This discussion raises two questions
How best to measure sustainable and environmental activities
and strategy?
How do I represent them on my strategy map and in my balanced
scorecard?
An Environmental Balanced Scorecard
I often get into discussions about how the Balanced Scorecard
needs another perspective in addition to financial, customer,
process and learning and growth to represent the environment.
If you are trying to do an environmental scorecard read this,
because it explains why doing so will cause you to make many mistakes
and miss a real opportunity. We started developing these over
ten years ago, so know what works and what misses the point.
Adding an extra environmental perspective to your balanced scorecard
seems an obvious thing to do, but can cause two problems. It van
mean you will lose the drivers of sustainable activity.
It can also cause you to look at sustainable activities in
isolation rather than as a part of what everyone does. Both
create problems for organisations and undermine sustainable and
environmental activities.
As you will discover reading further, you can represent any environmental
strategy for an organisation within the balanced scorecard framework
as a theme, which does not destroy its structure and increases
the impact of your environmental strategy, objectives, measures
and initiatives. It also makes it easier to tell the story of
your environmental strategy: and that must be a good thing.
Some argument you need a dedicated environmental perspective
in the scorecard otherwise it does not address the significance
of Kyoto (or other environmental legislation) and its impact on
management reporting. For instance with Kyoto:
Chapter 40 of the Kyoto agreement sets out some national
level PI's related to the environment and sustainability. Kyoto
Chapter 40 defines Performance Indicators for use at Government
level, and Government will pass the necessary measures into
law that will force organisations, profit and not-for-profit,
into reporting on them. Chapter 40 effectively demands such
reporting be placed on the statute book of signatory nations
with much the same level of precedence as financial reporting.
The UK Government and other signatories have already implemented
a number of measures as a direct result of Kyoto. Other Governments
are doing the same kind of thing.
Does sustainability reporting, as a global issue, fit into the
Norton & Kaplan scorecard model? Isn't this balanced scorecard
model ultimately profit driven? Doesn't sustainability address
a wider social impact? Therefore it seems legitimate, if only
on a practical data management basis, to have "Environment"
as a fifth perspective.
This is all true, but leads to a wrong conclusion. Trying to
argue for a separate "Environmental perspective" misses
a fundamental understanding of the balanced scorecard model.
Why this thinking is wrong? Lets us look at some examples that
demonstrate how sustainability as a strategy is best represented.
Sustainability and environmental strategy are themes, not
perspectives.
Your sustainability or environmental strategy is a theme
of your strategy that spans the existing balanced scorecard
perspectives. It is a (vertical) theme of your strategy map.
To understand this, just for a moment think of all the other
similar aspects of a business. You could introduce new (horizontal)
perspectives for financial compliance, Health and safety, Innovation,
Customer service, Sales, Cost reduction and every other potential
theme of the strategy (as people amazingly do).
Guess what? When you then ask "How are these related to
the other perspectives in a cause and effect framework?"
there is not a simple answer. Why? Because what they are doing
is lumping anything associated with the environment into a single
perspective of the strategy map whether they be related to values,
capability (learning and growth), process, customers and their
needs, financial impact or CO2 emissions. Therefore you lose the
causal nature of the thinking and relationships between perspectives.
They lose anything that drives and tells the story of the strategy.
You also lose the ability to ask, questions about how the startegy
happens.
There are at least five potential themes in a sustainability
strategy map that illustrate how they should work. All of these
illustrate how all the Balanced Scorecard's perspectives apply.
Along side an organisation's strategic themes of making some sales,
managing costs, complying with health and safely, etc, there are
possibly another 5 themes to do with the environment.
They might have an interest in
i) Monitoring the environmental legislation to ensure you comply
(Understanding it)
ii) Complying with the environmental legislation (doing it)
iii) Reporting statutory environmental compliance (proving it)
iv) Innovating how you comply with and help save the environment
(doing it better)
v) Using PR about your environmental credantials to influence
customers and investors (levering it)
Having worked with environmental specialists in various companies
and public sector bodies we have made this work in practice. Let's
look at the balanced scorecard perspectives for these themes:
Financial impact of sustainable practices:
Well, there is
a) the cost of compliance, the cost of innovation and the potential
cost/risk of non-compliance (i, ii and iii),
b) the benefits of environmental processes, products and services
that create revenue (iv),
c) The marketing and market value of improved good practice in
cost of capital as well as the social costs of environmental improvement.
(Just simply think triple line accounting here - it works fine)
Customers of sustainable practices
There are likely to be at least four types of customers in the
broadest sense:
Processes - and their potential L&G pieces
Well that is trivial from the themes now (you see clever design
of the themes means that these things just fall out)
i) One represents your process for monitoring legislation. Of
course you may need additional skills, knowledge and capabilities
to this well which will appear in your learning and growth perspective.
Fail and there will be financial costs. The customers are the
regulators.
ii) You will have processes for monitoring your compliance with
the legislation. compliance (and the cultural piece of embedding
environmental thinking in the activities of production/maintenance
which would be represented in the learning and growth perspective.
Again, fail and there will be financial costs. The customers are
the regulators.
iii) You may need an effective environmental compliance reporting
process. I put this here to distinguish it from normal organisational
compliance practices. Again you may need to develop environmental
auditing skills or some other environmental capabilities. There
are costs with reporting compliance. There are costs with carbon
trading in both the trades and the transaction costs.
iv) If you have an R&D process (which some call an innovation
process) and that is aimed at improving sustainability then you
will also need to develop your organisation's R&D skills (L&G).
If it is about including environmental capability and thinking
into your existing R&D process, then the process remains the
same but new skills, competencies and capabilities will be needed.
Your customers are your customers and the financials will be mainly
revenue based.
v) Oh yes. Or course organisations want to make something of
their environmental credentials and therefore its useful to think
of the environmental public relations process. If you manage to
add to your environmental credibility, they you might improve
your share price, attract new customers or win awards that add
to your credibility and value.
As you can see, each of these are THEMES of the strategy. They
illustrate how the perspectives of the scorecard tease out the
underlying structure and system. They lie vertically across
the four horizontal perspectives quite comfortably. So
you don't need an environmental perspective.
What about CO2 you might ask. What about it. It is an output
and therefore needs to be in the upper perspectives. Sometimes
you will generate it directly through your activities. Sometimes
your customers will generate it for you (for instance when your
packaging is disposed of) , your product used or your product
recycled at the end of its life.
You could simply place a (total) CO2 number in the financial
perspective. This will have the effect of saying that our "environmental
profitability" is
revenue minus costs minus environmental impact.
Associated with CO2 are financial outcomes. It is being given
a financial value in the carbon trading protocols and through
other means.
So finally I will contradict myself and say that you could,
if you wanted to, put a CO2 perspective alongside the financial
one to represent the carbon impact of your organisation's activities.
Alternatively, just like the social impact you could report it
and also account for it with a surrogate financial cost within
the financial perspective explaining how it was derived just as
you explain how your revenues, costs, loans, working capital,
property and other financial assets are derived.
By starting with the view, it is not a separate perspective you
can see how we have teased out aspects of the environmental and
sustainability agenda into the existing perspectives of the balanced
scorecard and expanded the thinking about how you will achieve
these ends. If you had simply popped anything to do with sustainability
and environmental issues into a single pop you would have lost
this thinking about how you will achieve it.
That is up to the management to decide.
The context and system you are dealing with
Just be careful which system you are thinking about as well.
As an organisation you will operate in an industry that may have
environmantal initiatives and be subject to legislation. Likewise
as an industry you may lobby or seek to improve its environmental
impact. You are also working in the context of a government (or
governments). Therefore your organisation's environmental strategy
may be subject to local (or global) legislation and emphasis.
Be clear which part of these systems and at what level you are
thinking and working. It helps to tidy up your strategy maps and
your strategic thinking.
Getting started
Sustainability strategy maps and Environmental Balanced Scorecards
We have examples of environmental and sustainable strategy
maps and balanced scorecard that we can use to help you develop
useful and sensible environmental scorecards.
Climate change scenarios to test your strategy
We also have environmental scenarios explore how different
environmental changes and legislation could affect organisations.
They are really powerful for helpoing you to develop a sustainable
environemntal strategy.
To find out more, simply contact us.
