Norton: Balanced Scorecard must adapt to remain relevant

The management system of the future will need to adapt to a world that demands greater transparency, corporate responsibility, better risk management and changing patterns of human capital management, according to David Norton, co-founder of the most popular performance management system, the Balanced Scorecard.

The Balanced Scorecard is claimed to be used by 70% of companies across the world. The key to its longevity and popularity, says Norton, has been its ability to adapt and provide solutions to changes in the broader economy.

“The management system cannot lead change, it adapts to these broader macroeconomic things,” he says.

“The question about [whether] the Balanced Scorecard is obsolete – the answer is ‘yes’. Every day it becomes partially more obsolete, as do the management systems in general that you are using.”

Norton was speaking at the CGMA event “Kaplan and Norton: A contemporary performance” at the University of Edinburgh on Monday. The event was one of several events happening this week featuring Norton and his collaborator, professor Robert Kaplan, marking the 20th anniversary of the Balanced Scorecard.

In a thought-provoking address, Norton laid out the five major challenges performance management systems must overcome to remain relevant in the next 10 to 20 years.

1. Managing human capital will become a greater issue. Norton says this is due to what he describes as the “stratification of knowledge work”, which could involve organisations carrying out certain functions in countries where they can derive the most value.

“What kind of knowledge work is best done here versus there? In the US we have a certain level of unemployment even though we have hundreds of thousands of jobs unfilled. Why? Because we don’t have trained workers to step in those jobs, they haven’t readapted in the face of the new economy.

“That’s going to be a big deal and is probably the ultimate challenge for people who measure. How do I measure whether or not my human capital is adequate?”

Norton believes part of the answer can be found in the "cause and effect" logic that underpins the Balanced Scorecard approach. Cause and effect describes how delivering performance on a perspective, such as financial success, can only be achieved by delivering on another perspective, such as customer satisfaction.

“A new mathematics is required here,” he adds. “In the old world, I would measure something like employee turnover and I would look at it in isolation. But what we’ve learned through strategy mapping in the Balanced Scorecard is that performance comes from cause and effect relationships.

"For example, if I want to increase revenue, I have to increase customer confidence and participation. To do that I have to find a critical process and improve it, and to do that I have to train people and give them technology. It's a clear set of "cause and effect" relationships that you find when you learn what a company's strategy is."

2. The networked economy describes the growing interdependence companies have with internal and external suppliers.

“Management systems of the last generation were designed with idea of the legal boundaries of an organisation as being the domain for which strategy and measurement was related,” Norton says. “With outsourcing, you find the legal boundaries start to become meaningless. If your IT department reports to you, it’s inside the legal boundaries. But if it is outsourced, it reports to you in a different way.”

This also applies to a growing number of joint ventures as organisations need to manage what the priority of the joint venture is and whether it leans towards a specific partner or adopts a strategy that is different from that of the parent organisations.

3. Transparency: A growing trend is the need for non-profit and governmental organisations to become transparent. Several governments have committed their governance systems to the Balanced Scorecard, such as the governments of the United Arab Emirates, the Philippines and Botswana.

Each country and city has its own priorities, such as the creation of new businesses or to position itself as a leader in an industry sector.

Norton says the challenge is to ensure performance management systems adapt to evolving strategies.

4. A new role for corporations: Norton points out that the role of corporations in society is changing to recognise their impact on the environment and society, and management systems of the future must be designed with this in mind.

“It’s not enough anymore to make money,” he says. “If you broaden the responsibility of an executive, think about the implications of that on the measurement system, instead of narrowly focusing on one dimension as a success indicator.”

5. Risk: The management system of the future must take into consideration that organisations are becoming increasingly risk averse.

“Half of any strategy is what do I do if I succeed, and the other half is what do I do if I fail. I think almost all of our attention in the past decade has gone on the upside. Now, through a combination of randomness and forces, we are seeing problems in the financial system, rogue traders, hurricanes, problems in quality control of health-care organisations – disasters all around us. That’s created an awareness that more time has to be spent on dealing with risk and particularly strategic risk.”

On reflection: In outlining challenges for the future, Norton explains that in the past 20 years the Balanced Scorecard has had to negotiate several hurdles, including the shift from a products-based economy to a knowledge-based economy, exponential improvements in the speed of processes and systems, the decentralisation of the workforce and integration of governance systems across an enterprise.

“When I look at what was contemporary in 1992, it was an ugly picture,” he says. “Research indicated that 90% of companies failed to execute their strategy, 95% of employees didn’t know what the strategy of their organisation was. Sixty per cent of organisations did not tie their budgets to their strategy, and some 85% of management teams spent less than an hour a month talking about strategy.

“In 1992, the world changed from being a world dominated by products and tangible assets to being a knowledge economy. The knowledge economy, and companies that compete in the knowledge economy, have a very different set of demands.”

As, too, will companies in 2022 and beyond.

Related CGMA content:

"The Future of the Balanced Scorecard": Kaplan and Norton offer insight into how the Balanced Scorecard can be used to maximise future opportunities.