Magazine article Management Today

The New Balancing Act

Magazine article Management Today

The New Balancing Act

Article excerpt

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. …

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