Introducing the Stakeholder Scorecard

As my previous post outlined, ampoule there is a perceived lack of alternatives to the Balanced Scorecard. It also described why I believe there is potential to improve upon the Balanced Scorecard, order particularly when it is used as a strategic management framework (either on its own or in conjunction with the Strategy Map approach, also developed by David Kaplan and Richard Norton).

It was both these points that Richard Sanders and I sought to address when we devised the Stakeholder Scorecard. Our approach was described in an article published in Strategy, the journal of the Strategic Planning Society, in December 2010 and a copy of that article

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(Developing a Stakeholder Scorecard) can be downloaded from this site.

Taking a multi-stakeholder approach

Richard’s and my starting point was seeking to define an approach for developing strategy that would beget a performance management framework, in contrast with the Balanced Scorecard which evolved in the opposite direction. Underlying the Stakeholder Scorecard is the belief that strategy is best developed when the interests of all stakeholders are considered – a belief that has been supported by research undertaken by Jeffrey Pfeffer (see Shareholders First? Not So Fast, Harvard Business Review, July 2009) and by Nathan Washburn (see Why Profit Shouldn’t Be Your Top Goal, Harvard Business Review, December 2009).

The research found that returns for shareholders were improved when strategy development encompassed multiple stakeholder perspectives. In this context, strategy becomes the art of balancing the interests of different stakeholder groups in a way that sustains high levels of profitability over the long term. This stands in contrast to its having the objective of trying to maximise profitability in the short term – what typically happens when the interests of shareholders are focused on overwhelmingly.

This is not (as one of my colleagues perceived it to be) an attack on shareholder capitalism. Given that Richard is now a private equity investor, there is no way he would have been involved had that been the case. (Previously he spent several years in strategy consulting and was Strategy Director of the John Lewis Partnership; he is also a non-executive director of a couple of companies, including CarbonRiver, an emissions management and carbon accounting company and an executive recruitment firm – diversity of experience that provided the breadth necessary for a pan-stakeholder approach.) It simply advocates what economics professor John Kay has called obliquity – the idea that some objectives are best achieved by indirect or oblique means. In this case, long term returns for shareholders are improved if the interests of other stakeholders are given increased weight.

This should come as no surprise – no system will thrive if one member group benefits at the expense of others. Any perceived unfairness in treatment will result in suppliers prioritising other customers, staff leaving to work for other companies, customers defecting to other suppliers or shareholders selling (e.g. if the latter feel senior managers are being paid excessively).

Creating stakeholder value propositions

At the centre of our approach is the idea that strategy development needs to recognise the forces placed on the business by the different stakeholder groups. In essence, it needs to create and maintain a direction for an entity that is being pulled in multiple directions.

This is achieved through the creation of value propositions for all stakeholder groups, not just customers as has traditionally been the case. In addition, for each stakeholder group there needs to be a clear definition of what the business seeks to gain in return for delivering this value proposition. The result is a clearly defined value exchange which seeks to balance outbound forces (what stakeholders receive) with inbound ones (how the business extracts a return from the value it is creating for each group).

The value exchange

Central to balancing the interests of each stakeholder group is balancing the value exchange with each one. A value exchange that is highly favourable to one particular stakeholder group will mean there is less value for others to share. Effectively that group is pulling others in the direction it wants to go.

This will be strongly influenced by the business’s bargaining strength vis-à-vis each group. A monopoly supplier will ensure a more favourable exchange than if the business has twenty suppliers to choose from. Strong competition in the market place will bias the exchange in favour of customers. Or if a business is reliant on staff with rare and sought after skills, they will be able to extract a premium.

Focusing on trade-offs more than cause and effect

Strategy is first and foremost about making trade-offs and these intra- and inter-stakeholder group value trade-offs need to be the focus of strategic decision-making and management. A business will never be able to afford all that it wants to do if it is to deliver a reasonable return to shareholders. At its heart, strategy is the task of allocating scarce resources. Highlighting the choices that need to be made – making trade-offs the focus for strategic discussion rather than hypothesised cause and effect relationships – ensures that management is focused on making the most difficult decisions, both explicitly and openly.

Cause and effect cannot be ignored – a business will need to undertake initiatives to enhance its capability to create and extract value from its relationship with each stakeholder group. But there needs to be acceptance that you might do the right things but get the wrong results because for example a new competitor has entered the market, a natural disaster meaning raw material prices have rocketed or restrictive new regulation has been enacted. Equally the reverse could be the case. A company may have done the wrong things – developed the wrong capabilities, implemented the wrong initiatives – but show sparkling results due to luck flowing its way (a competitor going bankrupt or being taken over by another, plummeting raw material costs, etc.)

Focusing primarily on trade-offs rather than causes and effects is the first area of difference between our approach and the Balanced Scorecard. The second is ensuring that all stakeholder groups are dealt with directly through the creation of stakeholder value propositions. And the final one is the need for businesses to consider both how they create value for stakeholders and what they gain in return for doing so, with KPIs in place to track their performance on each side of this value exchange.

A better approach?

Does this make what we have developed a better framework than the Balanced Scorecard? That is not a question that I can answer in an unbiased way. Equally I expect others to find deficiencies in what Richard and I have developed. No problem, especially if any criticisms are matched by constructive efforts to improve upon it. More than being ‘the’ alternative to the Balanced Scorecard, the Stakeholder Scorecard is ‘an’ alternative. Performance management should evolve, but at the moment it is perceived to start and finish with the Balanced Scorecard. If the area is to advance that perception has to end; and ending it begins with all of us trying to build something that we believe is better.

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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.