Balanced Scorecard Diagnostics E-Book

Paul R. Niven

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 401

Veröffentlichungsjahr: 2010

Beschreibung

The complete guide to analyzing and maximizing a company's balanced scorecard Presenting the next step for balanced scorecard implementation, Balanced Scorecard Diagnostics provides a step-by-step methodology for analyzing the effectiveness of a company's balanced scorecard and the tools to reevaluate balanced scorecard measures to drive maximum performance. CEOs, CFOs, CIOs, vice presidents, department managers, and business consultants will find all the essential tools for analyzing a balanced scorecard methodology to determine if it's running at maximum performance and for seamlessly implementing changes into the scorecard. Paul R. Niven (San Marcos, CA) is President of the Senalosa Group, a consulting firm exclusively dedicated to helping businesses get best-in-class performance. He is the author of two successful books, Balanced Scorecard Step-by-Step (0-471-07872-7) and Balanced Scorecard Step-by-Step for Government and Nonprofit Agencies (0-471-42328-9), both from Wiley.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

WHAT YOU WILL FIND IN THIS BOOK

NOTES

Acknowledgements

CHAPTER 1 - The Current State of the Balanced Scorecard

THE ROAD AHEAD

WHY THE BALANCED SCORECARD HAS RISEN TO PROMINENCE

THE BALANCED SCORECARD

IS THE BALANCED SCORECARD HERE TO STAY?

NOTES

CHAPTER 2 - First Things First

WHY BALANCED SCORECARD AND WHY NOW?

WHO OWNS THE BALANCED SCORECARD?: EXPLORING EXECUTIVE SPONSORSHIP

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 3 - Before You Measure

YOUR BALANCED SCORECARD TEAM

BALANCED SCORECARD TRAINING

GETTING THE WORD OUT: COMMUNICATION PLANNING

TERMINOLOGY AND THE BALANCED SCORECARD

YOUR BALANCED SCORECARD IMPLEMENTATION PLAN

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 4 - Strategy Maps

DEVELOPING THE STRATEGY MAP

PERSONALIZING YOUR STRATEGY MAP

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 5 - Measures, Targets, and Initiatives

PERFORMANCE MEASURES

ADDING MEANING TO MEASUREMENT THROUGH THE USE OF TARGETS

MAPPING AND PRIORITIZING ORGANIZATIONAL INITIATIVES

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 6 - Cascading the Balanced Scorecard to Drive Organizational Alignment

DEVELOPING IMPLEMENTATION PRINCIPLES FOR CASCADING SUCCESS

UNDERSTANDING THE HIGHEST-LEVEL BALANCED SCORECARD

CASCADING IS BASED ON INFLUENCE

REVIEWING CASCADED BALANCED SCORECARDS

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 7 - Key Balanced Scorecard Process Linkages: Budgeting, Compensation, ...

STRATEGIC RESOURCE ALLOCATION: THE BALANCED SCORECARD AND BUDGETING

LINKING PAY WITH PERFORMANCE: THE BALANCED SCORECARD AND COMPENSATION

THE BALANCED SCORECARD AND CORPORATE GOVERNANCE

SELF-ASSESSMENT QUESTIONS

NOTES

CHAPTER 8 - Sharing Balanced Scorecard Results: Reporting and ...

REPORTING BALANCED SCORECARD RESULTS

THE STRATEGY-CENTERED MANAGEMENT MEETING

SELF-ASSESSMENT QUESTIONS

APPENDIX 8A: CHOOSING BALANCED SCORECARD SOFTWARE

NOTES

CHAPTER 9 - Building the Balanced Scorecard at Aliant, Inc.

POURING A FOUNDATION FOR BALANCED SCORECARD SUCCESS

ALIANT’S STRATEGY MAP, PERFORMANCE MEASURES, TARGETS, AND INITIATIVES

CASCADING THE BALANCED SCORECARD TO BUILD ORGANIZATIONAL ALIGNMENT

REPORTING BALANCED SCORECARD RESULTS

EVERYBODY WINS: LINKING THE BALANCED SCORECARD TO INCENTIVE COMPENSATION

ALIANT’S BALANCED SCORECARD RESULTS

NOTES

Index

This book is printed on acid-free paper.

Copyright © 2005 by Paul R. Niven. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Niven, Paul R.

Balanced scorecard diagnostics : maintaining maximum performance /

Paul R. Niven.

p. cm.

Includes index.

ISBN-13 978-0-471-68123-7 ISBN-10 0-471-68123-7 (cloth)

1. Organizational effectiveness—Measurement. 2. Performance—Measurement.

3. Industrial productivity—Measurement. I. Title.

HD58.9.N578 2005

658.4’01—dc22

2004025807

To the many organizations, especially those I am privileged to have worked with, dedicated to the use and ongoing evolution of the Balanced Scorecard.

Preface

The Balanced Scorecard drumbeat has grown increasingly loud and clear over the past 14 years, supplying a soundtrack of performance management wisdom to accompany us on our journey into the new and uncharted territory of the knowledge economy. The tool’s beginnings were humble enough, based on the notion that our traditional performance measurement systems—featuring an overwhelming reliance on financial metrics—were ill-suited to meet the demands of a modern business world characterized by value creation stemming from intangible assets such as employee know-how, deep customer relationships, and cultures capable of innovation and change. The notion was simple, but the ramifications profound. Organizations around the globe quickly began to embrace the Balanced Scorecard system. The idea of four distinct yet balanced perspectives of performance resonated with an enthusiastic audience weaned on shaky financial yardsticks used to quantify results for the past hundred years.

Co-created by Robert Kaplan and David Norton, the Balanced Scorecard has grown tremendously both in stature and adoption since its inception; it has been hailed as one of the 75 most influential business ideas of the 20th century and relied on in thousands of organizations spanning every conceivable type and size across the globe. It began as a measurement system, translating an organization’s strategy into an interconnected set of financial and nonfinancial measures used to communicate strategy, build alignment, inform decision making, power performance management, and prioritize resource allocation. The early adopters of the model derived benefits from this measures-based application but then took it to another level by forging linkages between the Balanced Scorecard and critical management processes such as budgeting, compensation, and, more recently, corporate governance. With that, the label of strategic management system was thrust on the Balanced Scorecard, and its legions of practitioners continued to grow. With the advent of strategy maps in the late 1990s, Kaplan and Norton wrote yet another innovative chapter in the deceptively simple creation’s life, and it gained a place in the pantheon of management concepts.

But wait, stop the music. Recent findings suggest that as many as half of all Balanced Scorecard users aren’t achieving the results they hoped for, and a significant number still rate their performance measurement systems as “adequate.”1,2 So where have we gone astray? Is the Balanced Scorecard system fundamentally flawed, or are the application and implementation practices of certain organizations resulting in these unflattering statistics? This book purports that the Scorecard system remains a robust framework, very capable of helping organizations navigate the challenging seas they face in an ocean of competition and changing dynamics. If anything, the theoretical constructs on which the model is based have grown stronger, as evidenced by the many enhancements made to the model over the past years: from measurement to strategic management to communication and strategy execution.

The trouble, I would posit, lies in the methods used to implement the Balanced Scorecard. Many organizations have been lured by the seductive simplicity of the Scorecard model, believing it could be easily implemented and produce breakthrough results with a minimum of care and feeding. Unfortunately, that is not the case, as the Balanced Scorecard above all other descriptors represents a change initiative: a change in the way you measure, and if utilized to full advantage, a change in the way you manage. As we all know, change is difficult, and hence it is not uncommon for organizations to struggle during their Scorecard implementation period and ultimately question the success of their decision.Troubled implementations stem from any number of deficiencies: a lack of executive sponsorship to reinforce the Scorecard’s value within the organization, tired metrics reflecting the past with no regard to the drivers of future success, and management systems that continue to reward unbalanced, largely financial, performance, to list but a few. This is a high-stakes game with significant implications for your success; organizations spend thousands of hours per year on their performance management systems, and therefore they must derive payback from this enormous investment of human and financial resources.

I wrote my first book, Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results (Wiley, 2001), to fill a perceived void between Balanced Scorecard theory and practice. Once again I sense an emerging void—between those questioning the efficacy of the Balanced Scorecard, based on unsuccessful implementation attempts, and what I perceive as the reality: that the Balanced Scorecard framework remains sound, but must be instituted with rigor and discipline if you expect to garner results.This book has been written to provide the tools and techniques necessary to ensure that you’re maximizing the benefits of your Balanced Scorecard system.

Over the past 10 years, first as a practitioner and later as a consultant, researcher, and author, I’ve had a front row seat from which to view the growth of the Balanced Scorecard from New Age measurement device to powerful communication tool to transformative strategic management system. Working with organizations on several continents, I’ve witnessed highly successful Balanced Scorecard programs built to withstand the considerable vicissitudes of our challenging markets, and those whose foundation is so weak that a subtle wind of trouble could send it toppling down.Those experiences as a participant observer revealed several implementation practices I deem as essential if you hope to effectively install the Balanced Scorecard and have it produce the breakthrough results it has generated for many well-chronicled success stories. Those essentials form the basis for this book, and I believe they are capable of both transforming troubled Scorecard implementations and further strengthening successful initiatives.

WHAT YOU WILL FIND IN THIS BOOK

Breaking new theoretical ground in the Balanced Scorecard field was not my purpose in writing this book; that task is proficiently attended to by many scholars and researchers pushing the academic envelope of the framework. My aim is to provide you with time- and field-tested principles you can use to assess your Balanced Scorecard implementation, along with ideas and recommendations for building a system that will provide results today and sustain that success for many years to come.

The nine-chapter text begins with an examination of the current state of the Balanced Scorecard framework.You’ll learn why it has risen to such heights of prominence, receive a refresher course on Scorecard fundamentals, and have the chance to ponder whether the Balanced Scorecard is here to stay. Any guesses as to my answer? You’ll have to read on to find out. Chapter Two is titled “First Things First,” and examines the foundational elements that must be in place if you hope to effectively employ the Balanced Scorecard. Included in the discussion are determining why the Scorecard is right for your organization and the critical importance of executive sponsorship to this and any change initiative. At the end of Chapter Two, and each succeeding chapter, you’ll find self-assessment questions that can be used to critically examine your implementation efforts. I encourage you to take the time to carefully reflect on these queries and use them as the basis for group discussions focused on propelling your Scorecard initiative forward. The theme of “Before You Measure” continues in Chapter Three, as we delve into a critical examination of your Balanced Scorecard team, training and education regimen, and communication planning.

Chapter Four signals a dramatic transition from laying the groundwork for Scorecard success to reaping rewards through the development of a strategy map. You’ll be provided with provocative questions you can apply to the objectives appearing in each of your four perspectives and will also discover how personalizing your map can often spell the difference between user apathy and acceptance. The chapter also supplies diagnostics to review the number of objectives on your map and examines the cause-and-effect linkages that tell your strategic story. Measures, targets, and initiatives are the subject of Chapter Five.Testing your current performance measures, questioning the number of measures appearing on your Scorecard, and the vital concept of using measure results to learn—not punish—will all be extensively covered. Many organizations find it difficult to set appropriate targets, thus you will find direction on target setting and sources of target information. The chapter concludes by reviewing how initiatives may be mapped to Scorecard objectives, ensuring that your resources—both human and financial—are directed toward the execution of strategy.

For many organizations, the high-level Corporate Scorecard is simply the first in a series of aligned Scorecards providing all employees with the opportunity to demonstrate how they contribute to overall results. This concept of cascading is the topic of Chapter Six. Cascading principles will be supplied, along with tools to gauge the degree of alignment among Scorecards spanning your organization. In Chapter Seven, we examine the linkage between the Balanced Scorecard and budgeting, compensation, and corporate governance. I’ll share proven techniques to effectively forge these linkages and outline how many companies are using the Balanced Scorecard to gauge the performance of their Boards.

Sharing Balanced Scorecard results is our focus in Chapter Eight. Here we’ll look at reporting mechanisms—software and lower-tech methods—and also investigate how the Balanced Scorecard can become the centerpiece of your management review process. The book concludes in Chapter Nine with a case study of Aliant, a Canadian telecommunications company that exemplifies many of the principles shared throughout the book.

Eleanor Roosevelt once remarked, “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”3 Growth and development in all facets of life result from a willingness to acknowledge our shortcomings and work diligently to overcome them. So it is with the Balanced Scorecard. My hope is that you will employ the principles and lessons found in this book to learn from those who have walked this path before you, and in so doing fortify your Balanced Scorecard for many years to come.

Paul R. NivenSan Diego, CaliforniaOctober, 2004

NOTES

1 Edward A. Barrows, Jr., “Assessing Your Balanced Scorecard’s Performance,” Balanced Scorecard Report, May-June 2004, p. 15.

2 Andy Neely, Chris Adams, and Mike Kennerley, The Performance Prism (London: Prentice-Hall, 2002).

3 Quoted in: Jef Nance, Conquering Deception (Kansas City, MO: Irvin-Benham, 2000).

Acknowledgments

I feel so fortunate to have had the opportunity to write this, my third book on the subject of the Balanced Scorecard, a topic that first ignited my passion a decade ago and continues to fuel a spirit of inquiry and discovery within me. Of course, an endeavor of this nature is never a singular task, but reflects the work, experience, wisdom, and advice of countless individuals all sharing a fundamental belief in the principles espoused in this text.

Let me begin by thanking some of the many people I’ve had the great pleasure to serve in a consulting capacity over the past years, and who graciously provided me with a real-world laboratory in which to test my Scorecard hypotheses and theories. From Anheuser-Busch in St. Louis, my thanks go out to Thomasine Joyce. From the U.S. Navy, Captain Bill Wilcox, Commander Mike Sumrall, and Captain Ray Berube. Stan Romanoff at Brother Industries, David Taran and Stephen Pilch of Divco West Properties, Bill Mao and Annette Hess at the Orange County Transportation Agency, Peter Murphy and Sue Patel from EpicData, John Wilcox of World Vision, and Tom Lynch and Vicki Lynn from the Worcester Polytechnic Institute. Special thanks go out to the many people I’ve had the privilege to work with at Aliant in Halifax, Nova Scotia, Canada. In particular, Jay Forbes, David Rathbun, Allan MacDonald, Dennis Barnhart, Jennifer Dicks, and David Blades.

Many thanks as well to Robert Kaplan and David Norton, whose work and spirit of discovery are a great inspiration to me.Vik Torpunuri of e2e Solutions has been a wonderful friend and strong supporter of my work, and I thank him for both.Thank you as well to Ray Smilor and Rob Fuller of the Beyster Institute in La Jolla, California, who gave me the opportunity to join them in promoting entrepreneurship, highlighted by a trip to Russia during which I delivered a series of Balanced Scorecard workshops. Finally, to my wife Lois:We recently celebrated our tenth anniversary, and I thank her for the love, support, and encouragement she’s provided every day of our life together.

CHAPTER 1

The Current State of the Balanced Scorecard

THE ROAD AHEAD

Note to self: Always turn off my e-mail program before working on the book. I’ve provided myself that reminder because my train of thought was just interrupted by a popup box in the corner of my screen. It gently notified me that a new e-mail was awaiting my immediate attention. Much like the ring of a telephone, the temptation overwhelmed me and I took a quick peek to see who had contacted me. It was a gentleman in Zimbabwe requesting additional information about the Balanced Scorecard. I’m happy to help him and will do so later in the day. Once I reply to his request, I’ll file it along with those I’ve received from China, Fiji, South Africa, Singapore, Finland, the U.K., from small manufacturing firms in the Midwest, and large conglomerates in New York City, from civic governments in California, and nonprofits in Washington, D.C. As the roll call of nations and organization types outlined suggests, the Balanced Scorecard has become a full-fledged worldwide phenomenon. And this phenomenon knows no boundaries; it stretches around the globe and has affected virtually every type of organization known to exist.

There is little doubt that the Balanced Scorecard has joined the pantheon of successful business frameworks; that elite group possessing the dual, and highly elusive, qualities of broad-based appeal and proven effectiveness. The sheer breadth and volume of Scorecard implementations are testament to this fact. Popularity, however, does not guarantee successful outcomes for those treading this road, and in fact it has been suggested that a majority of all Balanced Scorecard initiatives fail.1 The most commonly cited issues derailing Scorecard implementations are poor design and difficulty of implementation.2 The purpose of this book is to assist you in clearing those hurdles with proven tools and tech- 1 niques forged at the crucible of cutting-edge theory and practical experience. Pitfalls await those who are unprepared at any juncture in this journey, from poor planning to ineffective team design to inappropriate objective and measure selection, and many more. During our time together, we’ll carefully study the essential elements of Balanced Scorecard implementation, offering tools you can use to ensure that your Balanced Scorecard will help you achieve success today and sustain that success for the long term.

Before we begin to critically examine your Scorecard implementation, however, it’s important to step back and cast a trenchant eye on the tool itself. In this chapter, we’ll review exactly why the Balanced Scorecard has reached an exalted position as the strategy execution choice of literally tens of thousands of organizations; what it is about this seemingly simple tool, above all others, that quickly captures the attention of senior executives and shop-floor employees alike; and finally, why it remains vitally relevant when hundreds of other potential business panaceas have come and gone.

WHY THE BALANCED SCORECARD HAS RISEN TO PROMINENCE

The reasons for the Scorecard’s ascendance are many and varied, but principally I believe the tool’s longevity can be traced to an ability to solve several fundamental business issues facing all organizations today. In the pages ahead, we’ll look at four pervasive issues that are undoubtedly affecting your business even as we speak: (1) a traditional reliance on financial measures, (2) the rise of intangible assets, (3) the emerging pattern of reputation risk, and finally, (4) the difficulty most organizations face in executing strategy. Some of these issues are age old and have been the nemesis of organizations for decades—relying on financial measures and attempting to implement strategy.The others—a rise in intangible assets and the emergence of reputation risk—are new, and their effects are just now being perceived, evaluated, and monitored. What unites these potentially vexing agents of organizational distress, and serves as inspiration for all of us, is the proven ability of the Balanced Scorecard to overcome every one of them.

Financial Measures: Is Their Time Running Out?

When the uninitiated ask me to describe the Balanced Scorecard “in a nutshell,” I get the ball rolling by asking them how most organizations measure their success. A short and reflective pause is typically followed by the confident suggestion of “revenue” or “profits.” And they’re right, most organizations—be they private, public, or nonprofit—gauge their success primarily by the measurement of financial yardsticks. It’s been that way for literally thousands of years, and at the turn of the 20th century, financial innovations, such as the development of the return on equity formula, proved critical to the success of our earliest industrial pioneers, including DuPont and General Motors.

The decades have come and gone, with financial measurement continuing to reach dizzying new heights as the number-crunching savvy among us introduced increasingly sophisticated metrics for the analysis of results.The corporate world readily embraced these developments and, as the prodigious growth of our generally accepted accounting principles (GAAP, in accounting parlance) will attest, financial metrics became the de facto standard of measuring business success. But, as is often the case, too much of a good thing can lead to some unintended consequences. The unrelenting drive to achieve financial success as measured by such metrics as revenue and shareholder value contributed to a round of recent corporate malfeasance unlike anything ever witnessed in the long and storied history of commerce.

Leading the ignominious pack of corporate bad boys is, of course, Enron. Once the seventh largest company in the United States, where did their insatiable thirst for growth and financial success lead them? Right into bankruptcy court, dragging thousands of suddenly poorer and justifiably angry shareholders down the path with them. If we use history as a guide, we’ll find that Enron is not the first to apparently run afoul of the law in its tireless pursuit of fortune. A cautionary tale comes in the form of Samuel Insull. Upon migrating to the United States from England in 1881, Insull, through an association with Thomas Edison, co-founded the company that would eventually become General Electric. From his base in Chicago, he assembled a portfolio of holdings that would make any would-be financial impresario envious: Commonwealth Edison, People’s Gas, Indiana Public Service Company, and several more. At one point, he held 65 chairmanships, 85 directorships, and 11 presidencies.3 Sadly, the good times were not destined to roll on forever, and the 1929 crash brought his empire down in a tumultuous thud. Humiliated, and seen as the personification of corporate greed, Insull fled the United States but was later dragged back to stand trial for securities fraud. He was ultimately, and surprisingly, acquitted, but gone were his fortune and reputation. He died, penniless, in a Paris subway station on July 16, 1938.

Since the dawn of the corporation with Sweden’s Stora Enso in 1288, companies have walked the delicate line of providing prodigious societal benefits and causing immeasurable harm through questionable, and sometimes unconscionable, acts. Recognizing the need to keep corporations in check, Theodore Roosevelt, the 26th president of the United States, once remarked: “I believe in corporations. They are indispensable instruments of our modern civilization; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.”4 As the President who took a first step toward bringing big business under federal control by ordering antitrust proceedings against the Northern Securities Company, Roosevelt would likely have welcomed the introduction of the Sarbanes-Oxley Act in 2002. The Act has set some of the toughest corporate governance standards in the world, requiring companies to report on the reliability of their financial controls, and asking CEOs and CFOs to put themselves on the line and acknowledge responsibility for internal controls, verifying their effectiveness.

All companies required to file periodic reports with the Securities and Exchange Commission (SEC) are effected by the Sarbanes-Oxley Act.The sheer magnitude of the work associated with compliance is daunting.To give you some indication, Fortune 1000 companies have earmarked more than $2.5 billion this year in investigation and initial compliance-related work.5 Proponents suggest that the Act represents the most far-reaching U.S. legislation dealing with securities in many years.While the Act contains many provisions, two are particularly relevant to our discussion. Section 906 of the Act requires certification by the company’s chief executive officer (CEO) and chief financial officer (CFO) that reports fully comply with the requirements of securities laws and that the information in the report fairly presents, in all material respects, the financial condition and results of operations of the company. Basically, company executives must pledge that what is in their financial reports is accurate and true. The Act also requires plain English disclosure on a “rapid and current basis” of information regarding material changes in the financial condition or operations of a public company as the SEC determines is necessary or useful to investors and in the public interest.

Undoubtedly, many American investors will sleep more easily knowing the Sarbanes-Oxley Act is ever-present, threatening those even remotely considering anything outside the legal lines with the long arm (and increasingly sharp teeth) of federal prosecutors. But does the increased financial disclosure ensured by the Act really describe the value-creating mechanisms of the corporation? Does it provide us with insight as to how intangible assets are being transformed into real value for consumers and shareholders? To make an informed decision about any organization’s true state of affairs, we require information that covers a broader perspective. This is the case whether we’re talking about a multinational corporation, a local nonprofit health services organization, or any branch of the federal government. Ultimately, the Act makes reported financial numbers safer for our consumption and analysis, but it doesn’t diminish the increasingly apparent limitations of financial metrics. Working in the early 21st century, many organizations are beginning to question the once unquestionable reliance on financial measures. Specifically, they note the following:

• Financial measures are inconsistent with today’s business realities. When I ask my clients what drives value in their business, it is exceedingly rare for me to hear “machinery,” “facilities,” or even “computers.” What I do hear in near unanimity from everyone in attendance are phrases such as, “employee knowledge and skills,” “relationships with customers,” and “culture.” Intangible assets have become the driving currency of organizations wishing to effectively compete in the modern economy. However, beyond “goodwill,” you would be hard pressed to find the valuation of such intangibles on a typical corporate balance sheet. Financial metrics are ill-suited to meet the demands levied by the true value-creating mechanisms of the modern business economy—intangible assets. In the next section of this chapter, we’ll take a closer look at their steep rise in prominence.

• You can’t see where you’re going when you look in the rearview mirror. Don’t try this at home: driving down the freeway with your gaze cast intently on the rearview mirror. Great view of where you’ve been, but what does it tell you about where you’re going? Very little. Financial measures offer the same limited view of the future. A great quarter of financial success, a great six months, or even a great year are not indicative of what lies in store for you. The business pages are littered with stories of falls from grace by once-lofty companies.The legendary Fortune 500 bears witness to the inability of success to predict success. Two-thirds of the companies listed on the inaugural list in 1954 had either vanished or were no longer large enough to maintain their presence on the list’s 40th anniversary.6

• Financial measures tend to reinforce functional silos. If you were to type “teams” into the search box of Amazon.com, how many hits do you think you’d get? Curious, I did just that and was astonished when the total popped up at over 125,000! Granted, not all of these books embrace the topic of cross-functional teams in the modern organization, but the staggering population of texts about teams lends credence to the well-known notion that in order to get anything done in today’s environment, we must work together. Thus, in many respects, and in a growing number of organizations, work flows horizontally across the enterprise. Financial measures, however, are decidedly vertical in nature. A department’s numbers are rolled into a business unit, and business units are consolidated into a massive corporate heap of digits. This reporting system does little to encourage cross-functional work patterns.

• What’s the first thing to get cut in a downturn? Easy question, right? If yours is like most businesses, the first things flung overboard when the economic seas become choppy are those that won’t be missed tomorrow or the next day—items like training, employee development, and research. Their effects typically aren’t seen for months or even years, and thus they become simple targets for the instant gratification, “must meet the numbers this quarter” paradigm of most publicly traded companies. Focusing on short-term financial numbers can frequently cloud our judgment as to what is going to truly distinguish our business from competitors in the long term. While training may be easy to cut today, what effect will that have on your workforce next year as you attempt to compete in ever-evolving markets?

• Financial measures aren’t always relevant. We’re constantly bombarded with messages about the speed of change these days. I’m guilty of reminding you myself, and did so in the last sentence! Why are these disturbing missives being fired in record numbers? Because it’s true. Look at the disruptive technologies we’ve witnessed in just the past few years that have revolutionized the way business is conducted. Today, more than ever, we need performance information we can act on. Decisions can’t be debated endlessly, and the luxury of waiting for complete information is just not an option. Financial measures frequently lack the action imperative necessary to make future decisions. Let’s say you pick up your company’s monthly income statement and see that sales are 5% off plan. Beyond the obvious, what does that mean, and more important, what do you do? Obviously, declining sales is an important indicator, but what led to that unenviable state of affairs, what was the leading indicator? That’s the information we need, and fortunately that’s what the Balanced Scorecard can supply.

I’ve charged financial measures with a litany of offenses in the previous paragraphs, so you may be wondering if they even belong in a Balanced Scorecard. The answer is yes, because despite their limitations, no Balanced Scorecard is complete without financial measures.This is the case whether you’re reading this as the CEO of a large company, the executive director of a nonprofit, or the senior manager of a state government. An old song reminds us that “money makes the world go round,” and so it is with the organizational world. In many cases, the ultimate arbiter of corporate success is financial. Nonprofits and public-sector organizations must also be cognizant of the financial ramifications of their actions and steward their funds in the most efficient manner.This section simply reminds us that financial measures must be balanced with the drivers of future financial success and security. Considered alone, they offer limited value. However, when reviewed in the context of data supplied by nonfinancial measures, they are suddenly imbued with the power of information that can transform decision making and ultimately lead to even greater success.

The Rise of Intangible Assets

The story of intangible assets can sometimes best be told through the prism of your family history, so let me tell you a bit about the Niven clan. My grandfather cut his teeth on the Canadian prairie building railroads for Canadian Pacific.You talk about old economy—the tools of his trade were literally hammer and shovel. It was honorable work, back-breaking of course, but honorable. My father took a different route, opting to be an entrepreneur. He ran a soft-drink business for most of my formative years. Imagine the delight of a youngster whose dad’s product is soda pop! Yes, as the “sugar king” I was quite the popular kid in the neighborhood. Dad didn’t confine his management to a desk; he was out there on the front lines slinging soda cases from dusk until dawn six days a week. The means of production was a rickety assembly line that produced as many delays and mysterious wheezing sounds as it did soda.

Fast-forward many years, and you have me. I’ve spent my entire career in some sort of analysis or consulting role, working with others, sharing information and knowledge in an attempt to drive results. I’ve never swung a pick or hoisted a soda case; in fact, I recently turned 40, and my mother still says I haven’t worked a day in my life! Such is the fate of the knowledge worker, and if you’re anything like me, that’s probably an apt descriptor. In today’s economy, things like employee knowledge, relationships with customers, and cultures of innovation and change generate success—in other words, intangible assets.

The power of intangibles manifests in the valuations we see in modern organizations. Margaret Blair of Washington’s Brookings Institute explains:

If you just look at the physical assets of the companies, the things that you can measure with ordinary accounting techniques. These things now account for less than one-fourth of the value of the corporate sector. Another way of putting this is that something like 75% of the sources of value inside corporations is not being measured or reported on their books.7

Just 20 years ago, the value of intangible assets in a typical organization rested at around 38%.The value has virtually doubled in the past 20 years. In the United States, spending on intangibles has also grown astronomically, and at around a trillion (yes, trillion!) dollars a year is on par with what companies spend annually on physical assets.8

What’s become glaringly apparent is that intangible assets are quite different from the “property, plant, and equipment” that have populated fraying general ledger sheets for the better part of the past hundred years. For starters, they may not have a direct impact on financial results. Take training, for example: Many studies have demonstrated that training is positively correlated with financial success, but can we safely say there is a true one-to-one, cause-and-effect relationship evident? Chances are the financial results are a second- or even third-order effect of the training. Perhaps quality improves as a result of better-trained employees. Customers respond favorably to enhanced quality and buy more of the product, which in turn generates financial returns.

There are other differences as well: Tangible assets (as noted previously) are rigorously quantified on our financial statements. Intangible assets, however, can be maddeningly difficult to put a price on. Just what is the value of an innovative culture that consistently delivers new products faster than its competitors? Tangible assets can be easily duplicated; your company may buy a new machine that increases productivity, but it won’t be long before competitors are beating a path to the same supplier. However, intangibles in your possession cannot be bought or duplicated. Relationships with customers that have been cultivated through years of trust and mutual benefit are something your competitors will undoubtedly covet but find it exceedingly tough to beat.

Finally, and this is my favorite, tangible assets depreciate with use. That new computer you bought last week may have the luster of a sparkling diamond now, but just give it a year or two (if that) and then see how much it’s worth. Conversely, intangible assets actually appreciate with purposeful use. Consider knowledge sharing: Every time you communicate with a colleague and she expands that knowledge, the circle has been enlarged. Multiply that by dozens, hundreds, or thousands of colleagues on innumerable topics, and the dizzying ramifications will make your head spin. I can scarcely think of a more encouraging fact.9

History and tradition yield about as easily as iron bars, so it’s not surprising that the rise of intangibles has put tremendous pressure on our performance measurement systems.The antiquated devices employed by most companies simply don’t have the capacity to identify, describe, monitor, and provide feedback on these most critical value-creating elements. Going forward, however, there simply is no choice. If 75% of value is generated from intangibles, then we absolutely must develop the ability to measure effectively. As you’ll see throughout the book, the Balanced Scorecard has gallantly risen to this vital measurement challenge. In fact, a hallmark of the framework is its ability to track intangible assets and provide intelligence on their transformation into results.

A story from the Balanced Scorecard implementation of the U.S. Army’s Medical Department (AMEDD) illustrates the power of the Scorecard in transforming intangible assets. When Lt. General James Peake began his command of AMEDD, he quickly noted: “we recruit soldiers but retain families.” Keeping those families happy meant AMEDD had to provide outstanding medical care, and as a result, “quality, compassionate healthcare” became a key objective on the strategy map. The objective sounded noble, but what effect would it have on decision making and action in the field? The test came soon after in the form of a pregnant woman whose unborn child was threatened with a serious neurological defect. Careful diagnosis led to the recommendation of a costly surgery that held the promise of saving both mother and child, but initially the reimbursement was declined because the procedure was deemed experimental. A team of Army medical experts was soon convened, and the promise of compassionate care was put to the ultimate test. After careful reflection the decision was reversed, payment approved, surgery performed, and amid the great joy of all, a beautiful baby girl was born completely free of any complications. As Major General Patrick D. Sculley describes it:

A commander and many consultants went the extra mile, realizing that the initial “no” would have been far more than just a hassle for the family. They wanted to deliver the compassionate care we aspire to on our Scorecard. I’m proud of the way AMEDD could cut through all the red tape and make an informed and appropriate decision.10

Reputation Risk

Can you recall where you were on June 13, 2002? I was at home that day, and began my morning as I frequently do, by reading the Wall Street Journal. One headline that day jumped out at me above all others: “ImClone’s Ex-CEO Arrested, Charged with Insider Trading.”11 The article described the sorry tale of Samuel Waksal, who had been arrested for allegedly relaying information to family members that the Food and Drug Administration was about to reject his firm’s cancer drug, Erbitux. Buried deep within the text was this seemingly innocuous reference to a friend of Waksal’s: “Also implicated is Martha Stewart, who sold 3,928 shares on December 27th the day before Im Clone announced the FDA’s rejection.”12 That single sentence was reported to headlines and cable news shows around the world in what seemed like a nanosecond.The government soon shifted its investigative rigor into high gear, and Ms. Stewart was destined for a prodigious fall from grace. Since the implications, and later her arrest, Omnimedia’s market value has plummeted, with hundreds of millions of dollars evaporating. It seems like only yesterday that Martha Stewart was ringing the bell of the New York Stock Exchange, a symbolic gesture that signaled her glittering status as a newly minted billionaire. As of this writing, everyone’s favorite domestic diva is completing her sentence of five months in prison, to be followed by another period of house arrest, which should offer her plenty of time to consider the perils of reputation risk.

Reputation is truly the ultimate intangible asset, one that must be constantly polished to a sparkling finish in this era of ever-increasing corporate oversight. Earlier in this section, I noted the difficulty in quantifying the worth of an intangible asset. So it is with reputation. However, the stakes here are sky-high, as recent estimates suggest that 5% to 7% of a large corporation’s market capitalization is represented by brand value.13 When we’re talking billions of dollars and the ever-watchful eyes of an increasingly suspicious public and hypervigilant regulators, organizations must act and safeguard their reputations.The importance of reputation has not been lost on Wal-Mart, the world’s largest retailer. In a tele-conference with market analysts, CEO Lee Scott suggested that Wal-Mart management had failed in efforts to repair a reputation tarnished by discrimination cases and charges of worker mistreatment. Many analysts believe bad publicity and the related hit to reputation may be the retailing behemoth’s greatest obstacle to store expansion and further growth.14

In order to protect reputation, it must be managed, and to manage reputation, it must be measured. Enter the Balanced Scorecard. As previously discussed, a principal benefit of the Scorecard is its ability to shed new light on intangible assets, removing the shroud of mystery and displaying them in the cold light of rational analysis. Leading indicators such as the number of negative news stories or number of audit findings can go a long way toward steering boardroom discussions in a new and provocative direction as leaders openly address this vital asset and put in place mechanisms to protect it for generations to come.

Strategy: It’s All About Execution

What do the following words and phrases have in common: positioning, design, power, emergent, cognitive, learning, cultural, environmental, configuration, disruptive, five forces, and value innovation? Despite the wide swath of language they cut, each represents a school of strategic thought.15 The field of inquiry that is strategy has produced enormous volumes of information and insight over the past five decades. Every single piece of work produced, despite the often esoteric jargon, contains at least a few nuggets of extremely practical and valuable information, but the sheer volume of material often leaves us scratching our heads and wondering aloud, “Just what is strategy, anyway?” Every person reading this book could undoubtedly provide a unique response to that question, and while that may lead to initial confusion, the spirit of discovery and debate it spawns holds promise for all of us.While we may never reach a consensus on exactly what strategy is (or is not), one thing most pundits and practitioners alike tend to agree on is the fact that strategy execution is more important than strategy formulation.

It’s one thing to sequester yourself and your team away in an off-site location for a few days of chocolate chip cookies and excruciating debate that leads to a fresh new strategy, and another thing entirely to bring that plan to life. But breathing life into the plan on a day-to-day basis is what spells the difference between winning and losing on the front lines of business. As an old Talmudic dictum teaches us, “study is not the essence, but action.”16 And to the victors, go the spoils. One study suggested that a 35% improvement in the quality of strategy implementation for the average firm was associated with a 30% improvement in shareholder value.17 Sadly, the execution of strategy often falls woefully short, which not only leads to severe bottom-line maladies but can also crumble the often wafer-thin credibility held by senior management when a new plan is introduced. An oft-quoted Fortune magazine study from 1999 found that 70% of CEO failures came not as a result of poor strategy, but the inability to execute.18 So why does strategy execution prove so elusive for the typical enterprise? Scorecard architects Robert S. Kaplan and David P. Norton believe the answer lies in the form of four barriers that must be surmounted before strategy can be effectively executed (Exhibit 1.1):

EXHIBIT 1.1 The Barriers to Implementing Strategy

• Vision barrier. Suggests a scant 5% of the typical workforce understands the strategy. As discussed earlier, success in executing a strategy is the product of execution. Execution results from action, action from understanding, understanding from awareness. Right in the middle of that simple equation lies understanding. St. Augustine once remarked, “one prays for miracles, but works for results.” Leaders who develop strategies and fail to take the requisite time and allocate the appropriate resources to ensure awareness and understanding are doing just that—praying for miracles. Each day your employees are faced with choices: how to handle a customer situation, what to budget for the forthcoming year, how to staff, and a hundred others of practical importance. Informed action is virtually impossible without a sound knowledge of the organization’s strategy.

• People barrier. Incentive compensation systems have become wildly popular in the corporate world, and with good reason. Linking pay to performance drives focus and alignment around common themes. Problems emerge as a result of the actual construction of the rewards systems, however. Typically, the incentive is linked to a short-term financial target, and that can lead to some less-than-rational decision making as managers seek to maximize short-term gain, often at the expense of long-term sustainable success.

• Management barrier. On the topic of brevity in communication, Mark Twain once opined, “I tried to write a short letter, but it was too hard so I wrote a long one.” It’s a great line, and one that rings absolutely true. In the organizational world, it’s difficult to boil things down to their essence, and as a result we tend to spend time on the periphery of issues rather than tackling the core. Management meetings manifest this point well. Rather than examining the blueprint we’ve developed for success (i.e., the strategy), teams will spend hours debating line items on the income statement such as gross revenue or cost of sales.These are undoubtedly important contributors to success, but are they necessarily strategic?

• Resource barrier. Raise your hand if you love budgeting. I’m guessing not a single person will derive any aerobic benefit from that question! Budgets are much-maligned these days, with critics calling their very existence into question. We’ll examine the topic of budgets in greater detail in Chapter Seven, but for now suffice it to say that if your budget is not linked to your strategy, then where exactly is it aligned? Strategy should always be the guiding hand in creating the budget, and simple questions employed in crafting them: Based on our strategy, what initiatives will distinguish us from our rivals, and what are the associated resource requirements?

One of the many joys of writing books is having the opportunity to begin a dialogue with people from around the world on a topic of common interest. Since the publication of my first book (Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results), I’ve received calls and letters from readers around the globe, who have shared their stories and provided feedback on the text.Among the comments I cherish most are those suggesting that my books are “practical and simple.” In this age of complexity and constant change, it’s comforting to find something that is nonthreatening and approachable.When I reflect on those sentiments, I believe it’s not simply my literary style, but the topics I discuss.

Everything I’ve shared with you thus far in this book is something you face every day—using often outdated financial metrics, harnessing intangible assets, protecting your reputation, and attempting to execute your strategy. These concepts are not particularly challenging from an intellectual standpoint, rather they are “practical and simple.” But they are also profoundly important to the success of your business and have led organizations of every conceivable shape and size to embrace the Balanced Scorecard. In the next section, we’ll briefly examine the Scorecard model and begin to determine exactly why it has become the tool of choice for those attempting to beat the overwhelming odds and effectively execute their strategies.

THE BALANCED SCORECARD

Origins and Background