Customer satisfaction, employee skills or product and process innovation are among factors tipping the scales against purely financial measures of performance.
For decades companies have measured performance by financial indicators alone. These may have been appropriate in an industrial age, when wealth was created through converting labour, raw materials and capital. In the information era, however, there is a growing consensus that financial indicators on their own, however conclusive they may seem in their air of numerical precision, are neither an adequate measure of competitiveness nor a guide to future performance.
This sense that performance metrics need to promote a broader view is most evident in the obviously knowledge-based service industries, but is relevant in manufacturing industry too, where the value chain now incorporates such elements as service, customised design and response times. There are also external pressures, from environmental lobby groups, for example, for companies to take a more inclusive view of their responsibilities and worth, and even from City analysts, who say they would take a longer-term view of companies if only they had the information.
One solution is what has become known generically as the balanced scorecard.
This is an approach devised by David Norton, president of Renaissance Solutions, the international strategy consultancy, and his partner Robert Kaplan, Arthur Lowes Dickinson professor of accounting at Harvard Business School. In 1990 Norton and Kaplan conducted a KPMG-sponsored, year-long study with a dozen US companies, motivated by the belief that relying primarily on financial accounting measures was leading to short-term decision-making, over-investment in easily valued assets (through mergers and acquisitions) with readily measurable returns, and under-investment in intangible assets, such as product and process innovation, employee skills or customer satisfaction, whose short-term returns are more difficult to measure.
Meanwhile, companies such as BP Chemicals and Xerox have independently been developing their own versions. According to a Tower Perrins survey of 100 top companies in the US last year, 60% had adopted the new approach. In the UK, the adherents include BT, BUPA, the Halifax, Shell and Brown & Root.
The balanced scorecard does still include the hard financial indicators, but it balances these with other, so-called soft measures, such as customer acquisition, retention, profitability and satisfaction; product development cycle times; employee satisfaction; intellectual assets and organisational learning.
However, exponents also emphasise that the balanced scorecard is more than just a collection of measurements. After all, comments John Geanuracos, managing consultant at Renaissance Solutions in London, the problem is not that companies currently do not measure enough factors. On the contrary, he says, 'Companies now have too many measures: 95% are not needed to run the business, but have just developed ad hoc, over time. Companies are measured to death. The point is, what are you actually doing with this measuring?'
Speaking at a Business Intelligence conference in London recently, Norton explained that while the balanced scorecard is a measuring system, like any such system it cannot live in isolation. Inevitably it becomes tied into budgets, goal-setting programmes and incentives and compensation. Crucially, exponents see it as a way of implementing strategy, linking strategy to action and making strategy understandable to those on the front line as well as to senior managers. A survey by Renaissance Solutions and Business Intelligence found that only 60% of UK executive management clearly understood their organisation's vision or strategy.
So how do you draw up a balanced scorecard? First, you need some concept of where the company or strategic business unit wants to be in three to five years - the vision, whether it is to be the world's favourite airline or the biggest and best financial services company in the UK. 'The trick is to use this as a framework,' says Geanuracos, 'to work with the management team to flesh out that vision.' Next, you need to define your strategic objectives. The Norton-Kaplan model views these from four 'perspectives' - financial, customers, internal processes and organisational learning. For industries like oil and chemicals, a category for the environment and regulatory requirements may be necessary, while the Xerox system includes one for leadership. What you end up with, Geanuracos suggests, will not be 12 or 13 discrete goals but 'a linked set of objectives, a way of thinking about the business as a whole'. And these goals will themselves suggest the measures, he says. Thus Norton uses the example of Kenyon Stores, a fashion retailer, whose financial objectives were profitable growth, increased penetration and improved productivity, to be measured by operating income growth, sales per store, and expenses as a percentage of sales.
Customer objectives of right product, image and ideal shopping experience were measured by average annual purchase growth, premium on branded items, and customer surveys. The internal processes included brand dominance, sourcing and distribution, and shopping experience, measured by market share, out-of-stock incidence, and sales per square foot; and the learning objectives of developing strategic skills, providing strategic information and aligning personal goals with the scorecard were measured accordingly.
The strategic business unit is usually the really important level for introducing the scorecard approach. The Halifax retail network, which has developed its own (paperless) version, is a good example.
'Historically, the way we managed the network was against solely hard measures, like product sales, quality standards and audit grades,' explains David Fisher, head of retail sales. 'Now, instead, we look at four areas: the way we manage our people, and what they say about that (measured in a quarterly questionnaire); how we manage internal processes (for example, audit standards and the relations with the Halifax's financial services and property services wings); levels of customer service (measured by reports from a mystery shopper and by six-monthly market research surveys, interviewing 100,000 customers across every branch in the network); and business performance (measured by actual sales against the whole range of products).'
The theory, Fisher explains, is that getting people management and development and the internal processes right will generate customer satisfaction which will lead to improved sales performance. The effect of the scorecard, he says, is that 'people understand exactly what we need to do and why: if it's on the scorecard, that's what matters'. Scorecards are displayed on desktop machines in each branch. Each branch manager can only see information for his or her branch, each area or regional manager for the relevant area or region, and so forth. The head-line screen displays a distillation of statistics for each area - for example, the customer service survey covers 50 items, but these are compressed into just five components. A further 70 screens can, however, be accessed for further levels of data.
The Halifax system took a full two years to develop, says Fisher. The process involved wide-ranging discussions with senior managers on the network's strategic direction, followed by exhaustive discussions with managers and staff. 'It is essential to have this management and staff involvement,' he says; without it, you end up with unrealistic ivory-tower measures. Furthermore, he adds, a balanced scorecard in isolation doesn't achieve anything: it must be used as the basis for performance management, succession planning and personal development.
Comments Rick Anderson, performance analyst at BP Chemicals, which introduced its system in 1994: 'Most of the measures we use are not new, but they had been held in different silos, different boxes, in the organisation. The new approach has brought existing measures on to one piece of paper, so everybody can relate to one area.' It means that there are common definitions of reliability, for example, across the company's 50-odd plants, and 'common conversations'.
Finally, note that the scorecard is not graven in stone, but needs to be modified, adapted and improved in the light of experience. So, for example, BP Chemicals reviewed its system six months ago, to include external benchmarking so as to assess the competitiveness gap, and quarterly supply chain measures. And Xerox, which introduced its system in Europe in 1992 and worldwide in 1994, has recently completed an update. Apart from aiming at greater clarity and less duplication, this revision has now built in measures of customer loyalty, rather than just customer satisfaction. Says Rank Xerox (UK) quality manager Reva Braham: 'Business practices, terminology and concepts move on'.
THE XEROX SYSTEM - RESULTS THAT FEED STRATEGIC PLANNING
At Xerox you won't hear talk of a balanced scorecard. But the corporation's 'management model' and 'business assessment process' taken together form just that. Each business unit assesses itself annually against 31 separate items in six categories. These assessments are then validated externally by senior managers from other parts of the business, so as to bring objectivity and a different perspective.
The idea behind the self-assessment, explains quality manager Reva Braham, is 'to see where we are as a business, establish what's helping or hindering our performance, define areas for improvement, and then to drive out some actions'.
The first five categories - leadership, human resource management, business process management, customer and market focus, and information utilisation and quality tools - are enablers or behaviours which drive the sixth category, results. This last includes financial results, but also such items as market share, employee satisfaction, customer satisfaction and loyalty, and productivity.
Each category holds between three and seven items. For example, the customer and market focus category (which lies at the heart of the management model and, fittingly, holds the highest number of measures) includes market segmentation and coverage, customer query and problem management, and customer and market communications.
As with a jigsaw, explains Braham, all the items have to be effective if the whole is to work; and for each item there is a 'defined desired state', 'written in an active, almost emotional way', to create a positive mental image.
Measures have been identified for each item; and assessment will also include root-cause analyses of performance (what causes the gap between the desired state and actual performance, for instance) and, where possible, a look at three-to five-year trends. Items are rated, with evidence to match.
The results of the assessments are reviewed by the board of directors and fed into strategic planning. This is essential, says Braham, if the exercise is to add value to company performance in future.