What really makes a balanced scorecard, balanced?
If you are used to balanced scorecards that simply have measures in a variety of perspectives, this article will help you. Even if you are familiar with the cause and effect model you will learn about how simple improvements made a big difference to its effectiveness. To understand how requires a short history lesson. This story is so fundamental you can read part of it in the preface to the first balanced scorecard book. I have added some of my own insights having worked for Norton & Kaplan from 1995 to 2000.
Some balanced scorecard early history
Back in 1990 Norton & Kaplan were looking for ways to measure performance in the organisation of the future. By December 1990 they decided it would help to expand an organisation’s scorecard to be organised around four perspectives and published their work as the first balanced scorecard Harvard Business Review paper in Jan 1992.
However, as it says in the preface, “Most organisations implementing performance measurement were NOT linking their measures to strategy.” Sound familiar? It is still very common. The very first organisations to try out the new balanced scorecard approach immediately started to expand the approach because they wanted to align their organisations and communicate the strategy. This was reflected in their second HBR article “Putting the balanced scorecard to work”.
By 1993 Norton (with some others) had formed Renaissance Solutions with the intention of using the balanced scorecard as a vehicle to help companies translate and implement strategy. “Translating strategy into action” was the tag line to the first balanced scorecard book.
Insight 1: Cause and effect
It soon became apparent that to effect change, they needed to create a cause and effect model across the four perspectives. This approach came out of “Performance modelling”. Initial ones were called performance driver models. These were then “branded” as “Strategic linkage diagrams” and later became “Strategy maps”. The insight was to create a cause and effect relationships between the measures across the perspectives, rather than having many measures with unspecified (if any) relationships amongst them.
It was clear in Renaissance at that time (1993/4) that “Balanced scorecard” implementations that stayed on measures, without a cause and effect relationship, created several problems. First there was the question of which to choose? Just collecting and adding extra measures to “Balance” the number in each perspective was ineffective. It just created more measures with uncertain usefulness. Cascading the measures through the organisation was hard because many measures did not easily break down. Aggregating measures caused them to become meaningless.
Insight 2: Objectives before measures
The cause and effect model made a big difference. However another insight also came from the early work at Renaissance: Don’t start with measures: start with objectives. Looking through the libraries of projects I recall seeing “performance driver diagrams” from as early as 1994, which had objectives on them, rather than measures. This was the second major insight and solved many of the implementation problems of earlier engagements. Objectives before measures became embodied in the phrase “Don’t manage what you can measure, measure what you want to manage”.
The benefits of “Cause and effect” and objectives
When you have an agreed objective, the measures are how you assess progress towards that objective. Thus, if a measure is not a good indicator of progress you can change it for a better one without altering the objective. Now we had criteria against which to choose measures and decide how useful they were. Further, when it came to cascading, objectives were easier as they permit potentially different measures as you move down the organisation. As a bonus, objectives, in a cause and effect model communicate the intention of the strategy far better than measures alone. You can describe what you want to achieve (the objective), how you will tell (the measures), the level of ambition (the target) and what will change performance (the cause and effect model).
These two innovations “Cause and effect” and “objectives before measures” were fundamental developments through 1994 and 1995. They made the difference in the balanced scorecard.
Why do so many balanced scorecards ignore these insights?
It does puzzle me that so many organisations claim they have a “Balanced scorecard” yet only have measures in perspectives. It is not as if Norton & Kaplan hid the idea. It is introduced in the first book, on page 30: Page 30 of over 300 pages. The cause and effect model is so fundamental that they devoted the whole of the third book, “Strategy Maps” to the approach. I think this is a cry to say, “Oi, you lot, pay attention! You have missed out a key piece: the cause and effect model”.
nearly twenty years later this seems like ancient history. Yet today (2009) I regularly come across so called “balanced scorecards” that don’t have a cause and effect model. If your “balanced scorecard” is simply measures in perspectives, think again. You have a 1992 model that was discarded as fundamentally flawed by 1994. It is probably why there is frustration with it. Please, at least, move to the 1995 version and develop a cause and effect model. You then have the potential to develop it into a strategic management system, its next development, which added most value to organisations.
I asked Professor Bob Kaplan whether he thought the first book, (published in 1996) was giving too much away. He replied, “It was 18 month old consulting when we wrote it”. Some, it seems, have not even learn the basic lessons from 1994. To bring your balanced scorecard more up to date, and make it even more useful, call us.
Download this article as a pdf: What really makes a balanced scorecard balanced?
Norton & Kaplan (1996) Balanced Scorecard, translating Strategy into action, Harvard Business Press, (preface pages vii to xi)
Norton & Kaplan, (1992) “The balanced scorecard – measures that drive performance” Harvard Business Review, (January-February 1992)
Norton & Kaplan, (1992) “Putting the balanced scorecard to work” Harvard Business Review, (September – October 1993)
Norton & Kaplan (2004) Strategy Maps, converting intangible assets into tangible outcomes, Harvard Business Press.