Financial Executives Online

Leading Change with The Balanced Scorecard
By Robert S. Kaplan and David P. Norton

We thought we were making an advance in performance measurement systems in 1992 when we introduced the Balanced Scorecard. We quickly learned, however, that measurement has consequences far beyond reporting on the past. Measurement creates focus for the future and communicates important messages to all organizational units and employees. To take full advantage of this power, companies integrate their new measures into a management system.

A successful Balanced Scorecard (BSC) program should be a change project, not a "metrics" project. Initially the focus is on mobilization and creating momentum to get the process launched. Executives use the BSC to communicate a vision for performance that is dramatically better than the present. The focus then shifts to governance, with emphasis on team-based approaches to deal with the transition to a new performance model.

Gradually, a new system evolves, a strategic management system, which institutionalizes the new cultural values and structures. The executive team links traditional processes - like compensation, budgeting and resource allocation - to a BSC that describes the strategy. The management system wires every part of the organization to the strategy scorecard.

Adapting an organization's measurement system to the change agenda is critical for achievement. Steve Kerr, in a famous 1975 article entitled, "On the Folly of Rewarding A, While Hoping for B," described how management espoused its desire for long-term growth but rewarded quarterly earnings performance. It's not surprising that managers delivered quarterly earnings performance, but did not invest for long-term growth.

Managers measured and evaluated by short-term financial measures will manage to those measures and likely short-change new initiatives for growth, customer-focus, innovation and employee empowerment.

Executives who adopt the BSC for their new strategies understand the need for a new measurement framework and see it as a powerful tool for driving change initiatives. The executive leadership that creates the BSC becomes the guiding coalition for driving change in the organization. The process of building the scorecard builds both the team and its commitment to the strategy. The scorecard makes the vision and the strategy operational. Words do not sufficiently communicate change initiatives, since the same words mean different things to different people. It's when word statements are translated into measures that everyone in the leadership team understands clearly what the vision and the strategy are about.

But strategy cannot be implemented by the senior leadership team alone. Implementation requires the active contributions of everyone in the organization. For the new strategy to triumph, it has to move from the boardroom to the back room and to the front lines of daily operations and customers.

Those who adopt the Balanced Scorecard have strategies that include a strong growth component. They don't want to increase profits simply by cutting costs, downsizing and eliminating unprofitable business units; cost and productivity improvements typically deliver only the short-term component of the strategy. The executives also wish to improve profitability long-term through expanding revenues.

It's not hard to build a business plan on a spreadsheet to meet specified growth objectives; the hard part is identifying how the assumed growth rate will be achieved. The BSC helps an organization specify in detail the critical elements for its growth strategies: targeted customers for profitable growth; the value propositions that lead customers to do more business and at higher margins with the company; innovation in products, services and processes; and investments in people and systems to enhance processes and deliver differentiated value propositions for growth.

The dynamics of the executive leadership team frequently determines whether the BSC can be sustained so that the strategy can be executed as planned. Most executive teams consist of functional specialists, each with intense specialist knowledge, who have surprisingly little awareness of how other functions work. To ensure success, organizations must transform their collections of functional specialists into cross-functional, problem-solving teams.

At Mobil North American Marketing & Refining, now part of ExxonMobil Corp., the finance and the operations disciplines dominated the executive team. Brian Baker, then Mobil NAM&R's CEO, remarked: "We were a company with a lot of engineers - analytical people - and pretty introspective. We hadn't looked outside the business at the customer, and we hadn't understood the importance of the customer."

As the senior managers tried to become consumer-driven and sell products other than petroleum, they had to elevate the marketing executive's role. Five years later, every executive understood the nuances of the market segments, how Mobil differentiated itself and the drivers of consumer behavior. The cultural transformation occurred by putting the customer on the agenda and getting an intelligent spokesman to help bring the rest of the team along.

The creation of the shared vision and strategy is an effective way to build an executive leadership team from a collection of functional and individual business unit heads. And, the framework of the BSC provides a structured way for the team to work together - with a tremendous amount of cross-fertilization taking place as each element of the strategy becomes translated into the scorecard format.

Strategic issues surrounding customer segments, operations, cost of capital, information technology and human resources become the shared issues of the executive team; historically, each of these issues has been considered the domain of a single functional executive.

The BSC strategic management system works best when it's used to communicate vision and strategy, not to control the actions of subordinates. This use is paradoxical to those who think that measurement is a control tool, not a communication tool. Excellent leaders recognize that the biggest challenge they face in implementing change and new strategies is getting alignment throughout the organization.

Cigna Property & Casualty's then-CEO Gerry Isom expressed this dilemma: "How do you get 6,000 people's minds aligned to the strategy? How do you get the functions people are performing aligned with the businesses they were supporting? The BSC became my key communication vehicle for reporting, planning and budgeting processes. It shifted us from a bureaucratic, autocratic, top-down company with people working within organizational silos, to one that was streamlined and participatory, had top-down and bottom-up communication and [one] with people that worked across organizational boundaries."

Strategy-focused organizations use a new kind of reporting and feedback process. The BSC focuses the management meeting agenda on strategic issues, teamwork and learning. Traditionally, management meetings focused only on financial measures and tactics. The BSC expands this process by having the meetings report and discuss all the measures relevant to the strategy plus the initiatives designed to improve measured performance.

This agenda focuses attention on the strategy and identifies the management and organizational actions required to get performance back on track, or to adapt the strategy to changing opportunities and threats.

Yet the protocols for many management meetings are all too familiar. AT&T Canada's President Bill Catucci said, "People told you what they did last month and what they were going to do next month. It was show-and-tell with no focus. Operational reviews and discussions of tactical issues dominate the typical meeting. Little time is left for strategic issues."

Catucci scheduled a new monthly Strategic Management meeting one year in advance, making attendance compulsory for himself and the eight business unit heads. He added, "How you conduct the meeting, [and] how you react to the reported numbers, is tremendously important. In the past, the person reporting an unfavorable number was lonely and isolated. Now, I want people to admit to shortfalls and have everyone else respond, 'How can we help?' This is an entirely new management model for the company. We're sharing information and working together as a team to improve operations and fix problems. This monthly meeting has become so interesting, people started to ask me if they could attend. I could sell tickets to it."

The BSC is most effective when it's part of a major change process in an organization. Adopting the new measurement and management system helps leaders communicate the vision for change and empower business units and employees to devise new ways of doing their day-to-day business to help the organization accomplish its strategic objectives.

Robert S. Kaplan is a professor at The Harvard Business School and David P. Norton is Founder and President of the Balanced Scorecard Collaborative. Drs. Kaplan and Norton are developers of the Balanced Scorecard and co-authors of Harvard Business Review articles and books, including The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Harvard Business School Press, 2001).