How to Use the Balanced Scorecard
- 11 June, 2002 11:30
You can't tell when you're winning if you don't keep score. The Balanced Scorecard helps track your hits and misses.
MOBIL OIL (now Exxon Mobil) leaped from last to first in profitability within its industry from 1993 to 1995 - a rank it maintained for the next four years. Cigna Insurance was losing $US1 million a day in 1993, but within two years it was in the top quartile of profitability in its industry. Then in 1998 it spun off a $US3.5 billion division. What's the key to these dramatic turnarounds? These companies attribute at least part of the solution to having implemented the Balanced Scorecard.
Developed in the early 1990s, this valuation methodology converts an organisation's value drivers - such as customer service, innovation, operational efficiency and financial performance - to a series of defined metrics. Companies record and analyse these metrics to help determine if they're achieving strategic goals. A fully implemented Scorecard cascades from the top levels of a company all the way down. Ultimately, each member of the organisation works off a personal Scorecard, striving to achieve personal objectives based on measurements directly linked to the corporate strategy.
It is ideal to implement the Balanced Scorecard throughout the enterprise because that framework helps foster alignment between business and IT, says David Norton, cocreator of the Scorecard and president of the Massachusetts-based Balanced Scorecard Collaborative. Still, the concept can work within an IT organisation specifically . The key difference when the Scorecard is implemented within IT as opposed to the entire company, says Norton, is that the "customer" is a user within the corporation, not an external consumer.
Because the Balanced Scorecard requires every action to answer to established corporate goals, using the Scorecard within IT can still help promote alignment and eliminate projects that contribute little or no strategic value. "It really changes the conversation between IT and business," says Linda Bankston, CIO of DuPont Engineering Polymers, a $US2.5 billion division of DuPont Chemicals. "The conversation is around strategy and impact, rather than just whether you can or can't do something."
Nevertheless, installing the Balanced Scorecard within IT is a challenge. It changes the job approach of all employees - not to mention how they're evaluated. CIOs need to take a number of necessary steps to properly lay the groundwork for a successful implementation.
- Prepare the organisation for change.
- Devise the right metrics.
- Get buy-in at all levels.
- Plan to follow through to completion.
Before jumping in and developing all sorts of metrics, sit down with the rest of the leadership team and define the overall strategy, says Norton. Strategy is typically articulated by four or five value drivers, or broad strategic goals, for the organisation. The Hilton Hotel Corporation, for example, gears its strategy and Scorecard framework around financial performance, customer service, efficient business processes, innovation, learning and growth. It's also critical to designate a Scorecard champion, says Norton. When implementing the Scorecard within an IT department, that champion should be someone other than the CIO. "The CIO is responsible for using and driving the Scorecard," says Norton. "But you need an individual from within IT - maybe whomever's responsible for planning within IT, or someone responsible for preparing your finance or budgeting system - to be assigned responsibility [for the Scorecard]."
To succeed in the role, the Scorecard champion must be capable of strategic thinking, understand the strategic view of the company and have the ear of the CIO, says Al Grasso, former senior vice president and CIO of Massachusetts-based The Mitre Corporation, a non-profit systems development group. "When he has the ear of the decision maker in the organisation, he can effect change," says Grasso, who implemented the Scorecard at Mitre's New Jersey operations facility.
Bill Schiemann, CEO of Metrus Group, a New Jersey-based consultancy that works with the Balanced Scorecard, emphasises that implementation has to start at the top with the CIO (if done within IT) or CEO (if done companywide) and the most senior levels of that person's group. "We find it critical to [agree] upon a set of drivers and results of their business strategy that can be measured," he says. "What we've seen not work at all is delegating the whole thing to a committee to go off and work out measures and come back for a blessing."
Set the Right Metrics
Once the groundwork is set, the next step is to identify both the right metrics and the right amount of metrics with which to track the company's progress toward its organisational goals. At FirstEnergy's $US5 billion utilities division (formerly GPU Energy), one strategic goal is to create "raving fans" among its customers. Its other value drivers are reliability, finance and creation of a winning culture. For FirstEnergy's IT group, raving fans mean internal customers, so CIO Rick Fidler and senior process analyst Mel Brinkman, who is in charge of FirstEnergy's IT Scorecard, have devised three metrics to determine whether they're meeting customer demand.
- Percentage of projects completed on time and on budget.
- Percentage of projects released to the customer by the agreed-upon delivery date.
- Client satisfaction as indicated by customer surveys completed at the end of a project.
At DuPont Engineering Polymers, a major value driver is fostering new business models. For Bankston's IT group, that means streamlining e-commerce. Because avoiding manual transactions is a primary goal of e-commerce, Bankston established a metric for her global program manager and e-commerce technology manager to reduce the number of transactions that require human interface. "This metric gets to the real strategic purpose of having the Internet," she says. "Having someone place an order online only to get a human involved is really not the goal."
Metrics should also relate to softer, less technical strategic goals such as workforce development and retention. At Mitre, Grasso's managers are graded on their ability to keep low attrition rates. Other companies grade managers on how many of their workers have comprehensive development plans - and how those are progressing.
It's important to measure the right factors, but Bankston warns against getting metric-happy. Pursuing too many metrics dilutes the strategic purpose, reducing it to an exercise in information-gathering. "You'll spend too much time reporting measures rather than making a change," she says.
Even with the right number of metrics, you shouldn't phase them in all at once, cautions John Nordin, vice president and CIO of Illinios-based metal distributor AM Castle. When Castle implemented the Balanced Scorecard two years ago, his company identified 13 metrics and focused on all of them simultaneously at the onset. "That's 13 events of discussion, measurement and debate," he says. If he could do it over, he says, he'd take two or three at a time, debate them and see if they work. "It's the idea of creating small deliverables along the way," he says. "You get quick wins for the organisation. Otherwise enthusiasm wanes as the world changes too fast."
Metrus Group's Schiemann also warns against selecting the easiest measures to implement. "If you just pick the things you've always measured before and expect different results in the future, you'll be sadly disappointed," he says. "All too often, there's the tendency to grab the easiest, most readily available measures, missing the more important ones that may be crucial to delivering high value to your customers."
Get Buy-In at All Levels
Implementing an established valuation program like the Balanced Scorecard is a significant change in the way employees view their job. The natural paranoia that comes with change is bound to surface, so it's important to ensure that everyone is into it at every level of the company, from the senior executives all the way to the entry-level employees. To make that happen at Castle, Nordin relied on systematic, organisationwide communication of the Scorecard concept.
Initially, Nordin and five other top-level execs trained on the Scorecard and agreed it was worth a look. Then, instead of emerging from the mountain holding a pair of tablets and an edict for the organisation, they grabbed the next 12 managers down the chain, trained them on the Scorecard and solicited their feedback.
They continued this process until 80 people were involved. Only at that point did they commit to the Scorecard, sending those 80 managers back to their business unit to talk it up with their employees. "We told them to go back and tell their employees what they'd been working on for three days, and to say: Â'I'm not sure I'm convinced - what do you think?'" says Nordin. This tactic involved everyone in the entire organisation - a critical factor in the Scorecard's success.
Once the staff was ready to go, AM Castle hired a training company that developed visual "learning maps" for employees to better understand the Scorecard concept. The company also developed a board game on the Balanced Scorecard that was similar to Monopoly and sent managers to play the game with their business unit. "We laminated them, stuck 'em on a wall and gave out game cards," says Nordin. "It was a huge success."
Balanced Scorecard Collaborative's Norton says that approach is the most effective way to implement the Balanced Scorecard, adding that the Monopoly game is a cool idea. "What this tells me is they understood that to make this work, they had to push it all the way down to the bottom of the organisation and to make strategy everyone's job," he says.
Susan Dallas, research director at Gartner (US), says the best way to tell if the Balanced Scorecard is working for your company is if you set higher measurement goals every year and continue to meet them. Obviously, it takes time to make this type of assessment. In the short term, however, you should be able to see anecdotal evidence that the approach is working, such as whether or not the organisation is meeting budgetary and project goals.
Bob Sheridan, head of market support systems at Connecticut-based health insurer Aetna, says you know it's working if after you ask people what they do, they define their job in the perspective of where it fits in with the strategic business goals of the organisation, rather than simply saying: "I write code."
Finally, says DuPont's Bankston, you should see vastly improved alignment between business and IT. "We're now seeing real joint decision making around what we do or don't do because of how it fits in around the work of the Scorecard."
Remember This . . .
Three keys for a successful implementation of the Balanced Scorecard.
TIE SCORECARD OBJECTIVES TO INDIVIDUAL COMPENSATION. This provides an incentive for employees to take the Scorecard seriously and think about their job in strategic terms.FOLLOW THROUGH. You need to periodically review and revise the Scorecard to keep it relevant as strategy changes. FIND THE RIGHT TOOLS. Many companies that implement the Scorecard either buy or build an application to track the different metrics so anybody can look at the organisation's progress toward its goals in real time. The Balanced Scorecard Collaborative has certified about a dozen vendors' applications, including CorVu, Hyperion, Oracle, PeopleSoft, SAP and SAS.
Can IT Keep Score by Itself
There are strong opinions on both sides of the fence.
The answer is a definitive: "It depends" There's considerable debate over whether the Balanced Scorecard is an enterprisewide tool in which IT plays a part, or whether an IT organisation can independently adopt the Scorecard.
John Nordin, vice president and CIO of metals distributor AM Castle, says it's a mistake to try to adopt the Scorecard as an IT-only program. "Don't build it in a vacuum," he says. If an IT Scorecard is not built against a higher-level Scorecard, he says, there will be no linkage between your metrics and the overall company strategy, and no guarantee that IT is creating value.
However, Susan Dallas, research director with Gartner (US), says IT can "absolutely" do a Scorecard by itself. "In fact, it's probably more important that IT has one than any other department because IT changes so much and the requirements of being an agile organisation are so much more important in IT," she says. "So it's even more important that IT have this kind of forward-looking approach."
Bill Schiemann, CEO of consultancy Metrus Group, agrees but says it's ideal for IT to build a Scorecard that follows the enterprisewide Scorecard. That way the technology strategy is firmly embedded within the overall business strategy.
If you build an IT Scorecard, seek feedback from other departments to ensure the metrics are on target. "This will also create a gesture that you really want to improve service," says Mel Brinkman, a senior process analyst at FirstEnergy, who spearheaded the IT group's Scorecard.
Why Full Rollout Isn't Necessary
The Scorecard can help IT by providing strategic guidelines, even if IT isn't directly subjected to its scrutiny The Hilton Hotel Corporation's experience with the Balanced Scorecard proves that an IT organisation can benefit from the Scorecard, even if it's never rolled out within the department. In 1997, Hilton implemented the Scorecard companywide to maximise revenue, improve guest satisfaction and operational effectiveness, and foster internal learning and growth. However, CIO Tim Harvey never implemented the Scorecard within IT.
Still, Harvey says the Scorecard has been a critical tool for ensuring IT's continued value. Though IT doesn't have its own Scorecard, Harvey says, no IT project is commissioned without tying it back to one of the major value drivers on the Hilton Scorecard. For example, because one of Hilton's key drivers is operational effectiveness, Harvey has made a major push to come up with technology to minimise manual efforts in conducting hotel business. "We're constantly looking at what kind of technology we can provide that will reduce cost as much as possible," he says. Harvey says using the Scorecard as a simple guidepost - even without devising one of his own - has done wonders for IT's relationship with business. "It's helped me make sure that everything we ask the corporation for money for is in complete alignment with the business," he says. "As a result, I've seen the satisfaction with my organisation rise."
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