The Balanced Scorecard:
Translating Strategy into Action
Robert Kaplan and David Norton in The Balanced Scorecard make clear that a business strategy is a set of if-then statements that attempt to predict how changes we make to our organizations and people will result in improved financial performance and customer satisfaction for our corporations. For example, consider this cause-and-effect sequence:
If we train our employees to study our customers and their information needs, then they will be able to design and develop more effective information products. If the information products they design are successful, customers will be able to lower their costs of doing business with us and increase their staff productivity in the process of using our companies' products. If customers are more successful, they will buy more products from our companies and increase our profitability and success.
Although the final measurements of success in this business strategy are financial, note that along the way we will be able to institute many other measurements of success:
- We need to be able to evaluate our customers' satisfaction with our information products.
- We need to know if we are effectively developing and implementing new processes that result in increased customer satisfaction.
- We even need to investigate the success of our training efforts by measuring to what degree they have succeeded in transforming our organization.
The Balanced Scorecard approach puts teeth behind many levels of organizational planning by accounting for a company's "intangible and intellectual assets" ("high-quality products and services, motivated and skilled employees, responsive and predictable internal processes, and satisfied and loyal customers"). Kaplan and Norton argue that, in a new information age, we cannot afford to fixate on bottom-line, expense-released, and often lagging measurement systems. We need to find new ways of predicting future success. The authors' solution is the Balanced Scorecard (BSC).
Traditional accounting measures tell us about what has occurred in the past, not what is likely to occur in the future. But what measures can we use to foretell the future?
To foretell the future, we need to approach carefully the four key perspectives of the BSC:
The BSC's key perspectives are derived top-down from our vision of the future and our strategy for getting there. (See the figure below.)
- Financial perspective-Are our actions contributing to the company's bottom line?
- Customer perspective-Are our actions contributing to satisfying customers?
- Internal-business-process perspective-Do we have the best processes in place to contribute to customer satisfaction and the bottom line? Are we creating entirely new processes to create better products and deliver better service in the future?
- Learning and growth perspective-Are our actions with regard to people, systems, and organizational procedures creating long-term potential for improving and growing the business?
If we develop our business strategy to include all four perspectives and to make measurements everywhere, Kaplan and Norton believe we can achieve a proper balance between outcome measures (customers and finances) and future measures (processes and abilities). Such a balance includes both objective and subjective measures, going beyond bottom-line calculations. At the same time, they ask us to connect our strategic plans to our corporation's or our department's financial goals. The authors point out that it is not enough just to improve internal processes; all process improvement and learning investments need to focus on improving the results for customers and shareholders. In planning and implementing a Balanced Scorecard, we need to make sure that all the pieces are carefully linked.
I believe that information-development managers can use a BSC approach to both drive and measure the success of organizational change. With the BSC, we can align with our organization's strategic vision and turn this vision into explicit objectives and measures for our own departments.
Kaplan and Norton like to point out that they agree with the maxim: "Measurement matters. If you can't measure it, you can't manage it." However, they insist that we need more than standard financial measures to evaluate the success of a strategic business planning activity. As many business leaders have reiterated, a focus on financial measures among US companies has increased the importance of short-term gains (the latest stock market evaluation or the results from the last business quarter). Because financial measures are lagging indicators (we measure only after the damage has been done), they don't show what is being created or destroyed by current management actions.
The Balanced Scorecard provides executives with a more comprehensive framework to translate a company's vision and strategy into a coherent set of performance measures than finances alone.
Remember that a strategy is a set of hypotheses about cause and effect. A good BSC shows how the planned actions are linked in a cause-and-effect relationship. If we do this, then this will happen. However, hypotheses are just that-hypotheses. We need a way to measure outcomes and drive performance improvements if our hypotheses are going to turn into fact.
In many cases, as we plan a business case, we know what outcomes we want
- Customers who are positive about the information products they receive
- Fewer calls to customer service because answers are found in the documentation
- Faster mean time to productivity because getting-started information is effective
- Less customer down time because information makes it possible to troubleshoot and solve problems more quickly
We know what we want, but we are still faced with a set of lagging indicators. What about the leading indicators? What do we have to measure about the performance of our staff to ensure that we get the outcomes we want?
It's important to point out a truism that Kaplan and Norton mention-Quality improvements don't always translate into financial success. Many process-improvement campaigns lead to improved capacity to perform the work (we're more efficient, we've eliminated unnecessary steps), which may mean that we now have resources that are really not employed very effectively. Process improvements mean that we have unused capacity but have realized few actual reductions in spending.
By taking a BSC approach, we link process improvements directly to customer satisfaction and financial gains. We also measure all along the way to ensure that we are spending our process and employee re-skilling dollars effectively.
The starting point of any BSC analysis concerns finances. Kaplan and Norton point out that we need to understand the goals of our corporation, business unit, or individual product line. Three financial strategies are typical: growth, sustain, and harvest.
- Growth. Grow revenues, grow sales, invest in new products, infrastructure, distribution, customer relations, and so on.
- Sustain. Enhance profitability. Increase the return-on-capital-employed. Increase the return-on-capital-invested.
- Harvest. Make no significant new investments. Instead, maximize cash flow from existing products.
They point out that in a high-growth environment, a company may not really be interested in controlling the costs of its resources. Rather, it may seek to build resources and ensure that they can respond quickly to changing needs.
As information-development managers in high-growth environments, we need to figure out how to use our assigned resources effectively to ensure that revenues and sales increase. Our businesses' financial objectives may be reflected in developing new products as quickly as possible or finding new applications of existing products, new customers for existing products, new solutions in which more of a product line is sold, or in shifting the product market (for example, moving a product to less skilled customers and providing more services).
In a high-growth environment, productivity improvements are likely to be viewed as more strategic than cost reductions. Our companies want us not to save money but to increase the revenue generated by each employee. They want us to do more business with the same number of people.
For sustaining businesses, the situation is just the opposite. Because such businesses or product lines are not growing, they look more favorably upon strategies designed to reduce unit costs. The questions asked may include-Where are we spending money? Can we produce more efficiently (fewer people, more output, greater efficiencies)? Can we reduce the cost of a transaction (for example, by moving information online for customer self-service rather than calling a customer-service representative)? Our strategies must be designed to lower the cost of doing business.
If you're in a sustaining business, it would be wise to investigate the operating expenses of the competition. It will be important to reduce expenses. But any reduction in expenses must be balanced on the scorecard with the quality of customer service and the implementation of efficient processes. Many sustaining companies see operating expenses as a burden that must be contained or eliminated. However, that viewpoint can be counterproductive when quality is reduced beyond recovery. In fact, Kaplan and Norton argue that managers should not focus on decreasing spending but on increasing efficiency. We need to closely examine the benefits being produced and not endanger customer relations by cutting in the wrong places. I have long argued, for example, that bypassing a customer needs analysis is the wrong place to cut costs.
In a sustaining environment, we need to look closely at asset utilization and investment strategies. By measuring and reducing time to market, for example, we can make better use of our people and capacity assets by decreasing the time before revenues are realized. We may also successfully argue for a centralized publications organization so that we can increase the leverage of a capital investment (equipment, facilities, production) by sharing the investment across more of the company. By leveraging a capital investment, we choose not to replicate physical and intellectual assets any more than absolutely necessary.
In both sustaining and harvest lines of business, we need to practice strong risk management around our resource costs. Risk management might include better forecasting of expenses and better project estimating. Our companies want fewer surprises that increase costs unexpectedly.
In a harvest environment, the best approach may be to eliminate costs altogether. Organizations that have decided to orphan (stop making any changes to) harvest products have usually made the right decision by drastically cutting costs.
Thus, our first step in constructing a BSC is to determine the financial goals of our organization and determine how to measure success.
If we are to meet our financial goals, we need also to ensure that our customers are well served by our products and services. We measure our success by acquiring new customers and retaining existing ones. We assess customer satisfaction and market share, in addition to measuring the profit that we accrue from each customer segment. We know, however, in information development that mere measurements are not enough. We need to be proactive in ensuring that we provide our customers with value in return for the commerce.
In information development, we attempt to provide value by providing information that will assist our customers in using our products quickly and effectively. We help them to get started through installation and configuration instruction, and we help them perform tasks easily and efficiently by providing the right information at the right time. We also innovate methods of delivering information to our customers through electronic methods, as well as traditional paper-based publications. We attach information to products themselves, provide built-in training opportunities, and even work to make the products more intuitive.
Kaplan and Norton once again ask us to consider how to measure our contributions to meeting customer needs. They ask us to focus on timeliness, quality, and price. In information-development terms, timeliness equals finding ways of delivering information at the time it is needed and quality equals accuracy, accessibility, and usefulness. Price should be measured, not by the price per page of document-development, but by the cost-savings that come with assisting customers in reducing the cost of implementation and maintenance of our products in their environment.
Information-development managers actively seek out customer measurements of performance, but they would be well advised to consider studying the cost of implementation and use. If a product comes with excellent information resources, customers get started more quickly, require less training, make fewer mistakes, and experience less down time. Each of these measures leads to a lower cost per unit and increased customer profitability. Real measures like these can be shown through customer research more easily than we can demonstrate that excellent information products generate additional sales.
Perhaps the most exciting aspect of the BSC is the emphasis Kaplan and Norton place on innovating new processes to meet identified financial and customer needs rather than improving existing processes. If we begin by understanding what customers value about information products, we have an opportunity to find new ways to provide information solutions. Although we are all under pressure to reduce cycle time and spending on development efforts, we need to balance these pressures with the importance of developing innovative information products that effectively respond to customer needs. Too often in information-development we argue that because we have to reduce time-to-market, we cannot afford to innovate. However, that conclusion means that we spend time making poor processes more efficient rather than finding better processes that might result in delivering innovative products to customers.
To account for a process perspective, we need to identify the critical processes that we must perform very well if we are to meet the objectives for financial growth and customer satisfaction that we have already identified on the BSC. Once we have identified the critical processes, we need to find ways to measure their success. For example, if our customers value accurate installation instructions, do we have a way to measure whether we are producing them? If we are not creating accurate instructions, do we have a way to measure the effect on our customers? Can we find innovative ways to improve accuracy without increasing costs drastically?
If we want to implement innovative processes and better meet customer information needs, we need the right mix of employee skills. To achieve the right mix implies that we provide employees with opportunities to learn and grow within the context of the organization's strategic vision. Traditionally we have measured success by evaluating employee retention, satisfaction, and productivity. We have learned that employee satisfaction drives retention and may drive productivity. However, we must be careful to ensure that the productivity is going in the right direction. As we know, employees can be very productive producing the wrong product.
The BSC asks that we evaluate how effective our employees are in directing their learning and growth toward organizational goals. For example, if we want to develop information products that better meet customer needs, we need to put in place new processes, like customer needs analysis. To do so means that we need employees who can perform customer needs analysis and use the results to create new and improved information products. Cadence Design implemented just such a program a few years ago and measured its success by tracking the number of employees who had not only successfully completed training in needs analysis but had also actually completed a customer site visit.
Too often, learning opportunities (seminars and conferences) are simply viewed as perks without a real connection to results. If we institute a Balanced Scorecard, we are obligated to demonstrate how learning has resulted in growth, how growth has led to new processes, and how new processes have led to improved customer measures of satisfaction with learning products.
As you plan your BSC, remember that measuring outcomes is not sufficient to evaluate the success of your new business strategy. Outcomes are often too late. As lagging indicators, they tell us only what went right or wrong. They give us no tools to judge current performance or ways to predict the future. Every BSC must include, indeed focus on, the leading indicators that drive performance. We must take time to decide what change will look like as it happens. Will we see more staff members engaged in creative information design? Will a significant percentage visit customer sites and learn about information-use patterns? Will we find more staff anxious to change what they write and how they deliver information? Such evidence is the proof we need to show that our attempts to institute new processes and engage in strategic learning have paid off.
The Balanced Scorecard is a great tool for information-development managers. By implementing a BSC, you demonstrate how closely your organization is aligned to the goals of your corporation.