must ask whether they can continue to improve and create value.
- The financial perspective. How does the company look to shareholders?
According to Kaplan and Norton, by focusing energies, attention and measures on all four of these dimensions, companies become driven by their mission rather than by short-term financial performance. Crucial to achieving this is applying measures to company strategy. Instead of being beyond measurement, the balanced scorecard argues that strategy must be central to any process of measurement – “A good balanced scorecard should tell the story of your strategy”.
Over a decade later, the balanced scorecard has spawned an industry. Kaplan and Norton’s books – The Balanced Scorecard, The Strategy-Focused Organisation, Strategy Maps and Alignment – are bestsellers. The Balanced Scorecard Collaborative, a group of professional service firms which helps companies use the balanced scorecard, has offices and affiliates throughout the world. There is even a Balanced Scorecard Hall of Fame. David Norton, now CEO of the Balanced Scorecard Collaborative, talked to Business Strategy Review editor, Stuart Crainer.
How is your new book, Alignment, a development from your previous work?
At the heart is the idea that organisations don’t have systems to manage strategy. This is primarily because they don’t have a framework to describe a strategy. What we’ve been able to do with the balanced scorecard is to solve that first problem of how you describe the strategy of an organisation. Our book, The Strategy Map, gives the way to describe a strategy, and then The Balanced Scorecard is about translating that into a measurement scheme. And then the third book, The Strategy-Focused Organisation says, take the measurement scheme and tie it to the way you manage your organisation, tie it to your budgets, tie it to your people’s objectives, tie it to their compensation, and align these around the strategy.
So, Alignment is an important piece of the system for managing strategy. The big issue that sits underneath the book has to do with organisation design. If you go back to the classical business school theory of strategy and structure, the argument is that structure follows strategy. Then, in 2000, we got a new economy forming which was structurally at odds with what we had had. Outsourcing, intellectual capital, being customer-centric, and all of these things, basically require different kinds of structures.
Structure is probably the biggest impediment to change. You can’t get an organisation to re-organise just to execute a strategy. But we have 60-odd companies in our hall of fame which have executed their strategies and used the balanced scorecard approach and very few of them re-organised in order to pull this off. Bob Kaplan and I started pondering why, if structure follows strategy, aren’t they re-organising?
And the answer?
They’re accepting the organisation as it exists, because there are reasons why it exists and there’s a lot of good in it. Rather than playing with the structure, they’re playing with the system. They’re defining a planning process that cuts across the organisation, they’re defining incentive compensation that cuts across the organisation. So everything about strategy management that we have observed in these successful companies, and written about, basically is a way to cut across the traditional power structures, to cut across the silos. Alignment is really the organisation approach, how do you execute strategy without re-organising?
The balanced scorecard has been hugely successful internationally, does it ever surprise you?
Of course if somebody described the way this has turned out, you’d really be surprised. My rule of thumb is to never look back, keep looking forward. Very few ideas catch on, so you look at it and say, why? You’ve got to depersonalise it. What is it about this idea? And I think that if an idea is going to have staying power it has to be an idea that’s at the right time and the right place. The right time was the new economy which made the measurement and management systems that we were using somewhat obsolete because they were siloed and hierarchical when the new economy required you to be holistic and cross-functional.
So there was a need and then the right place was the measurement system. The tool that every manager uses to organise their performance management programme is the measurement framework they put in place. Those two things came together and we came up with the idea of balancing financial and non-financial indicators.
The idea is commonsensical once you’ve heard it.
Yes. As somebody once said, common sense isn’t all that common. And, of course, the phrase was just right — balance, scorecard, it just hit it right, it said what it was. But I think what made it stick was the thinking underneath it. When it was first written, the idea of balance was, well, there’s four things and only one of them is financial. Another level of thinking has subsequently come to the fore and that is a cause and effect relationship among those four things. What it is really describing is how you create value.
Happy customers lead to happy shareholders. Then the question was, well, how do I please my customers? Well, you do it through processes, you do research and build better products, you service them better, and so forth. And then, finally, well, how do I get better processes? Well, that’s built on the skills of my people and confidence in the climate. A sound climate leads to good processes leads to happy customers leads to happy shareholders. This cause and effect model really has stood out over time. Companies are able to describe their strategies which they couldn’t do before — they were trying to manage strategies, unable to describe them, it’s like shooting in the dark.
Who came up with the phrase, the balanced scorecard?
Bob Kaplan and I had this research group that we were leading and it started with the objective of finding a better way to manage. US companies in particular, and Western companies in general, were getting really beaten badly by the Japanese, and there was a lot being written about short-term America and how we’re doing it to ourselves with this quarterly focus on financials. That was the front-of-mind problem. We were looking for a better way. Our first conclusion was that you can’t throw away the financials – that is the lifeblood – but you’ve got to somehow make it long term as well as short term. Balancing just came naturally to describe that. We’re balancing long term and short term, we’re balancing lead indicators with lag indicators, so it was a natural outcome. I can’t remember seeing a flash of light nor did it happen in the shower in the morning.
What about the international responses to the balanced scorecard. When you took it out on the road and introduced people to it, did the reactions vary from continent to continent?
Bain does this survey of the tools that managers use. The most recent one says that in the US and Western Europe, about 60 per cent of companies use a balanced scorecard. I think for Latin America it is something like 40 per cent or so, and in Asia about a third of companies claim to be using it. So there’s been a lag internationally. Now we have this balanced scorecard hall of fame with 70 companies in there and they come from every corner of the world.
There are some cultural assumptions that we’ve built into our approach — for example, that strategy is everyone’s job, that you should push strategy down to the front lines in the workforce. I had some questions about how this would go down in, let’s say, Western Europe where labour unions are stronger. Or how would it work in the more hierarchical societies in Latin America? What we found is that the approach is flexible enough to adapt to a cultural difference. So, if your approach is make strategy everyone’s job, well, it doesn’t tell you how to do that, it just says it’s important to bring the workforce into the process.
I can remember talking in South Africa and somebody put their hand up and said, I don’t know how that will work here in South Africa, because in my company 40 per cent of the workforce is illiterate. How can we educate them on the strategy if they’re illiterate? And before I stammered a reply, somebody put their hand up and said, look, we have used this approach, here in our company, and we have the same issue, 40 per cent are illiterate, but that doesn’t mean you can’t communicate to people, we always communicate to them, we communicate to them about safety and about work habits, and so forth, you just have to select the media. You can’t use traditional reading and writing as the way to communicate, but you can communicate, and we found it a significant pay-off by being open and explaining to people what you’re trying to do and the directions you’re going.
So they adapted it. It wouldn’t be the approach we would have used with the glossy brochures that many companies use whether in Japan or here, but they communicated the strategy to everyone in the organisation.
When you see a statistic like 60 per cent of companies are using the balanced scorecard, what’s your reaction? Are you deeply worried by this? Say 60 per cent are, in all likelihood, of those 80 per cent are doing so in a haphazard way you wouldn’t approve of, I suspect.
Exactly. Another estimate is that 50 per cent are doing it wrong. When we say the balanced scorecard we mean a system for managing strategy which uses the balanced scorecard as the organising framework. Fifty per cent or so of the companies that say they’re using a balanced scorecard are trying to do that, but 50 per cent are doing it in some other way. My worst nightmare is I’m going to wake up some day and see an article that says 70 per cent of balanced scorecard users fail, because that’s what happened to re-engineering.
With re-engineering, they said, I think, at one point that 80 per cent of American companies were re-engineering.
That’s right. Re-engineering started out with a sound basis. It was to do with restructuring, a process rather than a functional view of companies. But then you started seeing reports that re-engineering was failing. When somebody said re-engineering was failing no one was able to step in and say, this isn’t re-engineering, this is something else.
One of the things that we have done with the balanced scorecard as a brand is that we have sought to defend it by moving it forward, by basically maintaining the association with our own names, Kaplan and Norton, so first of all it becomes synonymous, and then building an organisation that is able to execute on the balanced scorecard the right way. That also allows us to learn from our clients what the right way is. So it’s a two-way street. You need to have that consulting organisation and you need to keep the idea moving forward.
I think with re-engineering they wrote the book and were probably overwhelmed by the response. With the balanced scorecard we started with the measurement framework then, as we began to see how organisations used it to manage strategy, we saw it was bigger than a measurement framework, it was a management system.
I think we did some good work around human capital and measuring its role in organisations, and then alignment and strategy maps are all builds on the original idea. They have allowed us to keep pushing it forward, making it more flexible, taking it into niches, and at the same time building a body of knowledge around it. The Balanced Scorecard Hall of Fame is why I sleep well at night. I don’t have that nightmare of a quote in a magazine saying 75 per cent of organisations do it wrong. In the hall of fame, while I don’t know what percentage they represent, there are over 60 companies that did it right.
They officially validate your idea.
That’s right. So no matter how many people fail, if I’ve got 60 companies from around the world, every industry, every niche, in the public sector, the private sector, that have done it successfully, then the message is clear. You can do it successfully, if you know how.
It’s been successful in the public sector as well. I know that the NHS in the UK have been using it.
The UK’s Ministry of Defence is in the hall of fame as are the Royal Canadian Mounted Police, the Royal Norwegian Air Force, and the US Army.
How is it used differently in the public sector?
The primary difference is the pay-off. In the private sector the pay-off is financial, it’s return on investment for the shareholders, the ultimate point of accountability. In the public sector, organisations are mission focused. For example, the Department of Commerce in the US is the economic development agency. Its mission is to invest in the economic development of distressed communities, either poor communities or communities that have had disasters. For the American Diabetes Association its mission is to improve the life and hopes of victims and potential victims of diabetes. Its pay-off is reducing the incidence of diabetes, extending the life of people who do have the disease, and so forth.
It is the highest level objective that’s different, but once you establish that strategy is strategy, you’ve got processes, you’ve got customers, you’ve got people, you’ve got technology, and you’ve got to put those all to work to achieve that high level objective, it is just the same as they do in a private sector company.
So there’s probably quite a lot of room for growth of the concept in the public sector?
In many ways the idea is better suited for the public sector in the sense that in the private sector you could probably get a little sloppy and still not lose control of your organisation, because ultimately the financial discipline will force you to get back together again. You’re always accountable to the shareholders. In the public sector you generally don’t have competition, but if you clarify your mission, then tie it to measures that then drive the actions of your organisation, this is very powerful.
The new discipline is to ask, How do I measure whether I’m achieving my mission? This really forces you to think this through. The language of measurement is very powerful here. If your job is to improve the lot of people who are susceptible to diabetes, how would you know whether you’re succeeding? How would you know all the money you’ve raised from donors is being well applied? There are other diabetes associations so maybe you can learn from others, but it’s not like being in consumer banking where you’ve got all kinds of points of reference, best practices and things like that available to you.
Companies are still criticised for their short-termism and overly emphasising shareholder value, so in many ways the things that instigated you or your thinking in the early 1990s actually still apply.
Yes, the quarterly report is still the life cycle in organisations, particularly in the US, and so the battle isn’t won at all yet. I talked to several executives when we went through the downturn in 2000 to 2002. When the bubble burst there were a lot of organisations that were suddenly off the growth path, back in survival mode and cutting costs. I asked these CEOs, did you throw out the balanced scorecard when you had to cut costs? Is the balanced scorecard just a growth tool? Their response was pleasantly surprising. They said there are forces outside of their control pushing on them. The board of directors, for example, wants to see a coherent programme to reduce costs. Now, if they didn’t have the balanced scorecard, essentially what they would do is go through budget-line items and everything that’s discretionary would be cut, including half of the initiatives that are required for their long-term strategy. I think it’s proven flexible enough to allow an organisation to remain balanced even when there are short-term pressures.
One of the things we’re working on right now is the link between strategy and budgeting. There are some inconsistencies in these two processes, but at the end of the day a strategy has to get funded if it’s going to work. What happens is that the architecture of the budgeting system is so counter to the architecture of strategy that they’re incompatible from the beginning. For example, a strategy is visionary, it’s about setting stretch targets — we want to double sales in three years, or something like that. Budgeting, on the other hand, is conservative. You don’t want your budgets saying I’m going to double sales in three years because maybe that’ll happen, maybe it won’t. Budgets are built around a hierarchical departmental architecture. Strategy says, let’s do it, let’s train people, let’s build computer systems; budgets say, well, training programmes we expense, computer systems we capitalise. Strategy systems say, we’ve got to do all these things together, if we train people and don’t give them new technology it’ll fail, and if we give them new technology and we don’t train them it’ll fail, we’ve got to do both. Budgeting systems say, well, that goes in IT, and that goes in HR, and you guys manage those line items over there. When you try and put these things together they just don’t work structurally.
So, we’ve been working with this idea which builds on the economic concepts of Opex, Capex, and we call it Stratex. This is actually an idea that came from one of our research companies in Finland. The idea is that in your strategic management system you isolate the initiatives and investments that you need to support the strategy. You build portfolios, so your strategy might be broken into three themes, each of which has a portfolio of required investments. The portfolio is a combination of HR, investments, and IT, so the portfolio allows you to be cross business. Then when you map it over into the budget you have a new line item, called Stratex — strategic expenses — and it’s treated and managed separately, just as you manage R&D separately. Stratex is the responsibility of the executive committee of the organisation. They are the ones who approve the budget, who’ll make the decision to reduce it if times are tough, and so forth. But it’s not something that’s going to get mis-managed because the accounting convention forced it to be spread everywhere in the budget and basically lost. The interesting idea here – this is why it’s not going to happen too easily – is creating a new concept within the budget, so we’ve got to get CFOs to see the value of that, and then being able to isolate your strategic investments. To manage this as a single entity, as part of your financial management process, that’s the new ground.
Do you see yourself as an educator, or a consultant, or an entrepreneur?
Well, it is a combination of those things. I have a PhD in business from Harvard Business School, and so I have that framework of thinking of ideas and bodies of knowledge, and my partner Bob Kaplan has spent all of his career in academic institutions. So that’s one important part of the grounding. And then, secondly, I’m a consultant, and solve problems, and ultimately, I would say that most of what I know that’s of value in this journey has come from working with clients. The market place is an important mechanism. Everybody has got good ideas, but one definition of a good idea is one that somebody finds valuable enough to pay money for it. That’s an idea that has value. Consulting forces you to solve real problems under the pressure of having to deliver – where there’s a business model, an economic transaction – and that brings out the best, I think, in problem solving. And then, thirdly, having an organisation – ideas are bigger than individuals – and an organisation allows you to do this many times, allows you to broaden the scope. It’s allowed us to participate in these markets around the world, so we understand what’s going on in Korea or in Brazil, or Europe. And so you put those three things together, and it’s probably the secret to being able to grow a brand, and the ideas between them. If you took any one of them out, if you didn’t have academic roots you wouldn’t be thinking about the body of knowledge and trying to develop and to train organisations. If you weren’t a consultant you wouldn’t really see the ideas tested in detail. And if you didn’t have an organisation you just wouldn’t have the scope to be able to be relevant. It’s those three things, and their interplay.
Then I’d say the fourth thing, that I might humbly say I do a little of, is research. If you’re working at the leading edge you have to be able to do research in some way to keep your ideas moving forward.
Put those four things together and you have a recipe for developing intellectual capital that is going to work in the market place and help solve real world problems and create real world value.
In ten years time where do you see the balanced scorecard?
I have a crystal-clear vision of where it could go. I use the quality movement as my point of reference. When you think of quality, and ideas like that, these are ideas that move through a system, they move through the society, and it takes 25, 30 years or so. Quality is most analogous because it’s an idea that has statistical foundations and which created a competitive advantage for companies that mastered it, and, ultimately, it became a discipline in organisations that required special knowledge, certification, and so forth, and leadership at the executive levels of organisations. So I see a lot of parallels to the balanced scorecard in strategy management. It’s an idea, at the right time and in the right place; it’s creating competitive advantages for organisations; and it’s not easy to manage strategy — nine out of ten organisations fail to do it — so almost by definition you have a competitive advantage.
This means that organisations need to pay attention to this because, like quality, it does give you an advantage, and it can be learned. In studying these successful companies, we’ve seen that they use common management practices and we’ve chronicled many of them. And so it can be learned, if you set out to do it, just like quality. Somewhere down the line I would love to be able to certify that these people have black belts in strategy management because they do these things, then I’ll never see that article about 70 per cent failing because we’ll know that this set of people, whatever we call them, strategy management professionals perhaps, have been certified in an approach that we know works. And then at least we’re talking about the same phenomenon.
So I think that I can see us being 70 per cent of the way there, now, we’re seeing this idea of the office of strategy management emerge, we’re seeing the discipline and the groups of people within organisations come together that have mastered these disciplines. Our goal is to continue building this capability, and our objective as an organisation is to help companies build the competencies themselves, as opposed to being a consultant that does it for you, we do it with you but with the stated goal of having a very well-defined competency in your organisation, so that strategy management will survive the current leader and just become a standard way of managing a business.
I think there are lot of forces that we’ll see coming together over the next three to five years that might end up with this looking very much like the quality movement. Logic says you have to manage strategy. Everybody has a strategy. The job of those at the top is to execute the strategy and if they don’t execute the strategy they shouldn’t have the job. But there is no process to manage it, and that awareness hasn’t dawned on a lot of executives because they never had it hence they can’t miss it. Our job is to bring that message to the world.
Robert S Kaplan and David P Norton, The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, 1996.
Robert S Kaplan and David P Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Competitive Environment, Harvard Business School Press, 2000.
Robert S Kaplan and David P Norton, Strategy Maps: Converting Intangible assets into Tangible Outcomes, Harvard Business School Press, 2004.
Robert S Kaplan and David P Norton, Alignment: using the Balanced Scorecard to Create Corporate Synergies, Harvard Business School Press, 2006.