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The Fourth Generation Balanced Scorecard Approach

It is nearly twenty years since Norton & Kaplan started developing their approach and it has evolved and developed in that time.

Yet I still come across organisations struggling to get a grip on their organisations, influence behaviour, focus activity, get their staff to do the right things in the right way.

I have been lucky enough to have worked with them and followed that path since 1996.

Over the years it has become apparent that clients come to the balanced scorecard and strategic performance management with a number of different needs. These can be thought of as a progression of thinking, but is it not always the case. It is however a convenient way to classify how organisations think about their challenges and where developments are moving.

You can think of these as generations, each serving a different purpose and therefore having different approaches and benefits . In summary:

First generation thinking aims to solve the issue of control and "getting a grip on the organisation". It often creates a simple collection of measures in perspectives.  Such first generation scorecards are useful for operational measures but poor at describing the strategy and change.  They are rarely balanced. They often contain very static measures, as opposed to ones that are designed to drive performance. They are useful, as an operational tool.  Bob Kaplan refers to these as "operational scorecards" Frankly, as every set of measures gets called "a scorecard", some are not even worth of the accolade "first generation".

Second generation thinking focuses on what drives performance. The focus is on the few measures, (often called KPIs) that will make a difference. There is usually some sort of cause and effect model across the perspectives.  They tend also to objectives before measures are developed.  If they include a model of performance it is usually a performance driver model.  They start to reflect change in operations and they describe what drives performance.  They are more selective than first generation in their choice of measures. 

Third generation thinking is about systematic, methodical implementation of strategy. These Strategic Balanced Scorecards address what Norton & Kaplan set out to address: Strategy, its management and implementation.  There are various views on third generation balanced scorecards:

1. Norton & Kaplan's developments of their earlier versions which, though not generally recognised, emphasise the, articulation of strategy through the strategy map, the alignment of the organisation. the role of the Office of Strategy Management and ultimately about strategy execution.


2. Cobbland and Lawrie's Third Generation Balanced Scorecards that emphasise the Destination Statement, the problem of information asymmetry in setting objectives and targets and various implementation problems.

These two approaches have more in common than they have differences. Both contain strategy maps, cascaded through the organisation.  Both set levels of ambition over time, though Cobbland and Lawrie use the Destination Statement, whereas Norton & Kaplan do not.  Both generally use four perspectives (though Cobbland and Lawrie suggest dropping two for public sector organisations) . Both use strategic themes that cross the four perspectives and show the tension in the strategy.  Both use objectives, before measures. Both have scorecards that reflect the measures and targets, but also the the change projects that will bring about the increase in performance.  The projects can be organised into programmes of change that align with the strategic themes. They create conversation, generate understanding and help management learn from their strategy as they implement it.  Both put emphasis the management team agreeing the strategy and communicating it consistently. Both emphasise organisational alignment and communication.

Time to move on

Nowadays we are finding clients come from a different place. Recognising they manage amidst uncertainty and risk, they want agility and responsiveness and the ability to learn as they execute their strategy. They realise that control and measures are inadequate, it is about treating people as human beings, focusing on behaviours, not simply measures and targets. They need to empower people to make decisions locally, have conversations with customers in a human voice and that the most successful executives are managing with both left and right brains. They need ways to capture and manage their new models of business and new ways of thinking about strategy.

We call this "Fourth Generation" Balanced Scorecard thinking

Having been designing and implementing balanced scorecards since 1996, we have developed a number of enhancements, that build upon these approaches, some their limitations and that executives and people find intuitive. We have projects where spontaneous balanced scorecards break out.

This has relied on re-thinking, turning upside down, some of the common practices and assumptions in performance management. For instance we focus on behaviours, not on measures and targets. We assume strategy is continuous. We focus on learning, not simply control. Together, these techniques are encapsulated in the Excitant Fourth Generation Balanced Scorecard approach. You can read about the techniques within this approach in "Strategy Mapping for Learning organizations", written by our Managing Director Phil Jones, and published by Gower (2011). David Norton kindly contributed the foreword to the book, saying

"This book is a 'drivers manual' for anyone who is implementing a Balanced Scorecard performance management system. [...] it is required reading."

and

"...the work of Phil Jones makes a unique contribution to the field of performance management."

Below are some more details of the principles and underlying thinking within this approach..

Fourth Generation Balanced Scorecards start with a model of learning about the strategy as it is implemented.

They explicitly address how an organisation learns, rather than just control and management. Learning is fundamental to balanced scorecard thinking. They speed up the process of an organisation learning from its strategy. Avoiding large plans, the organisation is more amendable to change and more able to respond when changes are needed. This enables learning about the strategy and about the effect of performance.

They recognise how the organisation's approach to governance affects strategy maps and balanced scorecard design. The organisational learning approach reinforces the need to keep the name of the fourth perspective "Learning and growth".That is why the fourth perspective is called "Learning and growth". If it is renamed it undermines how the organisation learns. The focus on learning fundamentally changes how these balanced scorecards are designed, introduced and used.

Fourth Generation Balanced Scorecards create the space for both leadership and management.

Leadership creates the space for your people to perform. Management is making sure it happens. The fourth generation approach explicitly describes where leadership and management play a role in performance management.

Whole brained leadership & management.

To support the leadership and management, Fourth Generation Strategy maps and Balanced scorecards have an "Organisational values" perspective. This underpins the existing four perspectives and incorporates the organisation's values as a driver of performance and change. Organisational values are represented by a lower, fifth perspective that underpins the learning and growth perspective. We have used this approach since 1998.

Our approach invites you to both lead and manage. This is built into how our fourth generation balanced scorecards are designed implemented and operated.

Fourth Generation Balanced Scorecards address both the discipline and culture of performance. They encourage judgement and evidence

Discipline & Culture of Performance

“Measure mania”, “the tyranny of targets, “silo working” and “feeding the beast” are symptoms of a poor performance management culture. Of course, you need the discipline of performance management to keep a grip on the organization: but how do you unleash the potential of your staff to perform to their best?

The discipline of performance is about doing the basics. Evidence is needed to ensure you have the facts so you can manage. The basic information to make decisions. Having that grip, without burdening the organisation: without causing more problems that benefits.

The culture of performance is about getting the best from your people: unleashing their potential. Creating the space for your people to perform. Building their judgement, helping them to understand, analyse and make decisions.

Judgement
AND
Evidence

Judgement is what we pay our experienced managers for. So how do we build it? How do people learn? Our approach helps organisations develop their people,

Fourth Generation Strategic Balanced Scorecards assume that the environment is uncertain, contains risks and assumptions. They support strategy and decision making during uncertainty and change.

The future is uncertain. When we conceive of our strategy we include risks, uncertainties and assumptions. We do not conceive a single view of the future, a mythical single "destination". Rather we conceive of a journey to potential destinations and uncertainties along the way. This is an approach that reflects how Executives actually think.

Management amidst risk & uncertainty.

So we need tools designed to encourage thinking and develop conversation amongst the management team about the organisation's future. To ensure that the team are clear where they agree, where they are uncertain, and clear where (and why) they disagree. These are build into the approach.

These tools and techniques set out the level of ambition and rate of change the organisation wishes to achieve. They help you look forward to describe the environment and the organisation at several chosen points in time. In this one respect it is like a statement of destination, but our approach goes much further. We include assumptions, uncertainties and risks. Capturing the reality that our environment, market and situation might change direction, where there are assumptions about the environment, identifies the uncertainties that need to be understood and risks to be mitigated.

Understanding where there are uncertainties, assumptions and risks amidst this ambition, means that you know what you have to continue to monitor as a team, as your strategy unfolds and is implemented.

They include an external perspective. This has two parts:

Measures and targets have a context. This context is vital to ensure that the measures and targets stay relevant as the environment changes. It also makes it much easier to compare departments, regions or countries that have the same measures but are in different situations.

Awareness: The External context & perspective.

They use External Predicting Indicators. These External Predicting Indicators (EPIs) are used to monitor the external environment for indications that the assumptions behind the strategy has changed or that the environment has altered substantially. These are derived from the Tangible Future and Strategy map. The EPIs ensure that managers are plugged into the environment in which their strategy is being executed so that when they are reviewing the strategy with their strategy map, they are also conscious of the potential of their environment to change.

Incorporate social impact and environmental impact.

We incorporate social and environmental impact without destroying the cause and effect model across the original balanced scorecards perspectives. We recognise that these are a consequence of the organisation's activities and behaviour.

Social & Environmental responsibility

Environmental impact, is added as an external perspective alongside the financial perspective. Social impact can be added above the customer perspective. This represents the wider impact on society or the community than is represented by the customer perspective.

We retain the environmental and social impact question that the other balanced scorecards perspectives ask. What is the financial impact on the company? What do our customers want? What do we have to do well to achieve this? What do we have to learn and grow as an organisation to do this well? How do Social impact and environmental thinking affect our organisational values. These questions embed corporate social responsibility into the strategy and the social and environmental perspectives capture the consequences.

A clear simple public sector and third sector model for strategy maps using existing balanced scorecard perspectives.

Many seem confused about how to use strategy maps in the public sector. We don't understand why they are confused as it is very simple as our approach explains. We call our approach “The three ball juggle”.  The public sector strategy map model understands the tensions and satisfy the three main (often conflicting) demands on public sector organisations:

Public Sector 4G Balanced Scorecard

1. Serving the diverse needs of the public, community and partners,
2. Whilst satisfying the demands of regulators, politicians, governance and fund holders,
3. Yet doing this economically, within the financial and funding constraints.

Many public sector and third sector strategy maps lose the underlying cause and effect model. Ours does not lose this important component. We have a clear simple and logical model that preserves the cause and effect model, so you can describe strategy and show what drives performance. It works for any public sector or third sector organisation. We call it the three ball juggle. You will find it in the various public sector balanced scorecard case studies and examples.

Well developed techniques

These techniques are well developed. We have been using some since 1998 whilst others are more recent. Every client we work with will fit on this ladder somewhere.  Most of our clients use our fourth generation balanced scorecard with some aspects of fourth generation (though occasionally they need help getting past generations one and two first).  If they can only reach some aspects of fourth generation at the moment, we leave them legacy, and aspiration, to reach the other aspects when they are ready.

The best way to understand these developments is to have us explain them to you. To discuss arranging a briefing for you and your team at your own premises, simply contact us.

To get a sense of whether you are at least beyond generation one, this article explains where the second generation thinking and principles kick in. What makes a balanced scorecard balanced.  It might not be what you think. To learn more about these aspects of Fourth Generation Balanced Scorecard see these articles and pages:

1. The Organisational learning model is explained here.
2. Leadership and management
3. The culture of performance: One aspect is explained here.
4. Tangible visions.
5. External perspectives and EPIs. EPIs are explained in this paper
6. Aspects of Social and Environmental impact are explained here.
7. The Public sector strategy map model is demonstrated in these case studies.