This is great question posed to my colleague Brett Knowles at a thought leaders panel I participated on a while back. Since this is such an important question and I didn’t have an opportunity to provide my perspective on it, I thought I would now.
First, a little background.
As you may know, the balanced scorecard (BSC) was introduced to the world in the mid 1990’s by Dr.’s Kaplan and Norton as an alternate approach to measuring the performance of organizations. Historically, the focus in business measurement had been on measures of financial performance. Kaplan and Norton forwarded the notion that because these were measures of past performance and were really financial outcome metrics, they provided little insight into how the results were achieved (a critical gap in information when performance results are below target) and were not particularly useful in making decisions moving forward. In response to these flaws, Kaplan and Norton introduced the balanced scorecard, a system of measurement that included both financial AND non-financial metrics (i.e. the drivers of those financial results distributed over three primary supporting perspectives – customer, internal process, and learning & growth – arranged in a logical hierarchy).
At the time, the balanced scorecard was recognized as a revolutionary and transformative approach to business management. However, in my experience, most of the organizations I have seen adopting the balanced scorecard have tended to use the balanced scorecard as a reporting tool with a balanced set of measures (that may or may not relate to strategic objectives) and less as a business performance/strategy management tool and approach. More on this later.
Over time, the use of the balanced scorecard has waxed and waned. There were many early adopters who realized some success with the balanced scorecard. In the recent report “Management Tools and Trends 2011” by Bain & Co. (read the report here), survey results showed that while one half of business leaders in emerging market companies are using the BSC to tell them whether their business strategy is delivering results, only about one-third of executives in established market companies are using it. In addition, three times as many emerging market executives are using the BSC to improve their decision making as compared to business leaders in existing markets. Suggesting perhaps that the balanced scorecard has run its course in mature markets while its use is just being explored in the emerging market climate.
While the Bain & Co. report shows that that the balanced scorecard ranked 6th on a list of the top ten management tools in 2010, this is the same ranking reported in 2008 – a stagnating result. It is notable that the BSC didn’t even make the list prior to 2008 (CORRECTION: I recently learned that the BSC made the Bain list in 2003 with its useage rate falling below the mean compared to similar “compass-setting” tools and satisfaction levels coming in slightly above the mean for all similar tools). Do these results suggest that the balanced scorecard was never that big a hit as a business management tool in the c-suite of businesses in the developed world in the first place and that the current appearance on the list is courtesy of the interest in the BSC in emerging market companies? I’m not sure but would really like to see that research study.
A closer look at a more detailed graph of the historical use of the balanced scorecard provided by Bain & Co. (see it here) tells an interesting story.
This graph shows that, with these respondents, the balanced scorecard came out of the chute strongly in 1996 with a 38% utilization rate. After some mixed results relating to use, there was a strong upswing through the late 1990’s and early 2000’s that peaked somewhere around 2006/08 at approximately 70%. By 2010, this utilization rate had dropped sharply among respondents, settling in at about 48% – roughly a 10% increase over the initial 1996 utilization rate. It will be interesting to see whether this utilization rate holds at this level moving forward.
It is also interesting to note that from 1996 to 2010, the satisfaction rate with the balanced scorecard as a management tool has remained fairly constant hovering around a score of 3.7 out of 5.0. Ironically, peak utilization of the balanced scorecard amongst respondents coincided with a slight dip in satisfaction levels.
So, what caused the big drop in balanced scorecard utilization around 2008? Since we know that satisfaction with the balanced scorecard as a business tool likely wasn’t the driving factor amongst survey respondents, the most obvious culprit, in my opinion, is the economic crash. Basically, it looks like many respondents abandoned the balanced scorecard when business times got rough.
Despite the fact that this study may not be providing us with the most robust data, I think that it may be an interesting indicator of BSC utilization so let’s look at this a little closer. Let’s consider that perhaps the question isn’t just “is the balanced scorecard outdated” – maybe it’s, is the balanced scorecard an outdated tool in volatile, unpredictable, and tough economic times?
What is needed to succeed in the business conditions we are facing today? The short list of key requirements includes the ability to:
1. Know when business performance is heading in the wrong direction as early as possible and have the business intelligence required to change course, eliminate performance gaps/root cause problems in a surgical way, and produce improved results in a short period of time;
2. Have quick access to accurate and timely data that facilitates meaningful and consistent decision-making across the organization;
3. Leverage key external and internal insights and information efficiently and demonstrate agility (the ability to modify the business strategy and align tactics quickly) in the face of changing business conditions (including customer and market needs);
4. Access cause and effect data that can help make targeted investments that are guaranteed to produce specific outcomes and results;
5. Optimize operational efficiency and increase the capacity of existing human resources by eliminating duplication of effort and streamlining work activities; and
6. Develop the capacity to produce better business performance results on a consistent and sustained basis.
Even though these business imperatives actually apply whether we are in good times or in bad, I think the need to be really good at all of them is acutely magnified in a business environment like the one we are in today. Having a gap in just one critical area can mean the difference between business success and failure so when the pressure is on, all of a sudden businesses need to focus on and excel at the 6 items above.
So, how/can the balanced scorecard help business leaders master each of these 6 business requirements?
If you take the limited view of the BSC, often adopted by BSC users, that the balanced scorecard is simply a new type of report that contains a balanced set of financial and non-financial measures, then I would say that the balanced scorecard might only be able to help you out with items 1 and 2. Given this, it’s obvious why executives might turn away from the BSC in tough, demanding business conditions – they are looking for a more comprehensive, all in one solution.
If you view the balanced scorecard strictly as a business reporting vehicle then I would agree that it is an outdated tool, particularly in volatile, unpredictable, and tough economic times.
However, the real power of the balanced scorecard is discovered when you treat it as a strategy-focused business management system. This system includes (1) your strategy map, where a focused set of strategic objectives are placed over four perspectives in order to clarify the strategy and the cause and effect relationships that exist among them, (2) the core business processes and strategic initiatives that drive or support the actual change required by the strategic objectives, (3) the associated accountability structure, (4) the set of measures/indicators that directly reflect or represent the strategy/strategic objectives and the associated root cause commentary, AND (5) regular discussion forums where business performance and strategic information is exchanged and decisions are made.
If you look at and use the balanced scorecard in this new way, the BSC is well positioned to help businesses address the 6 key business requirements outlined above, making it a very relevant business tool in any business environment but particularly in the one business leaders are facing today.
Further study is required to really understand why the balanced scorecard appears to be losing favor with executives in mature markets versus emerging ones. I suspect that it has to do with both the definition and application of the balanced scorecard AND the nature of the current business environment.
So, is the balanced scorecard out of date, particularly in today’s business climate?
I say definitely not if it is used the way it was truly meant to be used – as a strategy and business management system.
Are you and your team tempted to abandon the balanced scorecard in your search for a tool/tools that will be more effective in tough times? The better suggestion is to ramp up and expand your use of your balanced scorecard so that it can deliver the benefits it was designed to deliver!