Does the Balanced Scorecard Improve Performance? Much of the Evidence Available to Gauge the Success of the Balanced Scorecard Has Been Anecdotal. A Recent Survey of IMA Members Provides Numbers. Do They Reach a Final Verdict? You Be the Judge

Abstract

EXECUTIVE SUMMARY A survey of IMA members in management positions indicates that 88% of regular users of the balanced scorecard believe it has led to improved operating performance. Conversely, a KPMG management consultant tags the overall failure rate at 70%. The survey also implies that it is valuable--albeit risky--to link performance targets to compensation. The balanced scorecard (BSC) has been shown by our survey to be successful in many cases. Managers who want to implement this innovation should be cautious, however--it can be risky. Before getting into the hazards and how to guard against them, we will provide some background on the BSC. Robert S. Kaplan and David P. Norton created the balanced scorecard to provide managers with a better performance measurement system--one that is linked to the organization's strategy and does not suffer from the problems of relying solely on financial measures. Financial measures are lagging indicators of performance. They are usually too aggregated to be of much help to management. Financial measures also are easily manipulated to achieve short-term results at the expense of long-term performance. The BSC is a system of financial and nonfinancial measures that reflect a balance between leading and lagging indicators of performance and between outcome measures and measures that drive performance. These measures are selected to complement the organization's strategy. To implement the BSC in an effort to boost the performance of their organization and employees, those designing their scorecards: 1. Identify the best strategy for the organization (usually a specific business unit); 2. Select specific business unit objectives to complement the strategy; 3. Select 20-25 performance measures to track the business unit's progress in achieving those strategic objectives; 4. Establish targets or goals for the performance measures, such as ROI=15%, sales growth=8%, market share=35%, process cycle time=two days, and employee turnover= 5. Communicate these targets to managers and employees; 6. Encourage managers and employees to meet these goals by offering incentives; 7. Communicate the BSC to all levels of the business unit by developing departmental and employee scorecards that complement the measures in the business unit scorecard. The performance goals are usually organized to address four perspectives. Kaplan and Norton recommend addressing the four perspectives that appear in Table 1. (1) The management group implementing the BSC must understand that the four BSC perspectives cited in Table 1 are linked; making improvements in one area can advance others (see Table 2). For example, in a manufacturing organization, employees who are skilled and trained are better able than unskilled workers to improve quality and lower cycle times. Better quality can lead directly to improved measures of customer satisfaction. Lower factory cycle times and fewer defects will lead to increases in the percentage of goods delivered on time. A higher percentage of goods delivered on time will also affect customer satisfaction. An increased level of customer satisfaction will lead to more sales and profits. EFFECTIVE COMMUNICATION Kaplan and Norton believe that employing the balanced scorecard leads to new business processes that can be used to link long-term strategies to short-term decisions. (2) They call one of these new processes Communicating and Linking. To implement the BSC successfully, a business unit must effectively communicate the organization's strategies for increasing shareholder value to all employees. For example, if quality is a component of the business strategy that needs to be sharpened, employees will see measures such as defect rates and warranty claims among the 20-25 performance goals communicated on the BSC. Management conveys the BSC with its performance targets to an entire business unit in meetings and on bulletin boards so employees can see which areas they must focus on without having to read top-level strategy documents. …

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