By Shih-Jen Kathy Ho and Ruth B. McKay
Two Organizations Share their Experiences
Balanced scorecard (BSC) is a performance measurement and strategic management system that translates an organizations mission and strategy into a balanced set of integrated performance measures. The performance measures provide a concise yet complete picture of an organizations progress toward its mission and goal. Organizations that have adopted BSC report varying degrees of success with its use as a motivational tool and form of performance feedback.
This article examines two case studies. At an automobile manufacturer, BSC successfully integrated organizational goals into the daily activities of the employees. In the second case, a bank replaced BSC with an alternative measuring approach because the bank found BSC inappropriate for the organizational culture it wanted to create. The authors compare the two organizations applications of BSC in order to better understand why the organizations experienced such different results and levels of satisfaction.
Balanced scorecard (BSC) is a strategic measurement and management system that translates an organizations mission and strategy into a balanced set of integrated performance measures. BSCs strength lies in its use of both financial and nonfinancial measures in encouraging and rewarding employees in achieving an organizations long-term goals. The creators of the BSC, Robert Kaplan and David Norton, argue that in the information age, organizations require new capabilities for competitive success, such as customer relationships, product innovation, customized products, employee skills, motivation, and information technology. By including all critical success factors in the performance measurement system, the organization will have a better idea of how to achieve its goals.
BSC complements the traditional financial perspective with other nonfinancial
perspectives, such as customer satisfaction, internal business process, and learning
and growth. It also mixes outcome measures (the lagging indicator) with performance
drivers (the leading indicator) because, according to Kaplan and Norton, outcome
measures without performance drivers do not communicate how the outcomes are to
be achieved. By selecting appropriate performance drivers and outcome measures,
the organization will have a better idea of its potential competitive advantage.
The balanced set of performance measures tells a concise yet complete story about the achievement and performance of the organization toward its goals and provides a holistic view of what is happening in the organization. By tying these performance measures to rewards, BSC ensures that the employees will do what is best for the organization as a whole.
Companies can use BSC to accomplish the following objectives:
Applying BSC generally begins with an articulation of corporate strategy by top management, followed by a rough sequence of implementation steps:
Case Studies and Methodology
Within two organizations, an auto manufacturer and a bank (the companies names have been changed), individuals at the management level involved in the application and implementation of BSC were interviewed (a production manager and financial analyst, and a branch manager, respectively). The style of the two-hour interviews was a combination of the focused interview, which uses specific questions, and the in-depth interview, which permits the interviewee to direct the discussion. Each interview also included a questionnaire that examined the sequence of steps involved in implementing BSC, the difficulty of each step, and the employees involved.
LMN Automotive Manufacturer
LMN introduced the balanced scorecard concept prior to 1993 but did not apply the comprehensive format of balanced scorecards, reflecting the business mission and corporate goals, until after 1995. The measurements to be used in BSC were initially directed to the plant level from the corporate level; however, in the beginning plant managers were unclear about how to complete the measurements. Over the years, a common measurement process evolved along five key dimensions: safety, quality, delivery/responsiveness, people, and financial/costs. The most difficult implementation step was pinning down causal linkages.
BSC helped the LMN plant focus on the most important things for the client. If there are too many measures and if the measures are inconsistent, managers may not know which are most important. According to one interviewee, There is a constant trade-off in [en]suring that you dont have too many, but [that] you have the right ones. BSC helped focus management so that when people begin to ask questions about what it is they should be engaged in, it is real[ly] simple: Does it affect the scorecard? If it doesnt, its probably not an activity that we should be engaged in.
The company used only a few common measures that were simple and easy to understand across different plants. Because LMN plants were competing for a finite amount of new business, all plant managers wanted to know that they were measured by the same metrics and that they could contribute to the decision-making process. BSC was a logical extension of the operating of the corporation. According to the financial analyst interviewed, [BSC] gives constancy of focus, constancy of purpose to the corporate vision, all the way down to the person working on the shop floor.
The plant used the visual aid of a traffic light to help employees understand the result of the operations, and the direction of continuous improvement. Each month, management evaluated the trend of the BSC measures and determined if the annual goal was attainable. Red indicated that the plant would not make the goal, yellow indicated that the plant was in jeopardy of not making the goal, and green indicated that the plant would make the goal.
The information technology infrastructure in place allowed the plant to report feedback data promptly. The BSC data were filled out within the first three days after the end of the month. According to the production manager:
BSC is administratively efficient because you get to it and get on with it. We also dont linger over it. The system allows you to quickly take a snapshot of what you did in the prior month. It also gives you data to say here is where we are going in the future.
For most employees, the plant made no direct connection between balanced scorecard results and compensation. Some plant managers compensation was tied to financial indicators for the corporation as a whole (such as increase in revenue, growth in market share, net income, and return on assets). The company introduced a new variable pay system with a somewhat discretionary compensation component that recognized local performance. Although compensation did not consider nonfinancial measures, the interviewees implied that these measures were ultimately reflected in the financial measures because of a causal relationship.
The management of the plant developed detailed action plans (sufficiency plans) to explain how the gaps between performance measures and goals could be closed. Management reviewed these plans constantly by examining the status of the BSC metrics with every business team involved. The causal linkages between different factors were defined as part of this process. According to the production manager:
We are starting to recognize that there is a cause-and-effect relationship to the things that we do. While we constantly fiddle with the dials, we can watch and see what effect that has on those metrics and make sure we are fiddling with the right dials.
Although the production manager considered pinning down the causal relationship to be the most difficult part of BSC implementation, this was also the area where concrete business decisions were being shaped and improvements made.
According to the two interviewees, the measurement system that LMN used before BSC had three notable faults. First, given the number of plants and divisions in the company, each local program was very different and each segment made its own interpretations of the measures. Second, the measures were not connected to the company mission statement. Finally, the standards and measurements in the former system were informal and thus open to interpretation and manipulation.
Both of the LMN plant representatives were very satisfied with BSC. It helped clarify managements responsibility and link authority and responsibility with improved accountability. According to the production manager:
I have never in my life felt as accountable and as responsible for the corporation[s] performance as I do today. I know exactly what the corporation expects of me. There is no ambiguity in what I do.
In 1995, XYZ Bank decided to introduce BSC as a performance measurement system that included a bonus program. The BSC program was based on quarterly performance reviews that could lead to bonus payments depending on how well the bank, branch, and individual performed on three factors: financials, people (customer service, staff relations, and community relations), and operations (audit and control). The program was tailored to each job being performed. For example, tellers were measured on efficiency; sales staff on accounts sold, volume, and account portfolio growth; and branch managers on overall branch performance. Different methods were used to track tangibles versus intangibles. Financials were tracked through the computer system, whereas more subjective measures, such as customer service, required customer surveys by Gallup Poll. Ratings in the three categories were below par, par, and above par. The bonuses were not linked to base salary; however, the company combined the four quarterly BSC results into an annual review to create the basis for salary increases. The most difficult implementation step was preparing the information infrastructure.
BSC replaced a performance measuring system called service building and leveraging (SBL) that rewarded each branch based on margin service scores. The downside of SBL was that it rewarded a branch but not the high performers within a branch. A second drawback was that it did not connect with the organizations goals.
BSC offered XYZ a number of benefits that SBL did not:
Despite the benefits offered by BSC, three and one-half years after introducing it management replaced BSC with a compensation plan (CP) program because the bank encountered a number of problems with the application of BSC. Regulatory changes in the banking, insurance, and securities industries also made BSC inappropriate as a performance measurement system. The first difficulty XYZ confronted was the different interpretations that regions and branches had in implementing BSC. In some regions, branch managers met to discuss their BSC results and distribution of the bonuses, comparing and justifying results. In other regions, it was left to the branch managers individually. Moreover, in some branches the division of the bonus pool created problems. As one interviewee explained:
I think the greatest obstacle was the differentiation in branches of people getting different-size checks for being above par. And [the] different implementation of it, because everyone took sort of their own adaptation where one manager may have a pool of $2,000 for the quarter and have 15 people to split it up. Do you take $2,000 and divide it by 15 or do you just give 50-50 to your two above-par performers?
An interbranch newsletter partially addressed this problem by presenting answers to questions regarding BSC and helping to rectify some differences in branch managers interpretations. By the time the bank replaced BSC with CP, however, there was a widespread belief among employees that the BSC was inequitable across branches, too subjective, and created favorites.
Second, given BSCs subjective nature, branch managers found it an ineffective management tool. Employees that had done well did not necessarily receive a bonus.
Third, BSC did not ensure
good customer service. The Gallup Poll was able to measure the satisfaction of
only a cross-section of customers at a specific time. XYZ found that if the customers
surveyed included several disgruntled customers, the results might not be representative
of all customers.
A fourth problem was the tremendous amount of additional work that BSC required of management. For example, after each quarter the branch manager had to gather and tabulate all the BSC results for each employee. Next, the allocation of the bonus pool had to be determined and discussed through interbranch pool meetings. Finally, branch managers had to meet with each employee for as much as an hour to review individual BSC results. This meant a delay in the bonuses and feedback for as long as two months after the quarter ended.
Although these problems with BSC set the stage for change, the real catalyst was federal deregulation. On November 4, 1999, Congress repealed the Glass-Steagall Act, which had restricted the banking, securities, and insurance industries from entering one anothers businesses. XYZ decided to aggressively pursue market share in insurance and securities products. Management decided that making this change required replacing the banking culture with a sales culture that would motivate employees to sell a wide range of products. Consequently, the bank replaced BSC with CP, which set sales hurdles. Sales above the hurdle were compensated on a percentage basis; tellers were compensated for successful referrals made to the salespeople.
BSC was not suited to motivating employees in this new culture. BSCs cap on bonuses limited sales incentives. CP has no financial compensation limits; employees are rewarded on an individual basis without a per-branch maximum. Secondly, the BSC feedback delay separated performance from reward and made it impossible to immediately reward outstanding performance. The CP system, however, provides feedback by the middle of the following month and is tracked month by month rather than quarterly. As one interviewee reported:
I think it has been a positive way weve been changing. It is more toward a sales culture and in a sales culture you dont wait six weeks to get paid on a commission. If you want your salespeople to sell and [then] pay them you have to do it in a timely manner [N]ow our sales are on a monthly compensation plan and get paid by the fifteenth of the month.
Under this new program, the sale of specific products could be encouraged by increasing compensation. Also, CP is based only on sales and therefore is free of the subjective BSC measures. All sales and referrals are recorded on the computer system as part of the sale, reducing the extra work branch managers must do to compute results. An additional benefit of the CP system is that it holds employees accountable. BSC did not permit management to monitor employee performance month by month.
Overall, the switch from BSC to CP has supported XYZs new sales culture and assisted the bank in making inroads into new markets. XYZ was glad to replace BSC as its performance measurement system; it was time-consuming, subjective, and inappropriate for the new organizational culture.
Differences in the Applications of BSC
There are several notable application differences between LMN Automotive Manufacturer and XYZ Bank (see the Exhibit). The most salient difference is the time to receive feedback. XYZ would tabulate the BSC parameters quarterly, then allow an additional month to six weeks to apply the results to compensation. At LMN, the feedback is developed within the first two to three days of the following month. Timely feedback is critical when organizations are trying to encourage and reinforce particular employee behavior. XYZs slow feedback process may have contributed to the banks decision to drop BSC measurements.
Feedback time was related to the nature and focus of BSC measures. Most of LMNs BSC measures were quite objective, and geared toward managing department or team efforts. Because all the parameter information was gathered electronically during the month, it permitted feedback at the department or team level within days. In contrast, at XYZ Bank, most measures were objective, with some subjective parameters that could not be generated or evaluated as quickly. Moreover, because the BSC was geared toward managing individual employees and linked directly to individual pay, additional effort was required to gather the subjective data at the individual level. This slowed down the feedback time.
LMNs short-term organizational objective was to maintain or attract customers by selling a quality product. In contrast, as a result of deregulation, XYZ Bank placed a greater emphasis on expanding their market. This shift in the emphasis of goals in the short run could have been translated into a change in BSC measures. XYZ Bank could have redesigned the BSC system to place greater emphasis on sales rather than adopting a different performance measurement system altogether.
The top managers at both XYZ and LMN designed their scorecards for the organization as a whole and helped the branch or department devise complementary scorecards. At XYZ, both the measures and their definitions of measures originated from the top down; no additional effort to define the causal linkage was done at the branch level. In contrast, at LMN, BSC measures were given top-down, and the definitions and measurement process evolved over time. LMNs plant mangers were also involved in defining the causal linkages. They experimented to uncover and refine the cause-and-effect relationship.
The Future of BSC
A number of interesting findings develop out of this research. First, prompt feedback is essential to the effectiveness of BSC. The delay in feedback at XYZ Bank may have contributed to BSCs replacement.
Second, BSC works best if employees have input into the formation of the parameters. When XYZ used BSC, the parameters were already set at the corporate level. With LMN, the initial challenge for the plant managers was to determine how to apply the new measurements directed by the top management; employees had to define how it would be applied. This involvement, while frustrating and time-consuming, may have contributed to BSCs ultimate acceptance.
Third, BSC may be most necessary during times of organizational change. BSC is designed to ensure that critical feedback loops are maintained and monitored. Managers can be fixated on isolated events, and during organizational change quick-fix solutions are developed without attention to longer-term consequences. For example, at XYZ Bank, the organizations shift toward acquiring new customers and product sales may undermine customer service. This may not be recognized as a problem until customers start moving their accounts to other banks, at which point it may be too late.
Finally, the number and type of parameters selected
in a BSC must be well thought out in advance. A manageable number of parameters
should be used, otherwise the system will become cumbersome and too time-consuming.
The way XYZ designed its BSC program was too time-consuming, so when the organization
was faced with the change, the prospect of redesigning the BSC program became
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