John K. was one of the more efficient store managers in his region. He ran a smooth operation with high per-person productivity. His shelves were properly stocked, accidents were rare, and his store was always clean and well-organized.
Customers, however, didn't always feel welcome. John was more focused on making the supply-chain process work than on delivering excellent service and helping his customers. Because of this, he was one of the many managers who kept his CEO awake at night. The organization's strategy was to increase market share through superior customer service. But how, the CEO asked himself, could he communicate and reinforce that strategy with managers such as John in a way that would actually change their behavior?
Robert Kaplan and David Norton published a now-famous report that addressed the dilemma faced by CEOs like this one. Their 1992 Harvard Business Review article, "The Balanced Scorecard: Measures That Drive Performance," proposed a new approach to managing performance. It broadened performance measures beyond just financials to include process as well as customer and employee perspectives. While some companies "balanced" their performance metrics before, this article brought intense focus to formalizing that process.
Today, Kaplan and Norton's balanced scorecard process starts by translating a company's mission and vision into a detailed strategy map -- a conceptual model outlining the factors that drive performance. Next, specific objectives and measures are developed and balanced across financial, customer, internal process, and learning and growth perspectives. Those objectives are then used to drive strategy-specific actions across the organization. Since Kaplan and Norton introduced these ideas in 1992, many companies have attempted to adopt and execute them. According to the Balanced Scorecard Collaborative, no less than 60% of Fortune 500 companies use the balanced scorecard in some form.
Some surveys suggest it's working, too. The Institute of Management Accountants conducts an annual Performance Management Survey among users and nonusers of the balanced scorecard approach. The data suggest that users are far more pleased than nonusers with the effectiveness of their performance management process -- specifically when it comes to their ability to support management's business objectives and initiatives and to communicate strategy to their employees.
Still, many companies aren't seeing the impact they desire. They try the balanced scorecard approach but don't see the expected returns -- or worse, the organization becomes more bureaucratic instead of more focused. Why does this happen?
The key elements
The Gallup Organization has observed that when companies implement a balanced scorecard approach, four elements are vital -- and too often, missing. Those elements are focus, validity, connectivity, and integration.
Organizations use the balanced scorecard approach in varying degrees, from the full methodology that Kaplan and Norton prescribed to basic scorecards that include some customer, process, and employee-related measures. Regardless of where companies are on that continuum, too many of their scorecards are missing one or more of the four key elements.
This article covers the first two elements: focus and validity. Part Two of this series will review connectivity and integration.
Many companies develop scorecards that are chock full of performance metrics. When you add up all the metrics, scorecards sometimes contain 15 to 20 different measures for a given workgroup or manager.
Although each measure may seem important, scorecards that include too many metrics fail to provide managers with any real focus. The scorecard ends up including every element the team could manage, without distinguishing what's essential for success and what's included because it's easy to measure.
Great companies have tremendous focus. Throughout the organization, employees know the few vital things that matter -- that make the difference between an organization that survives and one that thrives. For instance, many things are important and relevant for a typical manager, but the essence can often be distilled to building a strong team of associates and focusing them on delivering a superior customer experience. It sounds simple, but giving managers and employees just two overriding priorities provides more clarity than giving them a complex mix of processes, metrics, and initiatives. So ask yourself: Is your organization's scorecard clear about the outcomes that really matter? If not, find the essentials -- and eliminate the rest -- to increase your focus.
Many balanced scorecards contain metrics that lack validity. Organizations don't always validate whether their measures drive desired business success in a meaningful, reliable way. When this happens, organizations risk asking managers to focus on measures that don't really matter. Or companies are misled into assuming they've made progress when they haven't. The problem of a lack of validity often arises when organizations get into the following two areas:
- Evaluating intangibles. Balanced scorecards often attempt to evaluate not-so-tangible areas such as values, engagement, teamwork, or partnerships. These are important human capital dimensions that companies want to manage because they drive desired financial and operational performance metrics. Since these objectives need to be measured, organizations must find ways to quantify them. And most companies don't get that right.
To measure these intangible elements, companies often rely on conventional metrics, such as employee and customer satisfaction measures, that don't always link to real financial outcomes. Or companies may try to measure these dimensions by asking managers to develop and rate employee competencies. But like conventional metrics, this approach may also measure the wrong things. Many studies have shown that manager ratings are too subjective and are more a reflection of the manager's relationship with a given employee than an accurate reflection of the competencies that are being rated. (See "The Four Disciplines of Sustainable Growth" in See Also.)
- Creating task-oriented employee objectives. Companies often measure employees on individual objectives, or "milestones," that are to be completed by a certain date. For some organizations, evaluating employees based on their success in completing tasks or activities actually reduces their flexibility. In one company, for example, employees had to meet objectives in three areas on their balanced scorecard -- employee, customer, and shareholder. Managers would determine the activities and milestones. Then they would evaluate employees annually to determine which milestones had been met. Not only did this approach force employees to focus on "inputs" instead of "outcomes," it made the company more bureaucratic and less agile. Employees refused to work on important initiatives because they weren't part of their milestones or scorecards. What's worse, employees received milestone-related bonuses regardless of whether completing these tasks had any real impact on the business.
Companies need validated measures that reflect the performance outcomes that drive the organization's long-term financial success. But too many companies settle for measuring activities, not outcomes. And because the measures usually end up defining what actually gets done, the task of getting the metrics right shouldn't be taken lightly.
Focus and validity ensure that a balanced scorecard contains vital metrics that will move the organization in the right direction. For performance measures to have the desired impact, however, two more things must happen. First, each manager and workgroup must be connected to their scorecard in ways they understand and can influence. Second, scorecards must be integrated into a company's performance management practices or they won't change managers' or employees' behavior. I'll cover these two elements -- connectivity and integration -- in Part Two of this article.