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Drawbacks of the Balanced Scorecard
25-Feb-05 [ by Larry Chao ] 9311 Read and 92 Comment

David Norton and Robert Kaplan's balanced scorecard offers an elegant tool to create strategic focus. But without strong management in place‚ it can do more harm than good‚ writes Larry Chao.

The latest management tool making the rounds in Thailand is David Norton and Robert Kaplan's balanced scorecard concept. Designed to keep an organization focused on its strategic objectives by defining and measuring key business drivers‚ it is touted as the cornerstone for decision making. But without sound management judgement‚ the balanced scorecard has limited value.

The idea behind the balanced scorecard is quite simple. Norton and Kaplan originally proposed the concept in the January 1992 issue of Harvard Business Review. It was introduced as a management tool to convert a company's strategy into performance measures grouped into four different "perspectives" that drive a business: (1) financial‚ (2) customer service‚ (3) internal operations‚ (4) innovation and growth.

According to the concept‚ management can steer its strategy if it has relevant performance measures in all four perspectives. Each perspective focuses and optimizes organization resources to the benefit of total organization performance. The balanced scorecard also reveals trade-offs between different measures such as operating income and new product development‚ so that management can decide how to prioritize decision making to achieve strategic objectives.

Norton and Kaplan more recently designed a second management tool called strategy maps to complement the balanced scorecard. These maps enable managers to trace how individual jobs‚ assets and processes are wired to drive strategies and performance measures. For example‚ as Norton and Kaplan suggest‚ strategy maps show how faster process cycle time and better customer service skills are linked to customer satisfaction.

Together‚ strategy maps and the balanced scorecard are intended to provide management the information needed to run the business. But like the concept of reengineering‚ the balanced scorecard is less elegant when applied in real life. Confusion often arises when cascading performance measures down through functions and departments. For example‚ how do you allocate and align performance measures for customer service between sales and supply chain? If shared measures are missed‚ who is really accountable? How do you design a practical method to collect and interpret performance data?

Take the actual case of a bank here in Thailand that invested in the balanced scorecard. The bank defined strategic objectives‚ translated them into performance measures‚ and linked them to individual performance and compensation. Defining performance measures such as branch revenues‚ customer satisfaction and products per customer was straightforward. But when managers cascaded measure and began using the scorecards‚ complications they hadn't anticipated emerged. Here is what went wrong:

  • Inability to keep up with change. Some performance measures had to be continually reset to reflect rapid changes in the marketplace‚ introduction of new technologies that altered operations and restructuring. This proved impractical and counterproductive.

  • Explosion of complexity. As performance measures were distributed to divisions and departments to measure more specific activities‚ so many variations cropped up that it was impossible to align them properly.

  • Breakdown in teamwork. In the absence of clear roles and responsibilities‚ when performance targets were missed‚ cooperation quickly deteriorated to finger pointing and blame.

  • Handcuffing managers. Managers complained that too many performance measures made it difficult to prioritise activities. For example‚ what should come first‚ higher customer satisfaction or higher productivity?

  • Impractical to measure. The amount of time and energy spent collecting data every month to measure performance was enormous. Moreover‚ data collection was inconsistent‚ leading to misleading results.
In many cases‚ the information needed to run a business effectively already exists. The key is developing the management capability and discipline to use this information. Jack Welch‚ former chairman of General Electric once remarked that running GE was no different than running a mom and pop grocery store. Both have suppliers‚ customers‚ inventory and employees. The problem occurs when individuals do not share information. The lesson is obvious: With good management‚ business is simple. Use the balanced scorecard to keep it that way.

Larry Chao is managing director of Chao Group a strategic organization change and executive training firm

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