Can we not improve on the Balanced Scorecard?

Despite criticisms emanating from academic circles in the years after it was first launched, the Balanced Scorecard has reigned as the undisputed champion of performance management frameworks since Robert Kaplan and David Norton introduced it in the early 1990s. In a recent on-line discussion between members of the Strategic Planning Society Linked In group on whether it was an excellent tool or the reverse, one participant commented: “It seems unlikely that one third of the world’s largest companies would use the BSC or BSC-based approaches if they thought it was a waste of time.”

Assuming this to be true (and I have no basis for not doing so), it is compelling evidence of the Balances Scorecard’s mass appeal. But mass appeal can be

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interpreted in a number of ways (not all of them positive) and the second part of the comment was even more illuminating: “Sure, BSC has some problems and limitations, but it’s a big improvement on the alternatives – which are … ??” This raises the question: has the absence of credible alternatives played a significant part in the Balanced Scorecard’s success or does that simply reflect it?

In the online discussion, I was in a small minority of dissenters choosing to highlight the Balanced Scorecard’s weaknesses rather than its strengths. I certainly recognize that the latter exist – notably the rigour and balance it introduced to performance management; and that it was a huge improvement on what existed before. Equally that there is great value in the Strategy Map approach of started at the desired financial outcomes and working backwards through the customer value proposition to identifying capabilities and initiatives. However there are areas where it presents an appealing but overly simplified view of much more complex reality; and in the process, encourages focus on the wrong things.

My challenges to it fall into 3 categories. Firstly its assumptions on causality across the perspectives seek to force-fit cause and effect relationships into a rigid framework, creating an unrealistic view both on the ease of identifying correlations and the value of those that are found. (High correlation could signify cause and effect or both being effected by a separate unmeasured cause). Secondly the model does not deal holistically with the capability elements. Thirdly, strategy should explicitly consider all stakeholder groups – not just customers and shareholders. (Other groups are indirectly considered through the Learning & Growth or Internal Business Process themes, but all groups should be considered directly, not through other lenses.)

The appeal of cause and effect thinking

As the Balanced Scorecard evolved, particularly with the development of Strategy Maps, the role of causality became increasingly central to its intellectual underpinning. It is easy to understand the allure of assuming effects can be linked tightly to specific causes. It creates an impression of control which is very appealing – far more so than believing control is limited by factors beyond a business’ control, such as the behaviour of competitors, and the sheer multitude of variables that impact business outcomes.

Causality is most easily observed in closed, tightly-coupled environments – press on the accelerator of a car and you will go faster, turn the steering wheel to the left and the car will go left. In an organizational context when there are only internal factors to consider, as is the case when making many operational decisions, such thinking drives improvements in productivity, output and profitability.

But at a strategy level the key forces are external. As a result causality is much less easily defined – outcomes cannot be clearly linked to actions taken. To extend the driving analogy, you may not be able to press hard on the accelerator due to tailbacks caused by other traffic. This does not mean cause and effect linkages do not exist, merely that they are much harder to identify accurately and confidently. Seeking to identify correlations across measures, a necessary but not sufficient step for identifying causality, is likely to be both frustrating and potentially misleading. A business might be taking the right actions but not enjoy any improvement in performance due to external factors (e.g. the entry of a new competitor). Perhaps worse, an improvement in results (again due to external factors such as the competitive environment becoming more benign) may encourage continuation of actions which, in reality, are contributing nothing.

The presence of confounding factors, as statisticians call them, means strategic reasoning is generally inductive rather than deductive. A combination of factors generates a particular conclusion. Similarly a combination of factors and actions (or inactions) generates a particular outcome, with the exact impact of any one mostly impossible to ascertain.

But the Balanced Scorecard is unashamedly deductive – one result leads to another which leads to another. This creates an unrealistic expectation and one that is compounded by how the causality is squeezed into the four pre-defined perspectives with a pre-determined sequence – improving Learning and Growth performance leads to improving the execution of critical Internal Business Processes which drives better performance in the Customer dimension which in turn delivers superior Financial results.

Evolution from Balanced to Causal Scorecard

This was not always the case. At its inception in 1992, the emphasis was very much on balance. This came in three forms. Firstly the four areas provided a check that no area was being neglected – that good performance in one was not at the expense of poor performance in another. Secondly monitoring of external performance factors (e.g. customer satisfaction) was balanced with that of internal measures (e.g. delivery lead times). Thirdly that a balance was being struck between current results, as defined by the Financial perspective, and future growth, the latter being a function of performance on the other three perspectives. (The latter point being an example of inductive reasoning – together the Learning and Growth, Internal Business Process and Customer perspectives would drive future performance.)

But by 1996 the Balanced Scorecard had begun to morph from a framework for performance measurement into one for strategic management. And in the process, the emphasis switched from balance to causality. By 1996 and certainly by 2000 when Kaplan and Norton introduced the concept of Strategy Maps as a complement, a more accurate name for it would have been the Causal Scorecard.

The rationale cited in their 1996 Harvard Business Review article was a client who had sought and found a number of correlations, specifically between the number of suggestions and employee morale (two learning and growth measures), employees’ suggestions and rework (a process measure), employee morale and customer satisfaction; and customer satisfaction and the speed of invoice payment, thereby reducing accounts receivable.

Kaplan and Norton argue that evidence of correlation confirms the strategy is working; but that if over time the expected correlations are not found, it should be a sign that the theory underlying the unit’s strategy is not be working as intended. The result of which is that either the assumptions underpinning the strategy or the quantitative relationship between the scorecard measures need to be adjusted. That could be the case and would certainly imply the strategy should be rethought. But an alternative explanation is that the purported linkages in the balanced scorecard framework do not work as neatly as the authors suggest, especially if the target outcomes are genuinely strategic (and therefore subject to external forces). Or that if the correlations are strong, the measures are more operational than strategic (e.g. the increased speed of invoice payment cited above and associated reduction in working capital).

Strategy: a problem of constrained optimization rather than simple cause and effect

Rather than cause and effect, a more accurate way to look at the relationships would be as a problem of constrained optimization. Take the relationship between customers and shareholders. The best way to delight customers would be to sell stuff very cheap or give it away free, but obviously this would not be in shareholders’ best interests. On some points the interests of shareholders and customers align, on others they conflict.

This duality exists in the relationships between all stakeholder groups. There is both alignment between the interests of suppliers, staff, partners, customers and shareholders; and conflict. Alignment in how the ecosystem creates economic value, conflict in terms of how that value is shared between the different stakeholders groups. And perhaps the biggest problem with the Balanced Scorecard is that it only considers customers and shareholders directly. Others are only considered indirectly in the Learning and Growth or Internal Business Process themes.

Equally it does not force the consideration of both how value is created for each stakeholder group and the business outcomes expected in return for delivering that value. This is where the conflicts between stakeholders lie and the trade-offs must be made; and this is what a genuinely strategic performance measurement system needs to track.

Capability confusion

There is also some confusion as to how capabilities are developed. Capabilities are made up of a number of different elements – organization design (reporting lines, focus of organizational groupings, the design of roles and responsibilities, how performance is measured), the culture of the business (e.g. values, beliefs, attitudes and behaviours), staff competencies (skills, experience, levels of education and training), process design and enablement of those processes via IT systems.

In the Balanced Scorecard, competencies along with automation and culture are part of Learning & Growth. Processes are seen to be synonymous with capabilities, rather than a sub-component. And the role of organization design is not explicitly included.

To some degree these different capability components are substitutes for each other. Heavy investment in process design and documentation with a high degree of technology enablement means that you can get away with staff with less experience and less initiative. You can achieve customer intimacy by organizing around customer segments, by having a customer-centric culture or through designing processes with CRM system enablement that deliver pro-active and customized service levels.

Potentially a business can do all three, but that will be costly, either in terms of investment or operating costs and possibly both. That is sustainable if a price premium can be charged, but more often than not, profitability requires prioritizing expenditure on one or two capability components, not all. All of them need to be considered, not just a sub-set; and they need to be considered holistically rather than sequentially to enable the required trade-offs to be made.

Could do better?

All this is not to deny that there are considerable strengths to the Balanced Scorecard framework and that many companies

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have used it to great effect. In its first manifestation it was a massive leap forward on what existed before; and for that Kaplan and Norton deserve their place in the pantheon of management gurus.

Over time, though, the underlying philosophy has changed but not the structure. At times the latter appears a constraint with there being a difference between what they argue is important and what the framework actually delivers. (For example in their 2000 Harvard Business Review article on strategy maps, they state that a strategy should outline how a company will satisfy shareholders, customers and employees. But while value proposition for customers is specifically mentioned, it is implied that the Learning & Growth perspective provides the same for employees.)

With that in mind, I can’t help but question that if they were re-starting from scratch today, with what they know now, would Kaplan and Norton come up with a structure that was different to the Balanced Scorecard? I would never expect them to admit such a thing because they have invested too much in their franchise to risk eroding it in any way. But the rest of us do not face the same constraints. That a forum of well-informed strategy enthusiasts should perceive there to be no credible alternative is surely an indictment of the strategy community (however that is defined). At the very least we owe it to each other to try.

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About Jack Springman

I am a consultant with experience in business strategy and customer strategy development, customer management and customer service transformation.