The future of the Balanced ScorecardRobert S. Kaplan and David P. Norton, founding fathers of the Balanced Scorecard, offer insight into how it can be used to maximise opportunities in the future.
We introduced the Balanced Scorecard (BSC) in a January 1992 Harvard Business Review article and a 1996 book, now translated into 24 languages. Before speculating about the future, we want to anchor everyone on where the BSC is today since many, while familiar with the foundational ideas, may not have tracked developments over the past 20 years. We introduced the BSC to improve corporate performance measurement by balancing the lagging metrics of financial performance with nonfinancial metrics – customers, processes, people, systems and culture – that we believed drove future performance. Our fifth and most recent book, The Execution Premium (2008), synthesises the work of the previous 15 years and shows how the BSC has now become the number one management system for helping organisations execute their strategies.
We have helped create a new body of knowledge for strategy execution, one that can be implemented by a new set of professionals operating within what we call an “office of strategy management”. Many organisations, throughout the private, non-profit and public sectors, can benefit simply by implementing this proven strategy execution system.
Five guidelines for the future
1. Collaborate with external constituents, such as key suppliers, customers and alliance partners, to develop a strategy map that describes and communicates the strategic relationship; once developed, the map and scorecard are used to govern and guide the relationship. Building these together creates trust and understanding across organisational boundaries and mitigates the cultural conflicts that are the prime source of failures in strategic relationships. Generalising even further, companies or public-sector enterprises that operate in networked organisations can develop a holistic strategy map to describe the collective and shared value-creation process they are engaged in.
2. Realise that cities and provinces, and even nations, around the world are using our framework for describing and communicating strategies for competitive advantage, and then successfully implementing their visions with our strategy execution system. Among the leading governmental examples are the cities of San Fernando and Iloilo in the Philippines (guided by Jesus Estanislao of the Institute for Solidarity in Asia), Christchurch in New Zealand, Barcelona in Spain and Abu Dhabi in the UAE; Brazilian states, such as the Rio Grande do Sul; and the nation of Botswana. As citizens around the world demand more transparency, accountability and performance from their governments, the benefits of using the BSC to focus and align public-sector entities will become even more compelling in the years ahead. We are particularly excited about that.
3. Use the strategy map as a jumping-off point for risk management, especially the identification and management of strategic risks. Much of risk management today is narrowly oriented around compliance and controls. While managing these risks is important, companies often neglect the inherent and unavoidable risks that arise from their strategies. For each strategic objective on their map, company managers should identify the risk events that could lead to failure to achieve the targeted performance. They can then quantify the likelihood and consequence from each identified risk event and develop key risk indicators and risk mitigation initiatives that serve to reduce the likelihood and/or consequences of the most significant risk events.
4. Use the strategy map as a central change management tool. Some of the most successful BSC implementations have happened as new chief executives and agency leaders have attempted to transform the performance of the enterprises they now head. Among the most important change management principles are building consensus among the guiding coalition and communicating the new vision and strategy clearly to all employees. Having the executive leadership team build the strategy map and scorecard together creates consensus and commitment among the team. The map itself has proven to be a great communication tool to reach the hearts and minds of all employees. The quantification of performance for strategic measures gives employees a deeper understanding of what they are being asked to accomplish with the new vision and strategy, and empowers them to act in a way that helps the organisation succeed with its new strategy.
5. Expand the role for analytics in the strategy execution system. One of our disappointments over the past 15 years has been the slow uptake by companies to allow more testing of their strategies. They can use BSC data to distinguish when disappointing performance is caused by poor execution of a good strategy, as opposed to when it has been caused by very good execution of a poor strategy. We have discussed this possibility extensively, yet very few companies carry out formal statistical analysis of their data to detect potential violations of the hypotheses in their strategies. Data analytics can also be used to design operational dashboards by identifying indicators and metrics that best predict excellent customer and process performance. Additional analytic opportunities are integrated with a company’s activity-based costing system to develop customer profitability (and loss) metrics to include on the scorecard’s customer perspective.
Click here to view the "Six-stage closed loop management system for strategy execution"
With this ambitious agenda ahead, we expect to continue to be writing and speaking about the application of the BSC strategy execution system for many more years.
Robert S. Kaplan, Harvard Business School, and David P. Norton, The Palladium Group.