Source: Journal of Strategic Performance Measurement
T he Balanced Scorecard concept
has spread throughout the worldwide business and consulting business are met, eventually the dependant financial performance will follow. In fact, he can rightly ward, can only be attributed to exogenous factors over which he has no control and therefore cannot communities at lightening speed, argue to his boss, the Board of be held accountable. even by today’s fast paced Directors, that by achieving the What CEO would fail to be standards. Its approach has instant non-financial goals, he is doing all committed to the creation and appeal to a CEO. On one sheet of that is humanly possible to advance management of this sheet of paper he can not only capture the the owners’ interests. Any paper, this balanced scorecard? key financial goals of his deviation from planned financial organization, but for the first time performance, particularly down- And what line manager would not the most important non-financial welcome the agreed upon set of drivers for their achievement. No tangible operational goals? Given longer will the operational side of EXECUTIVE SUMMARY that lack of top management his business be disconnected from The Balanced Scorecard concept commitment has repeatedly been the financial measures that has intrinsic executive appeal. identified as the single most stockholders use to judge his To be successful the Balanced important factor in explaining the performance. He can be confident Score-card must be viewed as the tip of the improvement iceberg. failure of organizational change that if the non-financial measures, the independent variables of his initiatives such as TQM, Re- Less visible, but equally essential, are processes to assure engineering and Activity Based ARTHUR M. SCHNEIDERMAN is that the scorecard contains the Costing, is not the battle over and an independent consultant on right things and that support systems are in place to maximize success assured? process management. From 1986 to the chances of them being done Yet strip away the declarations 1993 he was vice president of right. of victory by those who make quality and productivity improvement at Analog Devices, External factors or impatience their living from them and you Inc., where he facilitated the may overpower the long-term will find that the vast majority of Quality Steering Council and positive financial consequences of chaired the Total Quality significant non-financial so-called Balanced Scorecards fail Management Implementation improvements. over time to meet the expectations Council. Schneiderman has served Tenacity and faith may be the of their creators. After a few short on the Malcolm Baldrige National most important CEO attributes for Quality Award as senior examiner years of use, they will join the successful Balanced Scorecard and the Conference Board’s US implementation. other fads in the corporate scrap Quality Council II. heap. Why should a tool that
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shows so much promise have such A financial measure of thumb is the juggler’s limit of 7 an ignoble end? has much greater to 10. In fact, my guidelines organizational weight restrict the scorecard to a single 8½ I developed the first balance than its new x 11 sheet of paper, 18 pica or scorecard in 1987 while Vice larger font size and a ratio of non- President of Quality and non-financial financial to financial metrics of 6:1. Productivity at Analog Devices, sibling This numerical imbalance is based Inc1,2,3. Although others have had on the fact that initially, a financial involvement with more scorecard financial and expected financial measure has much greater implementations, I base my views results. organizational weight then it’s new on many years of continuous non-financial sibling. Let’s look at each of these more The difficulty in identifying experience in a single organization closely. scorecard metrics is compounded by as the balanced scorecard “process the emerging requirements of non- owner.” In fact, the balanced owner stakeholders: employees, DETERMINING THE scorecard is in its twelfth year as a INDEPENDENT VARIABLES customers, suppliers, communities valued part of Analog’s planning Determining what went on Analog’s and even future generations. More and review processes4. I firmly first scorecards was easy. Everyone and more organizations are adding believe that a good scorecard can be could hear the voice (or was it the social responsibility as a the single most important shout) of the customer loud and stakeholder requirement by clear: “Where’s my order”? With a including discretionary management tool in Western 20% yield in manufacturing, the environmental initiatives, diversity organizations. To quote Tom cost driver was obvious. A long and employee wellbeing in their list Malone, President of Milliken and of strategic objectives. Unless these manufacturing cycle time (4 times Company: “If you’re not keeping what it could be) compounded the requirements are explicitly score, you’re only practicing.” problem of recovering from a “yield considered, a balanced scorecard I offer the following view as to bust.” Chaos on the manufacturing can be at their expense. why most balanced scorecards fail: floor meant that non-revenue The most important 1. The independent (i.e. non- generating engineering lots, critical implementation imperative for a financial) variables on the to the new product development successful scorecard is the scorecard are incorrectly process, were repeatedly bumped to enrollment of the entire identified as the primary drivers the back of the queue. This organization in its achievement. of future stakeholder satisfaction. significantly lengthened time-to- Duncan MacDougal, a former 2. The metrics are poorly defined. market. Show the resulting Boston University professor, 3. Improvement goals are scorecard to any employee at any observed that all processes in an negotiated rather than based on level and they would say “yup, organization can be thought of as stakeholder requirements, those are the right things for us to being connected by virtual “slack fundamental process limits, and be working on.” Show it to a ropes.” Although any given process improvement process customer and they’d say the same. can initially be improved in capabilities. But, that was more than a decade isolation, eventually the slack 4. There is no deployment system ago. Today, nearly every surviving comes out of the rope connecting it that breaks high level goals down organization has made dramatic to some other process, requiring that to the sub-process level where improvements in those then obvious process’s concurrent improvement. actual improvement activities areas. Now, the vital few are much High performance organizations reside. less visible. One suggestion is to have no slack ropes, creating the 5. A state of the art improvement simply add more non-financial need for total participation in system is not used. measures, but that will only result in achievement of significant goals. 6. There is not and can not be a a loss of organizational focus and a To paraphrase that old saying, an quantitative linkage between non- dilution of effort. A practical rule
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organization is no stronger than its appropriately smoothed, and The Metrics weakest process. metrologically sound may improve, but The stretch objectives that are operational definitions, inherent in a good scorecard can not all too often, 5.Timely and accessible to those be achieved by doing things in the the underlying who can best use them, usual way. As Rita Mae Brown processes don’t. 6.Linked to an underlying data said, “ the definition of insanity is system that facilitates the doing the same thing over and over identification of root causes of again expecting different results” or consensus and a good story are gaps in scorecard results, and as Jim Bakken, former VP of often keys to getting buy-in from the remainder of the organization. 7. Have a formal process for their Quality at Ford Motor Company continuous review and paraphrased it, “doing what you did DEFINING GOOD METRICS refinement. will get you what you got.” Metrics need to be defined and Organizational change is subsumed While financial metrics have maintained in a tops-down and in the Balanced Scorecard, and undergone more than a century of bottoms-up process that combines organizations only change when development and refinement, non- the detailed knowledge of the employees share ownership for both financial metrics are relatively new process executors with the big the goals and means. to the scene. Little wonder that picture perspective of the executive. Given this complexity, how can there are no standards and that This need for joint ownership of an organization construct a current practice yields definitions metrics definition is often scorecard that truly balances all of that often have serious, even fatal overlooked with the result that the the stakeholders’ sometimes flaws. Yes, the metrics may metrics are either unactionable or conflicting desires? The only improve, but all too often, the disconnected from business approach that I have found underlying processes don’t. I’ve objectives. successful is to adapt the written in the past on the methodology and tools used in requirements for good metrics6 and SETTING SCORECARD Quality Function Deployment5 applied the theory to the order GOALS (QFD). This involves three phases: fulfillment process. In summary, Unlike its sports counterpart, a 1. Establish prioritized metrics can be classified as results balanced scorecard needs to have (numerically weighted) (measures seen by the process specific goals and timeframes. stakeholder requirements based customer) or process (internal Unfortunately, most scorecard goals on strategy adjusted need for measures that cause the results) are negotiated, but, as I have improvement. metrics. Results metrics are most previously observed: 2. Quantitatively rank the useful as a management tool and are “Therein lies the basic flaw in processes in terms of their usually what appear on a scorecard. current goal setting: specific goals aggregate impact on these Process metrics are most useful to should be set based on knowledge of requirements. improvement teams since they focus the means that will be used to 3. Create appropriate metrics for attention on the places within the achieve them. Yet the means are the processes at the top of the process where improvements will rarely known at the time goals are list. set. The usual result is that if the have the greatest impact. goal is too low, we will I have found that the group Good metrics are the following: underachieve relative to our activity associated with this 1. A reliable proxy for stakeholder potential. If the goal is too high, we approach not only leads to team satisfaction. will underperform relative to others' consensus, but also produces a 2. Weakness or defect oriented expectations. What's really needed compelling and logical “story” (have an ideal value of zero) and to set rational goals is a means of which is invaluable in continuous valued. predicting what is achievable if communicating the scorecard’s 3. Simple and easy to understand. some sort of standard means for rationale to the rest of the improvement were used7.” 4. Have well documented, organization. Management unambiguous, consistent,
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In that 1988 article, I went on to propose the half-life method. Based on an analysis of nearly 100 improvement efforts, I observed that the resulting metrics improved at a constant rate, expressed in months to achieve a 50% defect reduction. The observed half-life depended on the organizational and technical complexity of the process and ranged from 1 to 22 months. Rather than negotiating scorecard goals, they should be based on knowledge of the required corrective actions, or absent that knowledge the capabilities of the improvement process as captured in an empirical My view is that scorecard model such as the half-life method. deployment needs to be a major STATE-OF-THE-ART activity in the management of IMPROVEMENT PROCESS SCORECARD DEPLOYMENT balanced scorecards. Wherever Nearly half a century ago, the We all know that our financial possible and sensible, scorecard Japanese codified a superior process systems consolidate data generated goals should be disaggregated and improvement methodology called at the transaction level. For deployed downward in the the “7-Step Method10”. This example, individual sales are organization so that each employee approach embodies the scientific aggregated to the product level, then understands their piece of the big methodology at a level that can be to the product line level, and on picture and can share in the employed anywhere and by anyone. until a total corporate sales number knowledge of their contribution to Even before that, similar methods is calculated. This process can be the organization’s overall success. such as Kepner-Tregoe were in reversed providing the means to Where this is not possible, fuzzy wide use in the West. Yet, I am explain changes in total sales. Non- linkages between scorecards can be amazed by the number of well financial measures should in made. There is great value in even known organizations that I’ve principle follow the same model. subjective agreement that if all of visited that still rely on trial and Unfortunately, while sales are the goals of subordinate scorecards error as their official improvement denominated in consistent units of are achieved, than a higher level methodology. They do not call it currency, most non-financial goal will also be achieved, almost that, but diagnosis reveals the lack measures have incomparable units. with certainty. This approach is a of a scientific approach. Usually Combining often involves mixing centerpiece of Hoshin Kanri8, a missing are essentials such as root apples and oranges. However, the planning and management system cause analysis, verification of value of deploying scorecards from widely used in Japan. improvement, documentation of the top to the bottom of the changes, and reflection on the organization is particularly One metric that does transcend improvement process itself. beneficial in providing alignment of processes is the ratio of Although improvement does improvement activities. Without improvement half-life to normative occur by trial-and-error, the rates of this alignment, significant process target half-life. I consider this to be improvement are less than 10% of improvements throughout the the prime measure of organizational what they might be. This is organization fail to generate bottom learning9. compounded by executives’ natural line results. tendency to expect improvement at a rate 10 times what it rationally
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could be. This combination sum of its parts. Being a complex (1987-1992) in his article in the provides ample fuel for frustration. and organic creature, much of its Sloan Management Review (see nature lies in the interaction of these Exhibit 1). In doing so, he not only LINKING BOTH SIDES OF THE parts with each other and with the published what was heretofore- SCORECARD external environment. But not only proprietary information (delivery, I started this article with the premise does organizational and yields, defect levels and cycle that both sides of the scorecard are technological complexity confound times), but also publicly committed linked by a metaphorical equation. the equation. We are beginning to to specific future improvements. In The non-financial measures learn about the applicability of addition, Analog came within days represent the independent variables, chaos theory to business systems. of committing to the publication of the prospective or leading indicators In chaos theory, very small, even the entire balanced scorecard as a of change. The financial measures minute decisions have an regular part of its Annual Report. are the dependant variables and are unexpected yet profound and lasting Concern that “Wall Street” was not the retrospective, lagging indicators. effect. ready for it led to the last minute Some organizations are tempted to I believe that management needs cancellation of this potential make this linkage quantifiable. to take on faith or fuzzy logic the innovation. They ask their improvement team linkage between the financial and Nor does the passage of time leaders to “quantify the non-financial sides of the scorecard. necessarily justify the balanced opportunity,” that is to dollarize the We do the non-financial things scorecard. Achievement of the non- likely bottom line impact of their because it is the collective wisdom financial goals can not assure proposed effort. Fortunately, these of the organization that they will absolute business success. The same organizations run this system improve our chances of success. external environment often open loop so there is no ex post This “leap of faith” can be dominates over internal facto accountability for the evidenced in a number of ways. For improvements. Take for example forecasted financial results. example, in 1988, Ray Stata, then Analog’s case. Exhibit 2 shows its I have learned the painful lesson CEO of Analog Devices, included principal non-financial delivery that an organization is not just the its 5-year non-financial scorecard performance metric and the
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concurrent stock price. There after 1993 and the stock price Yet the reality is that the lag appears to be a good correlation continued to rise to a 1998 split- time between non-financial and (R2=0.64) between percent adjusted peak of around $100. financial performance can be much shipments late and stock price over There are two possible longer than we would initially the seven year period. explanations: the semiconductor expect. First, there’s the time it Unfortunately, the correlation with business cycle dominated, or the lag takes for the customer to perceive delivery performance is negative. time between delivery and stock the change and become convinced In other words, as delivery price was more than five years. that it is permanent. Then there’s performance gets better, stock price Determining which requires the time for them to change their drops! analysis and assumptions that purchasing patterns, often We all know that correlation remain unconvincing. With data lengthened by existing multi-year does not mean causality. But try like these, it is tempting to move to purchase contracts. It would not be explaining these data to someone the “relative” business success surprising for the aggregate lag time who has been only reluctantly argument: things would have been in many situations to be in the range convinced that the non-financial much worse had we not achieved of 5-10 years! scorecard metrics are a leading the non-financial goals. Again, an indicator of future financial success. argument that is hard to prove to the To make matters worse, Analog’s skeptic. delivery performance worsened organizational leadership skilled in what Admiral Hyman Rickover, the 1 Ray Stata, “Organizational Learning – The “Father of the Nuclear Navy” called Key to Management Innovation, Sloan Management Review, Spring 1989 63-74 “courageous impatience.” Even in 2 Robert S. Kaplan, Analog Devices: The monolithic Japan, it took over 25 Half-Life System (Boston, MA: Harvard years after the 1950 introduction of Business School, 1989) Case #9-190-061 3 Robert S. Kaplan, "Companies as TQM for the world's perception of Laboratories," in The Relevance of a Decade, Japanese product quality and Paula Barker Duffy (ed.) (Boston: Harvard Business School Press, 1994): 179- 182. subsequent purchasing patterns to 4 Robert Stasey, “The Evolution of ADI’s change. Scorecard” in New Management Accounting, How Leading-Edge Companies Use In conclusion, it is somewhat Management Accounting to Improve ironic that the first balanced Performance, William F. Christopher (ed.) (Crisp Publications, Inc., 1998): 85-101. scorecard did address each of the 5 Quality Function Deployment, Yoji Akao above challenges. It did not do so (ed.) Productivity Press, 1990 6 Arthur M. Schneiderman, “Metrics for the perfectly, but annually the issues Order Fulfillment Process,” Journal of Cost were reexamined and refined. Management (Part 1: (Summer 1996): 30-42.,Part 2: (Fall 1996): 6-17) Analog’s scorecard was the frosting 7 Arthur M. Schneiderman, “Setting Quality on a very substantial cake. Goals,” Quality Progress (April 1988): 51-57 8 Yoji Akao (ed.) Hoshin Kanri, Policy Unfortunately, many subsequent Deployment for Successful TQM (Cambridge, scorecard attempts have focused on 9 MA: Productivity Press, Inc., 1991). Arthur M. Schneiderman, “Measurement, the the frosting, not the underlying Bridge Between the Hard and Soft Sides,” substance. It should be of no Journal of Strategic Performance Measurement, April/May 1998 14-21. surprise that the wished for silver 10 Arthur M. Schneiderman, “Are There Limits bullet mysteriously melts away to Total Quality Management?,” Strategy & Business, Second Quarter 1998, 35-45 also before reaching it’s distant target. reprinted in abridged form in Measuring Business Excellence, the Quarterly Journal of Business Performance Management, Second Quarter 1998, 4-9.