There is a new twist to the management truism “you can’t manage what you can’t measure”. In an era of uncertainty in business environments and paranoia about corporate governance, the phrase has been adapted to read: “You can’t account for what you can’t measure.”
Finding a watertight way of measuring business performance – or indeed of spotting regulatory compliance problems – has never been easy. But over the past two to three years one technique has progressively come to the fore, showing itself as the foundation for business performance management implementations at some of the world’s most successful companies.
Balanced scorecard, an approach developed by economists Dr Robert Kaplan and Dr David Norton in the early 1990s, has been called one of the most influential ideas of the last 75 years, and, even in its relevant nascence, is recognised by analysts such as Gartner as the most widely adopted performance management methodology.
The aim is simple to state: it takes a business’ strategic objectives and translates them into a set of performance measures designed to meet those objectives. Unlike many other business management techniques that focus largely on financial metrics, scorecarding extends into all parts of the organisation. So scorecards can be established to measure the cost controls
within a business unit, or determine a sales team’s ability to positively influence customer satisfaction levels, or even to see how well a logistics team can get the trucks out.
As Kaplan and Norton describe it, the goal of such an approach is to provide an environment that, “like the dials of an airplane cockpit, gives managers complex information at a glance.” There is benefit further down the hierarchy too: scorecarding enables employees to see just how their decisions and actions affect the overall strategy, and to establish their value and accountability.
Over the past two years certain factors have come together to make scorecarding much more relevant.
It first emerged in 1992 with the publication of a seminal paper by Kaplan and Norton in the Harvard Business Review. But, observes Pamela Eichhorst, product marketing director for scorecardng at business performance management software company Hyperion Solutions, in its first decade the approach did not take off as widely as some of the analysts predicted.
Gartner, for one, predicted that 40% of Fortune 1000 companies would have implemented the balanced scorecard philosophy by 2000. It was probably out by an order of magnitude.
The reason for the slow take-up was clear, says Eichhorst: “Scorecarding had been viewed only at a strategic level, and was not tied into the operations side of the business. The software was a ‘nice to have’. That has all changed with the downturn in the economy and the advent of corporate compliance issues,” she says.
All kinds of companies are now embracing scorecarding: KLM Royal Dutch Airlines credited its recent return to profitability, in a harsh economic climate, to the adoption of a new management style based on scorecarding. Another enthusiast is Hilton Hotels, which says balanced scorecard has become “an integral part of [the company’s] operating philosophy”, with over 400 scorecards in use by over 3,000 users at 300 locations. Meanwhile, strategy consultancy Booz Allen Hamilton says scorecarding is the foundation for its expansion plans (see box: In practice).
Many companies started tracking their scorecarding initiatives using Excel spreadsheets – and many still do – but as their requirements have grown in sophistication they are graduating to automated scorecarding packages from companies such as Hyperion, Corvu, Comshare, Temtec and QPR Software, as well as offerings from business intelligence vendors such as Cognos and SAS.
As that signals, the era of evangelism for scorecarding is coming to an end. “Two years ago scorecarding was often run and promoted by a department head. Now those driving projects are much more senior – the CEO, the head of finance,” says Andrew Smart, COO for EMEA at business performance management software vendor Corvu. “And in such cases we have seen enterprise-wide roll outs.”
Scorecarding is also becoming an integrated part of many business performance management suites, tying in with budgeting and planning systems, analytical capabilities and corporate dashboards.
Says IT market watcher Meta Group: “We have seen many organisations deploying analytic dashboards and scorecards within the past year to provide access to key performance indicators for the business, and during 2003/2004 we expect such deployments to mushroom and business performance management efforts to be initiated.”
While early projects sought to measure only the highest level metrics, companies are now taking scorecarding to a very granular level.
“The dynamic of organisational accountability has shifted from a handful of senior executives monitoring business activity to company-wide performance accountability,” says Nazhin Zarghamee, chief marketing officer at Hyperion. “As a result, more individuals need access to real-time, actionable information. Management dashboards provide a single, customer view of relevant information, empowering individuals to make strategic and operational decisions based on consistent and accurate information.”
Analysts warm that Kaplan and Norton’s ideas should not be followed slavishly. Originally the academics suggested that the balanced scorecard focuses enterprise analysis on four key ‘perspectives’: financial, customer, internal and learning and growth. But many projects that followed these key measures too closely have failed.
“What we see a lot now is people moving away from the [the strict implementation of] balanced scorecard to more of a dashboard and key performance indicator approach, where different departments or teams are following the strategy defined by the board but setting up their own scorecards to match that,” says Eichhorst at Hyperion. “You need to give the flexibility to individual business units or geographies – because they might be dealing with different competitors, different products.”
The model is being refined, but momentum behind scorecarding is there. “For the last four or five years, there has been a reluctance to replace spreadsheets with scorecarding software. Now scorecard software is being used as the starting point of the whole management process, giving management indicators when something is going right or wrong,” says Eichhorst.
With organisations such as Hilton Hotels and several others already tying management salaries to the balanced scorecard, that is a situation that concentrates the mind.