WHY BALANCED
SCORECARDS FAIL
Arthur M. Schneiderman
▀▀▀
T he Balanced Scorecard concept
has spread throughout the
worldwide business and consulting
longer will the operational side of
his business be disconnected from
the financial measures that
stockholders use to judge his
performance. He can be confident
that if the non-financial measures,
communities at lightening speed, the independent variables of his
even by today’s fast paced business are met, eventually the
standards. Its approach has instant EXECUTIVE SUMMARY dependant financial performance
appeal to a CEO. On one sheet of The Balanced Scorecard concept will follow. In fact, he can rightly
paper he can not only capture the has intrinsic executive appeal. argue to his boss, the Board of
key financial goals of his To be successful the Balanced Directors, that by achieving the non-
organization, but for the first time Score-card must be viewed as the financial goals, he is doing all that is
the most important non-financial tip of the improvement iceberg. humanly possible to advance the
drivers for their achievement. No Less visible, but equally owners’ interests. Any deviation
essential, are processes to assure from planned financial performance,
ARTHUR M. SCHNEIDERMAN is that the scorecard contains the particularly down-ward, can only be
an independent consultant on right things and that support attributed to exogenous factors over
process management. From 1986 to systems are in place to maximize
the chances of them being done which he has no control and
1993 he was vice president of therefore cannot be held
right.
quality and productivity
accountable.
improvement at Analog Devices, External factors or impatience
Inc., where he facilitated the may overpower the long-term What CEO would fail to be
Quality Steering Council and positive financial consequences of committed to the creation and
chaired the Total Quality significant non-financial
management of this sheet of paper,
Management Implementation improvements.
Council. Schneiderman has served this balanced scorecard? And
Tenacity and faith may be the
on the Malcolm Baldrige National most important CEO attributes for what line manager would not
Quality Award as senior examiner successful Balanced Scorecard welcome the agreed upon set of
and the Conference Board’s US implementation. tangible operational goals? Given
Quality Council II.
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WHY BALANCED SCORECARDS FAIL
that lack of top management process, were repeatedly bumped to
A financial measure the back of the queue. This
commitment has repeatedly been has much greater significantly lengthened time-to-
identified as the single most organizational weight market. Show the resulting
important factor in explaining the than its new scorecard to any employee at any
failure of organizational change non-financial level and they would say “yup, those
initiatives such as TQM, Re- sibling are the right things for us to be
engineering and Activity Based
Costing, is not the battle over and ▬ working on.” Show it to a customer
and they’d say the same.
But, that was more than a decade
success assured?
scorecard are incorrectly ago. Today, nearly every surviving
Yet strip away the declarations
identified as the primary drivers organization has made dramatic
of victory by those who make improvements in those then obvious
of future stakeholder satisfaction.
their living from them and you 2. The metrics are poorly defined. areas. Now, the vital few are much
will find that the vast majority of 3. Improvement goals are less visible. One suggestion is to
so-called Balanced Scorecards fail negotiated rather than based on simply add more non-financial
stakeholder requirements, measures, but that will only result in
over time to meet the expectations
fundamental process limits, and a loss of organizational focus and a
of their creators. After a few short
improvement process dilution of effort. A practical rule
years of use, they will join the of thumb is the juggler’s limit of 7
capabilities.
other fads in the corporate scrap to 10. In fact, my guidelines
4. There is no deployment system
heap. Why should a tool that that breaks high level goals down restrict the scorecard to a single 8½
shows so much promise have such to the sub-process level where x 11 sheet of paper, 18 pica or
actual improvement activities larger font size and a ratio of non-
an ignoble end?
reside. financial to financial metrics of 6:1.
I developed the first balance
5. A state of the art improvement This numerical imbalance is based
scorecard in 1987 while Vice on the fact that initially, a financial
system is not used.
President of Quality and measure has much greater
6. There is not and can not be a
Productivity at Analog Devices,
quantitative linkage between organizational weight then it’s new
Inc1,2,3. Although others have had non-financial and expected non-financial sibling.
involvement with more scorecard The difficulty in identifying
financial results.
scorecard metrics is compounded by
implementations, I base my views Let’s look at each of these more
on many years of continuous the emerging requirements of non-
closely.
owner stakeholders: employees,
experience in a single organization
customers, suppliers, communities
as the balanced scorecard “process and even future generations. More
DETERMINING THE
owner.” In fact, the balanced and more organizations are adding
INDEPENDENT VARIABLES
scorecard is in its twelfth year as a social responsibility as a
Determining what went on Analog’s
valued part of Analog’s planning first scorecards was easy. Everyone stakeholder requirement by
and review processes4. I firmly could hear the voice (or was it the including discretionary
believe that a good scorecard can be shout) of the customer loud and environmental initiatives, diversity
the single most important clear: “Where’s my order”? With a and employee wellbeing in their list
20% yield in manufacturing, the of strategic objectives. Unless these
management tool in Western
cost driver was obvious. A long requirements are explicitly
organizations. To quote Tom considered, a balanced scorecard
manufacturing cycle time (4 times
Malone, President of Milliken and can be at their expense.
what it could be) compounded the
Company: “If you’re not keeping The most important
problem of recovering from a “yield
score, you’re only practicing.” bust.” Chaos on the manufacturing implementation imperative for a
I offer the following view as to floor meant that non-revenue successful scorecard is the
why most balanced scorecards fail: generating engineering lots, critical enrollment of the entire
1. The independent (i.e. non- to the new product development organization in its achievement.
financial) variables on the Duncan MacDougal, a former
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WHY BALANCED SCORECARDS FAIL
Boston University professor, Process metrics are most useful to
observed that all processes in an The Metrics improvement teams since they focus
organization can be thought of as may improve, but attention on the places within the
being connected by virtual “slack all too often, process where improvements will
ropes.” Although any given process the underlying have the greatest impact.
can initially be improved in processes don’t. Good metrics are the following:
▬▬
isolation, eventually the slack comes 1. A reliable proxy for
out of the rope connecting it to some stakeholder satisfaction.
other process, requiring that 2. Weakness or defect oriented
process’s concurrent improvement. (have an ideal value of zero)
High performance organizations aggregate impact on these and continuous valued.
have no slack ropes, creating the requirements.
3. Simple and easy to understand.
need for total participation in 3. Create appropriate metrics for
4. Have well documented,
achievement of significant goals. the processes at the top of the
unambiguous, consistent,
To paraphrase that old saying, an list.
appropriately smoothed, and
organization is no stronger than its I have found that the group
metrologically sound
weakest process. activity associated with this
operational definitions,
The stretch objectives that are approach not only leads to team
inherent in a good scorecard can not consensus, but also produces a 5. Timely and accessible to those
be achieved by doing things in the compelling and logical “story” who can best use them,
usual way. As Rita Mae Brown which is invaluable in 6. Linked to an underlying data
said, “ the definition of insanity is communicating the scorecard’s system that facilitates the
doing the same thing over and over rationale to the rest of the identification of root causes of
again expecting different results” or organization. Management gaps in scorecard results, and
as Jim Bakken, former VP of consensus and a good story are 7. Have a formal process for their
Quality at Ford Motor Company often keys to getting buy-in from continuous review and
paraphrased it, “doing what you did the remainder of the organization. refinement.
will get you what you got.” Metrics need to be defined and
Organizational change is subsumed DEFINING GOOD METRICS maintained in a tops-down and
in the Balanced Scorecard, and While financial metrics have bottoms-up process that combines
organizations only change when undergone more than a century of the detailed knowledge of the
employees share ownership for both development and refinement, non- process executors with the big
the goals and means. financial metrics are relatively new picture perspective of the executive.
Given this complexity, how can to the scene. Little wonder that This need for joint ownership of
an organization construct a there are no standards and that metrics definition is often
scorecard that truly balances all of current practice yields definitions overlooked with the result that the
the stakeholders’ sometimes that often have serious, even fatal metrics are either unactionable or
conflicting desires? The only flaws. Yes, the metrics may disconnected from business
approach that I have found improve, but all too often, the objectives.
successful is to adapt the underlying processes don’t. I’ve
methodology and tools used in written in the past on the SETTING SCORECARD
Quality Function Deployment5 requirements for good metrics6 and GOALS
(QFD). This involves three phases: applied the theory to the order Unlike its sports counterpart, a
1. Establish prioritized fulfillment process. In summary, balanced scorecard needs to have
(numerically weighted) specific goals and timeframes.
metrics can be classified as results
stakeholder requirements based Unfortunately, most scorecard goals
(measures seen by the process
on strategy adjusted need for are negotiated, but, as I have
customer) or process (internal previously observed:
improvement. measures that cause the results) “Therein lies the basic flaw in
2. Quantitatively rank the metrics. Results metrics are most current goal setting: specific goals
processes in terms of their useful as a management tool and are should be set based on knowledge of
usually what appear on a scorecard. the means that will be used to
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WHY BALANCED SCORECARDS FAIL
achieve them. Yet the means are
rarely known at the time goals are
set. The usual result is that if the
goal is too low, we will
underachieve relative to our
potential. If the goal is too high, we
will underperform relative to others'
expectations. What's really needed to
set rational goals is a means of
predicting what is achievable if
some sort of standard means for
improvement were used7.”
In that 1988 article, I went on to
propose the half-life method. Based
on an analysis of nearly 100
improvement efforts, I observed that
the resulting metrics improved at a
the top to the bottom of the improvement half-life to normative
constant rate, expressed in months
organization is particularly target half-life. I consider this to be
to achieve a 50% defect reduction.
beneficial in providing alignment of the prime measure of organizational
The observed half-life depended on
improvement activities. Without learning9.
the organizational and technical
this alignment, significant process
complexity of the process and
improvements throughout the STATE-OF-THE-ART
ranged from 1 to 22 months. Rather IMPROVEMENT PROCESS
than negotiating scorecard goals, organization fail to generate bottom
line results. Nearly half a century ago, the
they should be based on knowledge
of the required corrective actions, or My view is that scorecard Japanese codified a superior process
absent that knowledge the deployment needs to be a major improvement methodology called
capabilities of the improvement activity in the management of the “7-Step Method10”. This
process as captured in an empirical balanced scorecards. Wherever approach embodies the scientific
model such as the half-life method. possible and sensible, scorecard methodology at a level that can be
goals should be disaggregated and employed anywhere and by anyone.
SCORECARD DEPLOYMENT deployed downward in the Even before that, similar methods
We all know that our financial organization so that each employee such as Kepner-Tregoe were in
systems consolidate data generated understands their piece of the big wide use in the West. Yet, I am
at the transaction level. For picture and can share in the amazed by the number of well
example, individual sales are knowledge of their contribution to known organizations that I’ve
aggregated to the product level, then the organization’s overall success. visited that still rely on trial and
to the product line level, and on Where this is not possible, fuzzy error as their official improvement
until a total corporate sales number linkages between scorecards can be methodology. They do not call it
is calculated. This process can be made. There is great value in even that, but diagnosis reveals the lack
reversed providing the means to subjective agreement that if all of of a scientific approach. Usually
explain changes in total sales. Non- the goals of subordinate scorecards missing are essentials such as root
financial measures should in are achieved, than a higher level cause analysis, verification of
principle follow the same model. goal will also be achieved, almost improvement, documentation of
Unfortunately, while sales are with certainty. This approach is a changes, and reflection on the
denominated in consistent units of centerpiece of Hoshin Kanri8, a improvement process itself.
currency, most non-financial planning and management system Although improvement does
measures have incomparable units. widely used in Japan. occur by trial-and-error, the rates of
Combining often involves mixing improvement are less than 10% of
apples and oranges. However, the One metric that does transcend what they might be. This is
value of deploying scorecards from processes is the ratio of compounded by executives’ natural
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WHY BALANCED SCORECARDS FAIL
its 5-year non-financial scorecard
(1987-1992) in his article in the
Sloan Management Review (see
Exhibit 1). In doing so, he not only
published what was heretofore-
proprietary information (delivery,
yields, defect levels and cycle
times), but also publicly committed
to specific future improvements. In
addition, Analog came within days
of committing to the publication of
the entire balanced scorecard as a
regular part of its Annual Report.
Concern that “Wall Street” was not
ready for it led to the last minute
cancellation of this potential
innovation.
Nor does the passage of time
necessarily justify the balanced
scorecard. Achievement of the non-
financial goals can not assure
tendency to expect improvement at I have learned the painful lesson absolute business success. The
a rate 10 times what it rationally that an organization is not just the external environment often
could be. This combination sum of its parts. Being a complex dominates over internal
provides ample fuel for frustration. and organic creature, much of its improvements. Take for example
nature lies in the interaction of these Analog’s case. Exhibit 2 shows its
LINKING BOTH SIDES OF THE parts with each other and with the principal non-financial delivery
SCORECARD external environment. But not only performance metric and the
I started this article with the premise does organizational and concurrent stock price. There
that both sides of the scorecard are technological complexity confound appears to be a good correlation
linked by a metaphorical equation. the equation. We are beginning to (R2=0.64) between percent
The non-financial measures learn about the applicability of shipments late and stock price over
represent the independent variables, chaos theory to business systems. the seven year period.
the prospective or leading indicators In chaos theory, very small, even Unfortunately, the correlation with
of change. The financial measures minute decisions have an delivery performance is negative.
are the dependant variables and are unexpected yet profound and lasting In other words, as delivery
the retrospective, lagging indicators. effect. performance gets better, stock price
Some organizations are tempted to I believe that management needs drops!
make this linkage quantifiable. to take on faith or fuzzy logic the We all know that correlation
They ask their improvement team linkage between the financial and does not mean causality. But try
leaders to “quantify the non-financial sides of the scorecard. explaining these data to someone
opportunity,” that is to dollarize the We do the non-financial things who has been only reluctantly
likely bottom line impact of their because it is the collective wisdom convinced that the non-financial
proposed effort. Fortunately, these of the organization that they will scorecard metrics are a leading
same organizations run this system improve our chances of success. indicator of future financial success.
open loop so there is no ex post This “leap of faith” can be To make matters worse, Analog’s
facto accountability for the evidenced in a number of ways. For delivery performance worsened
forecasted financial results. example, in 1988, Ray Stata, then after 1993 and the stock price
CEO of Analog Devices, included continued to rise to a 1998 split-
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WHY BALANCED SCORECARDS FAIL
adjusted peak of around $100. argument: things would have been the change and become convinced
There are two possible much worse had we not achieved that it is permanent. Than there’s
explanations: the semiconductor the non-financial goals. Again, an the time for them to change their
business cycle dominated, or the lag argument that is hard to prove to the purchasing patterns, often
time between delivery and stock skeptic. lengthened by existing multi-year
price was more than five years. Yet the reality is that the lag purchase contracts. It would not be
Determining which requires time between non-financial and surprising for the aggregate lag time
analysis and assumptions that financial performance can be much in many situations to be in the range
remain unconvincing. With data longer than we would initially of 5-10 years! This requires
like these, it is tempting to move to expect. First, there’s the time it
the “relative” business success takes for the customer to perceive
organizational leadership skilled in
what Admiral Hyman Rickover, the Performance, William F. Christopher (ed.)
“Father of the Nuclear Navy” called 5
(Crisp Publications, Inc., 1998): 85-101.
Quality Function Deployment, Yoji Akao
“courageous impatience.” Even in (ed.) Productivity Press, 1990
monolithic Japan, it took over 25 6
Arthur M. Schneiderman, “Metrics for the
Order Fulfillment Process,” Journal of Cost
years after the 1950 introduction of Management (Part 1: (Summer 1996):
TQM for the world's perception of 30-42.,Part 2: (Fall 1996): 6-17)
7
Arthur M. Schneiderman, “Setting Quality
Japanese product quality and Goals,” Quality Progress (April 1988): 51-57
subsequent purchasing patterns to 8
Yoji Akao (ed.) Hoshin Kanri, Policy
Deployment for Successful TQM (Cambridge,
change. MA: Productivity Press, Inc., 1991).
In conclusion, it is somewhat 9
Arthur M. Schneiderman, “Measurement, the
ironic that the first balanced Bridge Between the Hard and Soft Sides,”
Journal of Strategic Performance
scorecard did address each of the Measurement, April/May 1998 14-21.
above challenges. It did not do so
10
Arthur M. Schneiderman, “Are There Limits
to Total Quality Management?,” Strategy &
perfectly, but annually the issues Business, Second Quarter 1998, 35-45 also
were reexamined and refined. reprinted in abridged form in Measuring
Business Excellence, the Quarterly Journal of
Analog’s scorecard was the frosting Business Performance Management, Second
on a very substantial cake. Quarter 1998, 4-9.
Unfortunately, many subsequent
scorecard attempts have focused on
the frosting, not the underlying
substance. It should be of no
surprise that the wished for silver
bullet mysteriously melts away
before reaching it’s distant target.
1
Ray Stata, “Organizational Learning – The
Key to Management Innovation, Sloan
Management Review, Spring 1989 63-74
2
Robert S. Kaplan, Analog Devices: The
Half-Life System (Boston, MA: Harvard
Business School, 1989) Case #9-190-061
3
Robert S. Kaplan, "Companies as
Laboratories," in The Relevance of a Decade,
Paula Barker Duffy (ed.) (Boston: Harvard
Business School Press, 1994): 179- 182.
4
Robert Stasey, “The Evolution of ADI’s
Scorecard” in New Management Accounting,
How Leading-Edge Companies Use
Management Accounting to Improve
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