The balanced scorecard first came to the attention of managers at the beginning of the 1990s with the publication of the Harvard Business Review article "The balanced scorecard," January/February 1993, by David Norton, co-founder of the consulting company, Renaissance Solutions, and Robert Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School.
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?
By focusing energies, attention and measures on these dimensions, companies become driven by their mission rather than by short-term financial performance.
Over a decade later, the balanced scorecard has spawned an industry. Kaplan and Norton's books 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.
Bob Kaplan and I were leading a research group and we started with the objective of finding a better way to manage. US companies in particular, and Western companies in general, were being outperformed by the Japanese. There was a lot being written about short-term America and how the US was making it worse for itself with the 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 have got to somehow make it long term as well as short term.
Balancing just came naturally to describe that. We are balancing long term and short term, we are balancing lead indicators with lag indicators, so it was a natural outcome.
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 are 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, 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.
Exactly. One 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.
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.
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.
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.