ON BALANCE
Almost ten years after developing the balanced scorecard, authors Robert Kaplan and David Norton share what they've learned.
By Lori Calabro

When Robert S Kaplan, the Marvin Bower Professor of Leadership Development at the Harvard Business School, and David P Norton published "The Balanced Score-card - Measures that Drive Performance," in the Harvard Business Review in 1992, they were pointing out the drawbacks of using only financial metrics to judge performance, and urging companies to measure such factors as quality and customer satisfaction.

Companies embraced the idea. A balanced scorecard became the hallmark of a well-run company. Today, more and more Asian companies say it is the foundation of their management systems.

Recently, the duo wrote a sequel, The Strategy-Focused Organization (Harvard Business School Press, 2001). In it, they describe the evolution of the balanced scorecard from a measurement system to a system for managing change. They also examine its impact at some of the 200 companies that have implemented it. "For the first time," says Kaplan, "we've been able to document that it works."

Kaplan and Norton discussed the impact of the balanced scorecard with Lori Calabro, deputy editor of CFO, CFO Asia's sister publication in the US.

CFO: When you developed the balanced scorecard, did you have any idea how pervasive it would become?

Kaplan: I think not. We really set out to solve a performance measurement problem: why are financial measures alone unable to capture the value-creating activities of contemporary organizations? What we did not anticipate was that the balanced scorecard solution was also a solution for a much bigger problem: organizations' inability to implement new strategies and to move in new directions, particularly those focused on customer value.

Norton: Also, neither of us appreciated that the approach was hitting at the fundamental question in the New Economy, which is: "How do I create value from intangible assets?"

CFO: How widespread is the use of the balanced scorecard?

Norton: A Bain & Co survey indicates that 50 percent of Fortune 1,000 companies are using the balanced scorecard.

CFO: What about the other 50 percent?

Norton: The approach has probably moved through the large organizations [first], because they tend to be more in tune with current management concepts.

Kaplan: There needs to be a style of openness and transparency present in order for the scorecard to be adopted. Executives must want to communicate the organization's objectives to everybody. And, before the new book, there had not really been any documentation that this works.

CFO: What are the main features of an organization that successfully uses the balanced scorecard - a so-called "strategy-focused organization"?

Kaplan: Each organization we studied had strong leadership. They translated their strategy into a balanced scorecard, and cascaded the strategy down to the business units. Then they were able to make strategy everybody's job, reinforced by setting up personal goals and objectives and then linking variable compensation to the achievement of those objectives. Finally, they integrated the balanced scorecard into the organization's planning and budgeting processes, and developed new reporting frameworks as well as a new structure for the management meeting.

CFO: How do you know it works?

Norton: Take Mobil. They started the process in 1993, conducting an annual employee survey asking questions such as: "Do you understand the strategy; what we're trying to do with our customers?" Only 20 percent of the workforce understood the strategy. Five years later, it was 80 percent.

The foundation for Mobil's subsequent success was its ability to get that 80 percent to understand, and then support that strategy.

CFO: But, unlike Mobil, firms often hesitate to link the scorecard to compensation.

Kaplan: They have to be sure they have the right measures on the scorecard. They want to run with the measures for up to a year before saying they have confidence in them.

CFO: What about data integrity? You mentioned that the nonfinancial measures are often eyed suspiciously because they can't be audited. At least with financial measures, we have the SEC and FASB standing guard.

Kaplan: That's an important issue. Many organizations are defining metric owners, who are typically independent of the line business units that are being measured. Ultimately, the scorecard should have some degree of auditability.

CFO: Some finance executives won't implement the complete scorecard because of the rigorousness of the theory. They'd rather adopt a KPI system because it's more flexible.

Norton: When you have KPIs, you may have 20 random measures. You're still going to have to build an information system, review the data, and tie it to compensation.

The difference between a bad scorecard and one that describes your strategy is the effort that goes into the front end, with the executive group agreeing to the strategy and how they're going to measure it. If somebody doesn't want to do that, they're viewing the scorecard as a measurement system as opposed to a system to manage change.

Kaplan: Simplistically, we find two types of CFOs. [One type] likes the rigor and discipline of financial data and feels uncomfortable with the more subjective data.

Others view the finance function as an indispensable part of defining how the organization creates value. The marketing people tell you where to sell; product development launches new products or services; operations deliver the products. It's the finance function that brings this together and asks if it is creating value.

CFO: In your first book, you wrote about finance executives' discipline, "these are not necessarily the traits required for managing a holistic, innovative, judgment-based, people-intensive management process."

Norton: In the Old Economy, the finance function was the custodian of the system that set objectives, allocated resources, and monitored how they were used.

In the New Economy, the system gets broader. You have continuous budgeting, things like that. But those with the traditional finance background logically inherit the responsibility of the new system.

CFO: In your new book, you note that CFO Jay Forbes of Nova Scotia Power proposed the balanced scorecard there. How often do CFOs lead the charge?

Norton: About 20 percent of the time. More often it comes from strategic planning or human resources departments.

Kaplan: Because the CFO is sometimes not heavily involved, one aspect of the strategy-focused organization that has lagged is integration with the budgeting system. If we don't establish the link with budgeting, then the scorecard initiatives may wither.

CFO: Yet the balanced scorecard still starts with financial measures...

Kaplan: We start with the destination. What are we trying to achieve? We feel that for-profit companies should be delivering great financial performance.
Norton: If you look at the logic of the scorecard, the arrows all end up with financials, but start with things like skills, technologies and process design. You have to measure those today to impact financial results tomorrow.

CFO: You point out that financial measures have limitations. Are some more limiting than others?

Kaplan: I don't think we're unhappy with financial measures. We're comfortable with the newer metrics like EVA and other shareholder value based on metrics as the overarching objective. If you were just using earnings per share or net income, you'd run into problems.

CFO: In some cases, time and cost of implementation have been a deterrent to using the scorecard. Is the cycle time or the cost decreasing?

Kaplan: In terms of building the system, I think we've accelerated it, and the templates help that. In addition, the tools that will soon be available on our website will help people implement systems at [a] lower cost and faster [speed]. But there is a front-end expense. I don't know how you'd quantify internal time versus external consultants and systems. It may be measured in hundreds of thousands, but not in millions of dollars. At the same time, you're getting billions of dollars of value creation.

CFO: [What is] the impact of the balanced scorecard on shareholder value?

Kaplan: A lot of the applications were done in divisions, not the entire corporation. We talk about Mobil, but that was really a division. It was a US$20 billion division, but maybe only 20 percent of the company.

Norton: When Cigna started, however, they had negative shareholder value. The parent company was trying to sell it and had no takers. They introduced the scorecard, and five years later it sold for US$3 billion. Saachi & Saachi introduced the scorecard, I believe, in 1997 when shareholder value was US$500 million. They were acquired last year for US$2.5 billion.

CFO: Does the balanced scorecard work in the New Economy, with its shorter cycle times and increased volatility?

Norton: If it takes ten years or 90 days to bring a product to market, the scorecard will describe the steps to take.

Kaplan: You have to be skilled in rapidly updating the scorecard in the New Economy - it can't take six months. The scorecard could be the most powerful tool these companies have [to communicate] the new shared understanding.

I don't think companies have recognized that if you want to be a flexible, fast-moving organization, you need a mechanism to bring everybody along.