The Balanced Scorecard: Get Smart and Get Control
July 1 1999 by Paul Rolph
You’re at the helm of a $1 billion global company with more than 5,000 employees. You’ve received internal projections for the company’s fiscal third quarter and they’re less than exciting. Pretty soon, Wall Street analysts will be knocking on your door, and when the official numbers are published, in all likelihood the impact will be on your stock price and corresponding market cap.
What has happened? The strategy seems sound, you’ve implemented corporate reengineering programs as well as automated back-office processes with enterprise resource planning (ERP) systems from vendors like SAP and PeopleSoft. Sure, you’ve known for a month that a couple of departments could be streamlined, but the only indicators you’ve been able to use to establish goals have been based on historical bottom-line performance and guesses at the future. What can you do?
Enter the Balanced Scorecard, a management philosophy that anticipates scenarios like the one above by using key leading and lagging indicators to measure a company’s performance. The CEO in this example could have used a scorecard to see which departments weren’t profitable and what measures would help streamline operations so that shareholders stayed happy. This CEO ultimately found himself in a sticky situation because of a problem that other executives have encountered: Most companies fail to turn executive strategy into action. The Balanced Scorecard solves that problem.
Executives can use the scorecard like an airplane’s control panel to see a comprehensive picture of the company’s health and effectiveness in achieving its goals. The Balanced Scorecard builds that picture with financial and non-financial measurements, such as customer loyalty, quality, revenue, and employee knowledge.
The Balanced Scorecard is rent from typical executive information systems because it also targets e indicators to give executives a forward looking approach to analyzing a company’s health. In doing so, a balanced scorecard allows executives to clearly view how well corporate strategy is translated into action. Executives can see cause-and-effect relationships that demonstrate how every objective selected should be part of a chain of events that leads to the corporate goal. Every measure an executive chooses while viewing a scorecard can ultimately be related to financial results, which helps executives study budget forecasts in relation to corporate strategy.
An accurate view of these factors enables management at such companies as Principal Financial Group and Fortis to measure overall performance rather than focusing exclusively on short-term, bottom-line results. The result is millions of dollars in impact both on the top and cost lines. Mobil Corp.’s U.S. Marketing and Refining division, a multi-billion-dollar, 7,000-person business, was ranked last in its field in relative profitability in 1993. Two years after implementing a scorecard, Mobil earned top ranking in its field for profitability.
CIGNA Property & Casualty and Brown & Root Engineering’s Rockwater division both experienced the same kind of turnaround after implementing scorecards. CIGNA went from a $400 million loss in 1993 to profitability and an 80 percent stock increase by 1995, and Brown & Root climbed out of financial woes and into the No. 1 spot in its niche for profitability and growth after using a scorecard. The U.S. division of exploration and production of a large oil company, which has seen percent decline in income over east five years, expects its recent Balanced Scorecard initiative to add $350 million to its bottom line over the next 10 years.
Yet one of the key benefits of the Balanced Score rd d by its inventors, Robert Kaplan and David Norton, is its ability to establish a communication system that bridges the gap between goals set by high-level executives and the frontline workers whose performance is ultimately responsible for reaching those goals. By gathering and processing information from a company’s existing computer systems, the Balanced Scorecard determines whether the company is meeting its goals and delivers a grade along with a qualitative assessment that everyone can view to see if the company is moving in the right direction.
A properly conceived Balanced Scorecard incorporates input and feedback from top-level executives down to the front-line workers in a company to set goals in four areas: customer satisfaction/loyalty, internal business processes, learning and growth, and financials. It then assigns measurable metrics to each goal. The goal receives a pass/fail grade which analytical systems calculate by extracting and processing data from existing systems. But to have this level of a Balanced Scorecard solution, the system must be automated so that ground-level data such as delivery times, sales figures, length of customer service calls, and similar information can be translated into a Balanced Scorecard summary that shows which goals the company is and is not achieving.
Until recently, the scorecard has been a paper- or spreadsheet-based tool. Everyone from executives down to front-line workers using a scorecard would conduct their analysis and incorporate their feedback on paper. It is a painstaking, costly, and time-consuming process. Automating the scorecard allows organizations to incorporate data from such diverse systems as payroll, inventory, sales, and human resources with minimum effort. Incorporating all of that critical data into a scorecard-based analysis of the company allows for a more comprehensive look at performance and ultimately saves the company money in time spent manually loading all of the data into spreadsheets.
Fortis and Principal Financial Group are examples of two companies that have used Balanced Scorecards to communicate executive-level strategy to the workforce and to analyze performance based on a variety of measures for different departments.
FORTIS PUTS BALANCED SCORECARD TO WORK
As one of the largest general banks and insurers in central
The Balanced Scorecard now gives controllers and managers an overall view of their business units, each of which is comprised of several divisions. According to Fortis Corporate Controller Henk Venema, the Balanced Scorecard makes information available to management in a structured and uniform way throughout the entire organization. That’s important because it ensures that everybody speaks the same language, so executives can now make valid comparisons between business units.
The Balanced Scorecard also makes it easier for the business units to share information, such as business practices that have proven effective in different divisions. With the Balanced Scorecard operating in conjunction with Fortis Excellence, controllers and managers can more easily develop comprehensive, effective business plans. At the outset, Fortis controllers and managers will have access to the Balanced Scorecard. As the company continues to grow worldwide, it plans to increase the number of users in the near future. To initiate these ambitious plans, Fortis purchased a worldwide site license of the Renaissance Balanced Scorecard with a Web rollout.
PRINCIPAL FINANCIAL, GROUP GRINS BALANCE
The Principal Financial Group uses a Balanced Scorecard as a communications tool to share corporate goals and objectives with nearly 16,000 employees worldwide. The Principal Financial
Group has deployed its Balanced Scorecard over a client/server network to senior executives and employees with the intent of eventually switching to a Web-enabled environment. The Principal Financial Group measures its overall performance using scorecards from each of its many units, which focus on areas ranging from insurance to investment to small business benefit plans.
According to Principal Financial Group CEO David Drury, the company plans to tie all the scorecards from these units into one central repository with a Renaissance Balanced Scorecard. This system will simplify management because it compiles information such as last month’s strategic objectives, last quarter’s earnings, and written comments in one format. Senior officers in the corporate strategic working group can better discuss strategy effectiveness by reviewing and discussing the scorecard analyses beforehand, so they can focus on future strategic issues during the session.
The firm has also tied the Balanced Scorecard to compensation/bonus programs. This is an increasingly popular use of a scorecard application within medium to large corporations because it can help drive varying incentive programs by keeping people focused on core objectives.
Executives can also use Balanced Scorecards to develop more accurate and compelling CEO reports. These reports are based on either summarized or detailed scorecard analysis available with some automated scorecard applications. These automated Balanced Scorecards can be easily integrated with Enterprise Resource Planning and other IT systems and can be deployed in conjunction with either data warehouses or data marts.
THE BOTTOM LINE
The Balanced Scorecard can help you to steer your company in the direction you and the board of directors choose by helping you determine how to tie corporate objectives to performance. Automating the Balanced Scorecard facilitates strategic planning based on performance measurement by taking much of the work out of integrating data from different departments’ scorecards and compiling it in one format. Rather than focusing on short-term financial results, which can blind management to internal inefficiency and lead to continued revenue losses, chief executives can benefit by using a Balanced Scorecard as a strategic management system for translating strategy into action at all levels of the enterprise. By balancing and managing an organization’s scorecard, executives can implement an automated solution to effectively implement their strategy and ensure accountability and control across the organization-leading to better bottom lines and higher shareholder value.
Paul Rolph is president and chief executive of London-based Gentia Software plc ADR, a supplier of analytical applications that enable clients to maximize their competitive position through enterprisewide deployment of strategy management, performance measurement, and operational analysis solutions.