Double-Loop Management: MakingStrategy a Continuous Processby Robert S. Kaplan and David P. Norton

To ensure that your strategies are adapting to meet changingcircumstances, you need to integrate management control with strategic learning. Two feedback loops can help you accomplish this.In the first, the Balanced Scorecard becomes the agenda for themonthly management meeting — the emphasis here is on strategicperformance companywide. The second loop involves periodic reviewsthat ascertain whether the implemented strategy is working as planned.Even the most well-conceived, most-likely-to-succeed strategy needs real-world monitoring. Things change; the environment in which the strategy was developed may no longer be operative. Yet most organizations lack a management process

for monitoring, guiding, and updating strategy. According to a 1996 survey by Renaissance Solutions, 85% of management teamsspend less than one hour a month on strategy issues, and fully 92%

of organizations do not report on lead performance indicators (Figure 1). The BalancedScorecard offers a solution: a “double-loop” process that integrates tactics management(management control) with strategy management (strategic learning). This new manage-ment system (see Figure 2, page 3) introduces two feedback loops that allow organizationsto monitor and test strategy, to update their scorecard measures as needed, and in turn,to adapt their strategies to changing environments.

In the first loop, the BalancedScorecard itself becomes theagenda for a new managementmeeting — one focused onstrategy implementation.Typically, this meetingoccurs monthly, replacing themonthly meeting previouslydevoted to reviewing budget variances. The emphasisshifts from reviewing financial performance withinfunctional silos to managingcompanywide strategic performance.

The second feedback loopcan occur quarterly, separatefrom the monthly strategyreview meeting. Here, theexecutive team tests whether

Volume 2, Number 4July – August 2000

In This Issue

In Context ......................5Policy Hubs: Linking Analyticand Operational ApplicationsHenry Morris, vice president of datawarehousing for IDC, explains theimportance of rules linking softwarethat facilitates business transactionsor operations to software that auto-mates the monitoring, analysis, and planning activities for specificprocesses. Taken together, these rulesconstitute a policy hub. For maximumutility, a policy hub should addressstrategic analytic applications such asthe Balanced Scorecard.

Case File ........................8The Balanced Scorecard atSears: A Compelling Place for Feedback and LearningSteve Kirn, vice president of innova-tion and organizational developmentat Sears, describes how the willingnessto acknowledge that managementmethods were flawed helped turnaround the general merchandiseretailer.

In the Trenches ............11

Culture and the BalancedScorecard: Is Your CompanyPracticing What it Preaches?A performance management methodology has to resonate with thefundamental values of the organization,argues Ray Bell of British Telecom-munications. Which is why he's infavor of making culture the fifth perspective of a Balanced Scorecard.

Point of View ................14

Should Balanced Scorecards Be Required?External constituencies base theirassessment of the company's value onexpectations about the quality of thecompany's future decisions — andhow those decisions affect suchthings as new product pipelines,recruitment channels, the quality ofthe management, and the quality ofthe strategy. The Balanced Scorecardprovides a standard means of com-municating such information to out-side audiences, declares David P.Norton. It “does for strategic manage-ment what income statements andbalance sheets do for financial man-agement.”

Article Review ..............16

Learning to Learn: UsingModels to Launch theStrategic ConversationA recent journal article examines thetrials and tribulations involved in theNational Reconnaissance Office’s useof the BSC to create a strategicimplementation process.

Continued on next page

HARVARD BUSINESS SCHOOL PUBLISHING

Strategy

Balanced ¤Scorecard

Performance

Budget

Initiatives ¤& Programs

Strategic Learning Loop

Management Control Loop

Update the strategy Test the hypothesis

ReportingFunding

INPUT¤(Resources)

OUTPUT¤(Results)

85% of management ¤teams spend less ¤

than one hour ¤per month on ¤

strategy issues

92% of organizations ¤do not report on ¤lead indicators

Figure 1. Most Organizations Don’t Have A Strategy Review Process

the implemented strategy is working as planned and whetherrecent developments warrant anymodifications. Because the BSCmakes the strategy’s causal linkagesso salient, executive teams can be more analytical with the informationprovided by the BSC feedback systems. Strategy can now evolve as new ideas and directions emerge,both internal and external.

The New Monthly ManagementMeeting: From Tactics toStrategy

Controlling the strategy is what mostpeople think of as management con-trol. The thermostat provides a goodmetaphor for such control, since itdetects differences between the actualand targeted temperatures and adjuststhe heating or air-conditioning unit tobring the outcome back to thedesired state. Monthly reports thatcompared actual performance to thebudget and calculated variances were what managers used to detectwhen initiatives were not beingdeployed as planned, to explain why results fell short of targets, and to plan corrective actions. Thenew monthly meeting, focused on the Balanced Scorecard, expands this thermostatic process by offeringan opportunity to report and discussall strategically relevant measures,along with performance-improvinginitiatives. It intensifies the focus on the strategy and identifies the management and organizationalactions required to get performanceback on track.

For example, at AT&T Canada, CEO Bill Catucci established a newset of monthly meetings for the executive team organized aroundfour strategic themes linked to theBalanced Scorecard. Catucci usedthe meetings to introduce a new culture of teamwork and problem-solving around the strategy. Insteadof dissecting the past, managementused the Balanced Scorecard reportsto direct the future. As Catucci says:

In the past, the person reportingan unfavorable number was lonely and isolated. Now, I wantpeople to admit to shortfalls and have everyone else respond,“how can we help?” Nothing that happens in this company isthe sole responsibility of a singlebusiness unit head. If an indicatoris in the “red (unfavorable) zone,” we identify the peoplewho can influence that indicatorand ask them to come to the next meeting with an action plan.

This team problem-solving process,however exciting, still constitutedsingle-loop control, working withinthe context of the existing strategy,not questioning or changing it.

The Second Feedback Meeting:Testing, Learning, and Adapting

More fundamentally, managers mustdetermine whether their strategies arevalid: will they deliver the intendedperformance breakthroughs? Througha process called double-loop learn-ing, developed by Chris Argyris, theycan examine the assumptions under-lying their strategies. In ChemicalBank’s first Balanced Scorecardmeetings, 80% of the time was spentreviewing financial results and 20%on strategy and its implementation.Soon, that was reversed: the teamspent 80% of the time discussingstrategy and strategic initiatives, andonly 20% on financials.

The strategy review meetings shouldalso explicitly allow for testing andadapting the strategy. We have seenthree processes that do so:

1. Analytic methods (hypothesis-testing and dynamic simulation)

2. Examining the impact of externaldiscontinuities

3. Considering emergent strategies.

Analytic methods. The BalancedScorecard highlights the hypothesesunderlying strategy through the strategymap’s cause-and-effect linkagesacross the scorecard’s four perspec-tives. But hypotheses are justassumptions about how the worldworks. They need to be continuallytested for their validity and eitherrejected when evidence accumulatesthat expected linkages are not occurring— or else re-tooled when unexpectedlinkages arise.

Early in its BSC implementation,Rockwater, a Scotland-based under-sea construction company and a divi-sion of Brown and Root/Halliburton,examined the relationships among its measures and found correlationsbetween employee morale and customer satisfaction, and customersatisfaction and short collectioncycles. A boost in employee moraleled to higher return-on-capital. Bettermorale had another effect: moreemployee suggestions were imple-

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Editorial AdvisorsRobert S. Kaplan, Professor, Harvard Business SchoolDavid P. Norton, President, Balanced Scorecard CollaborativeWalter Kiechel, III, Editorial Director, HBS Publishing

EditorRandall H. Russell, Balanced Scorecard Collaborative

Consulting EditorLoren Gary, HBS Publishing

PublishersRobert L. Howie, Jr., VP, Balanced Scorecard CollaborativeEileen R. Marks, Associate Publisher, HBS Publishing

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DesignRobert B. Levers, Levers Advertising & Design

Letters and Reader FeedbackLetters, editorials, ideas for articles, and other contributions maybe submitted to: Randall H. Russell, Editor, Balanced ScorecardReport, 55 Old Bedford Road, Lincoln, MA 01773 orrrussell@bscol.com.

Subscription Information To subscribe to Balanced Scorecard Report, call 800.668.6705.Outside the U.S., call 617.783.7474. Web: http://www.bscreport.com.For group subscription rates, call the numbers listed above.

Services, Permissions, and Back IssuesBalanced Scorecard Report (ISSN 1526-145X) is published bimonthly. To resolve subscription service problems, please call 800.668.6705. Outside the U.S., call 617.783.7474. E-mail: BSR@hbsp.harvard.edu

Copyright © 2000 by the President and Fellows of HarvardCollege. Quotation is not permitted. Material may not be reproducedin whole or in part in any form whatsoever without permissionfrom the publisher. To order back issues or reprints of articles, or for information about group subscription rates, please call 800.668.6705. Outside the U.S., call 617.783.7474. E-mail: BSR@hbsp.harvard.edu Web: http://www.bscreport.com

Harvard Business School Publishing is a not-for-profit, whollyowned subsidiary of Harvard Business School. The mission ofHarvard Business School Publishing is to improve the practice of management and its impact on a changing world.

Balanced Scorecard Collaborative, Inc. facilitates the worldwideawareness, use, enhancement, and integrity of the BalancedScorecard as a value-added management process. Founded andled by Balanced Scorecard creators Drs. Robert S. Kaplan andDavid P. Norton, the Collaborative provides organizations andindividuals with a global center of excellence and expertise on allthings related to Balanced Scorecards. Visit us on the Web at<http://www.bscol.com>.

Balanced Scorecard Report

mented, which, in turn, led to greaterefficiencies, lower operating expenses,and again, higher return-on-capital.(See Kaplan and Norton’s book, TheBalanced Scorecard, pp. 253–256.)

Using data from its 800 stores, Sears conducted extensive statisticalanalysis to examine patterns ofcausal linkages among scorecardmeasures. Company analysts performed sophisticated causal modeling, factor analysis, and clusteranalysis to identify systematic pat-terns. The results proved fascinating.Employee attitudes drove more thanjust customer service; they directlyaffected employee turnover and PR— the likelihood that employeeswould recommend Sears to family,friends, and customers. The statisticalrelationships revealed how improve-ments in training and employees’understanding of the business translated into higher revenues.Further analysis showed the varyingimpacts of key drivers on differentlines of business at the store level.Initiatives and investments could now be targeted to the particulardemands of each line of business andeach type of store.

Statistical analysis enables managersto evaluate historical relationshipsamong Balanced Scorecard measuresand establish the validity of thecausal linkages in the strategy map.The next step: using the causal relationships to forecast the strategy’strajectory.

Grupo BAL, a diversified Mexicancompany, built a dynamic simulationmodel to support its BalancedScorecard initiative. Although theBalanced Scorecard provided thecommon language for communicatingvalue creation strategies, the simpleBSC strategy maps did not incorporatefeedback loops and delays. So thedevelopment team then built a morecomplex model of the business, using a systems dynamics softwarelanguage. The model quantified themagnitudes and delays betweenchanges in a driver variable and

associated changes in outcome variables, and explicitly incorporatedfeedback loops across measures andperspectives. It gave managers a window into the future to see theimpact of today’s operations.

Although Sears’s and Grupo BAL’sdynamic simulation models and testsoffered new insights, managers stillfaced the challenge of using theseinsights to adapt their strategy.

Examining the impact of externaldiscontinuities. In today’s dynamicenvironment, changes in competition,technology, regulation, and macro-economic events can undermine theassumptions used to create the strategymap and the Balanced Scorecard.Management teams should periodi-cally assess the impact of externalchanges on their strategies.

If the organization has succeeded in making strategy everyone’s every-day job, it can mobilize all itsemployees to be scouts, detecting

external events that can affect thestrategy. This intelligence is a power-ful complement to management’sown information in the monthly andquarterly meetings. While there is nosurefire way of capturing all relevantexternal information that could affectstrategy, the scorecard provides theshared understanding that helpsemployees filter potentially signifi-cant information. Management meetings should be structured so that inputs on strategic opportunities(and threats) come from the entireorganization.

Considering emergent strategies.Employees are often the source ofnew strategies, through initiativesand experimentation, or by identifyingvariations in the existing strategy that yield new growth opportunities.It was a manager in a Mobil sharedservices unit who developed theSpeedpass program, a powerful wayto provide the fast, friendly servicethat embodied Mobil’s differentiated

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Continued on next page

Strategy

Performance

Budget

Initiatives ¤& Programs

Strategic Learning Loop

Management Control Loop

Update the strategy Test the hypothesis

ReportingFunding

INPUT¤(Resources)

OUTPUT¤(Results)

Balanced ¤Scorecard

TESTING, ¤LEARNING,¤

AND ADAPTING¤¤• Testing Causal Linkage¤

• Dynamic Simulation¤• Business Analytics¤• Emergent Strategy¤¤

CLOSING THE¤STRATEGY LOOP• Strategic Feedback¤• Management Meeting¤• Accountability

Figure 2. Make Strategy a Continuous Process

customer growth strategy. Seniormanagers rapidly incorporated thisinnovation into the division’s strategyand onto the divisional scorecard.Lesson: senior management shouldencourage employees to formulateemergent strategies and use its quarterly meetings to evaluate suchlocally generated initiatives.

Updating the Scorecard: the Store 24 Story

Continually reviewing, testing, andadapting strategy may eventuallylead to introducing an entirely newstrategy. Take the case of Store 24, a New England convenience storechain that introduced a new customerintimacy strategy based on innovativein-store promotions designed tomake shopping fun. After two years,however, the CEO scrapped the strategy. Despite acceptable financialperformance (same-store sales grew 4 – 6%, the industry average),customer feedback surveys showedlittle differentiation of Store 24 fromits competitors. The BSC customer

and internal process measuresdemonstrated that the customer intimacy strategy was not working.As a result, Store 24 introduced a new strategy refocusing on operational excellence — efficientservice, excellent selection, and quality merchandise. Its scorecardwas also updated to reflect this shift.Store 24’s experience illustrates how the Balanced Scorecard provided a framework for the company’s double-loop learning. The companyintroduced an innovative strategy,tested it in real time, learned whatwasn’t working, and modified thestrategy accordingly.

The double-loop strategic manage-ment system is a powerful tool,enabling management teams to perform such critical functions as:

• monitoring performance against the strategy;

• working as teams to interpret the data;

• developing new strategic insights;

• updating the measures on scorecards; and, ultimately,

• adapting their strategies to changing environments.

By enabling dynamic adjustments to change — internally as well asexternally— organizations can makestrategy a continuous process.

To Learn More:

Reasoning, Learning, and Action,C. Argyris, Jossey-Bass, 1982.

“Teaching Smart People How to Learn,”C. Argyris, Harvard Business Review (May – June 1991).

“The Employee-Customer-Profit Chain atSears,” A. J. Rucci, S. P. Kirn, and R. T.Quinn, Harvard Business Review (January –February 1998).

“Statistically Validating the Linkage betweenEmployee Satisfaction, Customer Satisfactionand Business Performance,” S. P. Kirn,The 2nd Annual Balanced Scorecard Summit,San Francisco (October 1999).

Reprint #B0007A

Setting the Stage for aQuiet Revolution?Many have said that the recent financialcrisis in Asia could have been preventedby use of fuller disclosure. The argu-ment is that if the inner workings of these large financial institutions had been more visible, then the non-performing loans that precipitated this disaster might have been dealtwith earlier on, and much of the disaster would have been averted. But,of course, this begs the question ofwhat information would have beenuseful to disclose. The larger question,though, is whether top bank managersreally understand what’s going on intheir own organizations, let aloneknow what to report externally.

A recent article in Asia Week (“FixingAsia’s Banks: The Key is NotTransparency, But Having the RightData,” May 26, 2000) reviews the evidence and concludes that “Quantity(of information) does not mean qual-ity. Nor does data mean knowledge.” In fact there is a surfeit of data in mostorganizations to the point that DeloitteConsulting estimates that 70% of anorganization’s effort goes into tryingto collect and format information,leaving just 30% available for analyz-ing what it means and acting on it.

Some organizations are beginning todo something about this imbalance.The first step is getting the basicsright. This means putting in placefinancial and reporting systems forhandling the data about customers thataccumulates with each transaction.This has been the traditional focus of

information management. What’smore difficult is effectively grapplingwith the non-financial data relating toquality issues such as how costs areallocated and how customer relation-ships are assessed. The BalancedScorecard provides a useful frame-work for structuring this non-financialdata on the customer, internal processes,and growth and learning dimensionsof the business.

With such well-structured informationin hand, bankers can then begin toconsider alternative scenarios andmodify strategies based on this integrated information framework.Will this approach help banks avoidcatastrophes in the future? One thingis certain: banks that are capable ofspotting unanticipated developmentsin their businesses will clearly be in asuperior competitive position.

In the News

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The Need to Couple Analytics to Operations

Recently, I spoke at a conference onthe current state and future of analyticapplications — packaged softwarethat automates monitoring, analysis,and planning activities for specificbusiness processes. Separate fromtransactional or operational applica-tions, analytic applications enableorganizations to measure and evalu-ate operational performance — andto integrate and access historical dataderived from multiple sources. Theseare necessary functions, yet they arenot supported by the current generationof ERP applications that are runningsuch business operations as inventorymanagement and customer service incompanies all over the world.

After my presentation, an audiencemember approached me with a prob-lem. His company, a large retailer,had accumulated several years ofcustomer transaction history in alarge data warehouse. This enabled

them to do in-depth analysis of buy-ing patterns, such as market basketanalysis (examining which itemswere purchased together). However,the company, pressed by financialdifficulties, was about to dismantlethe data warehouse in a cost-cuttingmove. How could this be?

I responded that this could only behappening if two things were true.First, the data warehouse was notbeing linked to operations. Theresults of the company’s customerbehavior analysis were not beingused to create different treatments for customer segments that wouldsupport, say, a loyalty or affinity program. Second, when the datawarehouse was designed and imple-mented, the company hadn’t estab-lished any financial metrics by which to gauge the effectiveness ofthis IT investment — that is, whetherit helped improve operations. It turnsout both of my assumptions werecorrect.

In fact, the two points — no linkbetween data and operations, nomeasurement process for the ITinvestment — are closely related.Understanding the linkage from theresults of analysis to the calibrationof business operations needs to bedesigned into any analytic system.Analytics isn’t an abstraction; it can’tsimply be an intellectual exercise. If the linkage is established, you gain the ability to measure theimprovements — a key to building financial metrics into the process.

Policy Hub: Control Point for aBusiness Process

Figure 1 shows the steps in a business process that combines operational and analytical elements.The policy hub is the critical linkbetween business operations anddecision support/analytics.

Let’s consider for a moment the differences between a transactionalor operational system (such as an ERPsystem) and an analytic application,in terms of the processes shown inthe figure. A transactional or opera-tional system covers the followingtwo stages:

• Adjust/act: At this point, businessrules governing specific operations,say, pricing for order management,are established (“act”). Or they aremodified after the operation hasbeen underway for at least a cycle,affording enough time to monitor it (“adjust”). This is necessary forprocessing transactions.

• Track: Here, results are monitoredto get a reading on the state of cur-rent operations — for instance, thecurrent marketing or recruitmentcampaign. These results can becompared to targets or goals thathave been established.

Policy Hubs: Linking Analyticand Operational Applicationsby Dr. Henry Morris, vice president of data warehousingand knowledge management, International Data Corporation

A set of rules governing specific business processes, a policy hub provides the vital connection between analysis and operations. It should include targets for process-specificanalytic applications and strategic analytic applications suchas the Balanced Scorecard.

Policy Hub

ActAdjust

Model

Analyze

Track

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Continued on next page

Figure 1. The Policy Hub in a Closed Loop Business

The next three points in this circuitrefer to what analytic applications do, such as customer or employeeretention analysis:

• Analyze: Time-oriented data frommultiple systems is integrated into a data warehouse in order to sup-port the analysis of key trends.Deviations from expected results or targets are explored, such as factors associated with customer or employee attrition.

• Model: Models are built to predictthe future impact of alternative policies or rules on operational metrics, such as alternative mark-down policies for a retailer.

• Policy hub: The results of theanalysis and modeling work areexamined to support changes to policies and rules governing specific business operations.

Any revisions to current policiesmust be forwarded to the relevantoperational systems where specificadjustments are made (such as pricingchanges) that govern current opera-tions (“act”). There may be severalsystems that must be adjusted, hencethe need for a hub. The results frommultiple systems are monitored(“track”) and analyzed as the cyclecontinues.

Consider, for example, pricing policy

— how a retailer develops markdownrules and schedules. Another examplemight be commission rules for sales-people — the policies designed toincentivize them to pursue more profitable business or to sell to thosecustomers who generate more profit.These are the rules that the policyhub is establishing or revising. Theanalytic system must ensure that theproper information is brought togetherand the appropriate analysis is donethat can lead to intelligent decision-making in the policy hub. That leads to refinements of these businessrules, which will govern future operations in that particular businessprocess.

Incorporating feedback is a basicprinciple of learning from experienceand understanding which operationalareas can be adjusted. A closed loopbusiness process incorporates feed-back about the effectiveness of cur-rent operations to enable intelligentadjustments in business rules. Wedon’t make decisions once, but overand over again — around that loop— based on the latest and best infor-mation available. And we learn fromthe analysis of past results, so that we can positively impact the future.Investments in analytic systems can be justified only if they lead toimprovements in operations, accordingto pre-established measurement criteria.

Policy Hubs at the Process-Specific and Strategic Levels

Policy hubs are, in fact, necessary for both process-specific and strategicanalytic applications. Why?

Policy hubs and process-specific analytic applications. Process-specificanalytic applications are emerging for each family of related processes,corresponding to the four perspectivesof the Balanced Scorecard. Examplesare activity-based management (thefinancial perspective), marketingcampaign optimization (customerperspective), quality control analysis(internal business processes perspec-tive) and workforce optimization(learning and growth perspective).(See Figure 2 for a representation of where Balanced Scorecard applica-tions fit in the hierarchy of analyticapplications: strategic, process-specific,and foundational.)

Process-specific applications showmore detail than broad scorecardapplications, revealing underlyingcauses of any disparities betweenactual and targeted performance. In each case, a policy hub supportsdecisions on process-specific policyor business rule changes. The policyhub then delivers the changed policyto the relevant operational systems.

Adjust/Act

Model

Analyze

Track

Financial-¤intensive¤

processes

Data Mart/OLAP Server

Adjust/Act

Model

Analyze

Track

People-¤intensive¤

processes

Data Mart/OLAP Server

Adjust/Act

Model

Analyze

Track

Customer-¤intensive¤

processes

Data Mart/OLAP Server

Process-¤specific/¤Operational

Foundational/¤Model Building

¤

Enterprise Data Warehouse (Data, Model Repository)

External DataInternal Data Activity Models

Strategic Strategy Formation, Dashboard of Corporate Performance

BALANCED SCORECARD

Figure 2. Relationship of the Three Levels of Analytic Applications

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Policy hubs and strategic analyticapplications. The Balanced Scorecardis an analytic application for determin-ing actionable business strategies.Out of this process comes a plan orset of plans, fleshed out for each ofthe major areas of the BalancedScorecard. These plans are, in effect,the policies at the strategic level ofthe business. The strategic planningprocess is therefore a policy hub inthat the policies and resulting goalsthat management establishes aredirected to each of the process-specific analytic applications. Thesegoals form the targets which theprocess-specific applications seek tomanage. It’s essential for companiesto capture results from each of theprocesses in order to oversee andmanage at the strategic level. Thiscombined feedback from multipleprocesses may trigger a need torevise the strategic plan, setting newtargets for operations to manage to.

The policy hub has a role in strategicanalytic applications, such as theBalanced Scorecard, in establishingmajor goals and strategies that havebroad reach in an organization.Should a business be focusing on one product line or another? Shouldit change its emphasis from optimizingefficiency (say, reducing the cost ofoperations) or work to drive person-alized customer service and higherlevels of customer satisfaction?Policies established at this level — at a strategic policy hub — establishgoals and objectives that flow tomany specific processes in an organi-zation. If the company is optimizingon lower cost, that sets a directivewhich an analytic application forprocess control needs to monitor.

It’s essential to incorporate feedbackand learning at all levels of the enter-prise. One difference between theprocess-specific and strategic levelsis the time horizon. The cycle ofmonitoring targets, analyzing results,and changing policies is shorter atthe process-specific level, whereongoing adjustments are made in

response to new information. Thecycle of monitoring results and cor-recting course at the strategic level is longer, since the too-frequent shift-ing and distribution of goals can becounterproductive.

Barriers to Implementing Policy Hubs

It’s clear: a policy hub is vital inorder to link results of analysis tooperations. And implementing abusiness process that incorporatesfeedback is highly desirable. At thispoint, many companies are makingprogress with policy hubs, particularlyin the customer relationship manage-ment area. But there are significantbarriers, both technological and organizational, to successful imple-mentation:

Technological barriers. The imple-mentation of a closed loop businessprocess requires the interoperabilityof many separate software products.Moving data from operational to analytic databases, coupled withmoving business rules from analyticto operational environments, is ahighly complex undertaking. In addition, multiple levels of analyticapplications need to be integrated,including foundational ones (such as activity-based management),process-specific ones, and strategicones (like the Balanced Scorecard).

Organizational barriers. In terms of adoption, organizational barriersare likely to be even more problem-atic. Consider customer relationshipmanagement processes. Traditionally,customer touchpoints have beenunder the control of separate depart-ments, such as customer service and sales and marketing. Having a common policy for customers thatcovers all touchpoints and all productsis a radical idea. How many companiesdo you know of that have establisheda chief customer officer? The transitionwill be neither straightforward norpainless.

A large bank I know of is currentlyexperiencing such organizational bar-riers as it makes the transition from aproduct to a customer segment orien-tation. The segment managers meetevery week to make policy — todevelop and review their strategiesand treatments affecting multipleproducts. The new policies are thentransmitted to all of the front-lineworkers who interact with customers.One manager in the analytic and pol-icy formation group observed that his group is engaged in an ongoingbattle to win the trust of the front-line workers. They don’t want to usethe recommendations of the policy-making group; they would rathertrust their own judgment on what tosell or recommend to their cus-tomers.

So, policy hubs represent both a technology change and a new kind of interpersonal collaboration. The barriers to implementationshould not be underestimated. Butthe benefits in linking analytics tooperations through the use of policyhubs cannot be overestimated.

Analysis without a tie to operationsbrings us back to the example of theretailer I mentioned at the beginningof this article. Many organizationshave adopted sophisticated customerloyalty programs that utilize theresults of market-basket and othercustomer analysis. This retailer obviously hadn’t — and, by the way,the retailer is not doing well today.

To Learn More:

“Balanced Scorecards and the Three Levels ofAnalytic Applications,” Henry Morris, postedat www.bscol.com (go to “Choose Software,”then “Technology Watch” ).

Henry Morris directs research on data ware-housing knowledge management software atIDC, a worldwide research firm with head-quarters in Framingham, Massachusetts. Hecreated the analytic applications concept andhas written extensively on the increasingimportance of closed loop systems. You canreach Dr. Morris at hmorris@idc.com.

Reprint #B0007B

When Arthur Martinez took the helm at Sears in 1992, the picturewas grim: the company was losingsome $3.4 billion annually. A numberof dramatic changes were made that reshaped and rejuvenated thebusiness. Martinez eliminated over50,000 jobs, killed the Sears Catalog,closed down many of the mostunprofitable stores, sold real estateassets (including the crown jewel, the Sears Tower in Chicago), anddivested many other subsidiary businesses.

Today, the picture couldn’t be moredifferent. The downsized Sears stillhas a formidable workforce of morethan 330,000 employees (which thecompany calls “associates”) at its2,900 physical locations. It hasembarked on a $4 billion multi-yearstore refurbishing program. And ahost of other changes have beenintroduced to reposition the storechain, including a new focus on targeting customer segments and a marketing campaign to establishthe value proposition in the eye ofthe consumer. While Sears also has asignificant distribution and deliverycapability, along with an on-linepresence, this article focuses on thebrick-and-mortar side of the business.

Building a Platform for Change

How did Martinez and the executiveteam achieve such a remarkable turnaround in such a relatively shortperiod of time?

The greatest struggle wasn’t acceptingchange — it was facing the fact thatour management methods may havebeen the problem. Clearly our losseswere both bad and unsustainable.While we had done a lot to changethe organization, the real questionwas whether we were doing thingsthe right way. We may have beenunhappy with our results, yet it wasn’tclear that we were unhappy with whatwe were doing to generate thoseresults. Did we have the courage and insight to change not only whatwe had been doing, but the way wedid things?

Martinez and the executive team setabout developing a strategic visionthat defined the company’s futurestate. We knew there would be a sig-nificant payoff if we could achievethe transformation. The big unknownwas whether we had the skills andabilities to surmount any barriers thatcould derail the effort.

Our first step was identifying our keystrategies. There were five:

• making Sears a “compelling place to shop”;

• establishing a market focus;

• building a winning culture;

• focusing on core businesses; and

• making continuous improvement in costs.

Martinez was intent on making Searsa flexible organization, an organizationable to recognize when the competitiveenvironment is changing so it wouldnot find itself in the difficult situationit was in when he joined the company.Focusing on the market, core busi-nesses, and building a winning culturewere the keys to building this reality.Cost improvement is a perennialtheme in retailing, and we felt thatmaking Sears “a compelling place toshop” renewed the company’s focuson the customer.

The team identified specific initiativesby which to implement these strategies.The initiatives were operationalizedand cascaded through the organiza-tion. Eventually, three central strategies,based on the “compelling” featuresof Sears, emerged: to make Sears “a compelling place to shop” (thecustomer perspective), “a compellingplace to work” (the employee per-spective) and “a compelling place to invest” (the financial perspective).These “three Cs” have become amantra that has spread throughoutthe organization.

The Measurement Challenge

A task force was established to defineworld-class performance objectivesfor the three strategic themes, alongwith a set of measures to help Searsassess its progress toward achievingthe strategic objectives. Sears’s mea-surement approach was critical tomaking the three Cs work.

We asked our customers to help usassess how compelling Sears is as ashopping destination. We began toinclude a 60-second survey with thecustomer’s monthly statement thatwould tell us how we were doing.

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The Balanced Scorecard atSears: A Compelling Place for Feedback and Learningby Dr. Steve Kirn, vice president of innovation and organizational development, Sears

In 1992 Sears was in desperate financial condition. This one-time American institution was hemorrhaging more than $3 billion a year. By 1999, it was named the most innovativegeneral merchandise retailer by Fortune. At a recent BalancedScorecard Executive Conference, Dr. Kirn recounted how theBSC framework has been used to help turn around the retailinggiant. This remarkable change was the result of new strategies,coupled with the creation of a culture focused on feedback and learning. This article is based on Dr. Kirn’s conference presentation.

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For our work measure, we turned to our employees, as well as ourextensive database on attitudes. Thisattitude database is a set of operationalmeasures based on the characteristicsof the local work environment.Finally, for the investor perspective,we turned to many of the standardfinancial measures.

Once we assembled all of this data,we began to analyze causal modelsof how these measures affect eachother. In 1995, Sears hired an econo-metrician to help analyze the dataprovided by our 800 stores. We wereinterested in testing relationshipsbetween these measures to uncover thefactors that lead to specific outcomes.

Discovering the Causal Linkages

This process enabled us to establishmeasurable relationships betweenleading and lagging indicators at the store level. In general, we havebeen able to demonstrate that the lag indicators (“a compelling place to invest”) are driven by the leadindicators (“a compelling place toshop and work”). We were able toexplore how these factors are relatedto each other within specific timeperiods and across different timeperiods. Two-quarter lag analysisshowed that it takes a while for thecustomer to see that we are doingsomething different before we areable to achieve measurable results.Of course, Sears benefits only when customer behavior changessufficiently to generate positivefinancial outcomes for the company.

This was a milestone for us. It wasthe first time we were able to demon-strate such relationships in a statisticalsense. For the first time we were able

to meaningfully test the hypothesisof our strategy. For example, 10 key items in the employee surveyrevealed to what extent Sears is really a compelling place to work. As Figure 1 shows, the “work drivers”(recognition, training, advancementopportunity) impact the attitudes ofour employees. In turn, the change in employee attitudes impacts customer perceptionsand satisfac-tion. The customer’sexperiencedeterminestheir willing-ness to return and whether they will recommend the store to others.The customer measures influence customer loyalty, which ultimatelydrives business results.

As we continued to explore the relationships that exist in our business,we began to “open the black box” toincrease the credibility and validityof the model. We also explored thekey issues in identifying the driversthat made Sears a compelling placeto work, shop, and invest. We wereable to reduce the initial set ofemployee satisfaction work measuresfrom 180 questions to a set of 22 factors. From the “shop” perspectivewe were able to reduce the initial setof 18 questions to seven groupings.These included four input drivers(people, place, product, and value)and three outcome drivers (reputa-tion, satisfaction, and loyalty). Ourunderstanding of the relationshipsbetween measures in the BalancedScorecard perspectives has growndramatically. We are able to performin-depth, store-level analysis of

multiple variables to test the relationships among the measures for “work,” “shop,” and “invest.”

Measuring the relationships betweenand among these major dimensionsof our business offers an added benefit:it allows us to explore observationsthat may be counterintuitive. Forexample, we have discovered that the degree of employee friendliness,

as perceived by the customer, is negatively associated with revenue —but only in our large stores. Whilewe don’t yet understand this finding,we were at least able to identify it.Although customers tell us thatemployee friendliness matters, itsnegative correlation to revenue in our large stores gives us reason topause and explore the relationship in greater detail.

Leveraging Feedback andCreating a Learning Culture

At this point we have a rich repositoryof information about many specificrelationships. This gives us valuableinformation with which to assess thepotential impact of new initiatives.We have the ability to identify spe-cific relationships that show, say, the impact of a 1% change in onefactor on some other variable. Forexample, a 1% improvement in“advocacy” (a management perceptionmeasure in our employee survey,“My Opinion Counts”) yields a 4.5%increase in employee retention.

Measuring the relationships among the majordimensions of the business enabled Sears to identifysome counterintuitive findings. For example, inlarge stores, the degree of customer friendlinesshad a negative correlation with revenue.

“Work” ¤Drivers

Attitudes¤Towards Job,¤

Company

Customer¤Perceptions,¤Satisfaction

Customer¤Loyalty

Business¤Results

Figure 1. Expanding Our Knowledge of the Linkages

Continued on next page

10

Furthermore, that 1% improvementin advocacy also yields a 7.4% gainin sales per square foot. Impacts such as these have tremendous implications for an organization thesize of Sears. Once these relationshipshave been identified, the next step in

the management process is to decidewhich improvements to pursue and to identify the cost/benefit case forany given initiative.

To disseminate this valuable information, we built an intranet site to report on how we are doing in particular areas of business. Thisreporting system provides weekly to annual updates (depending on how often we collect information on a particular measure). You clickon it to see the scores for a particularstore, or a department within a store.You can also use the system to pin-point problems that you may want to analyze further. We also created abest practices library based on over

800 practices derived from all thestores. Anyone can access this libraryto learn about the approaches othershave taken to similar problems andthe results they have achieved. Thishas become a very powerful sourceof organizational learning.

At Sears, theBalancedScorecard is not just astatisticalexercise. It is used togenerate a

repository of examples of how par-ticular interventions yield improve-ments in specific contexts. Peoplecan really affect the way the businessoperates and, when they are ready,they can learn from one another.

A Compelling Place for Learning

During the second year of imple-menting the BSC framework, wefound that one-third of the measureswe were working with yielded nouseful insights. So we got rid of them and replaced them with newmeasures. After the second year, wehad a similar experience. We werelearning so much and so fast that we were rapidly discovering which

measures provided value and whichdid not. Each of our measures arenow updated periodically, dependingon the time frame associated witheach measure.

In spite of all the progress we’vemade, we’re really just on the thresh-old of taking full advantage of thefeedback and learning capabilities we have put in place. Our progresshas been significant, and others haverecognized our achievement. As wecontinue to embed these practicesmore deeply into our organization,we plan to grow our capability toleverage the feedback system, and to enhance our learning culture. With$2.41 billion in operating earnings in1999, that’s a compelling argumentfor continuing on this path.

To Learn More:

“Strategic Human Resource Management at Sears,” Steven P. Kirn, Anthony J. Rucci,Mark A. Huselid, and Brian E. Becker,Human Resource Management (Winter 1999).

“The Employee-Customer-Profit Chain atSears,” A. J. Rucci, S. P. Kirn, R. T. Quinn,Harvard Business Review, January –February, 1998.

“Bringing Sears Into the New World,”Fortune, October 13, 1997.

Reprint #B0007C

A Balanced Approach forMeasuring ROI on ProjectManagement

Project managers have been complain-ing for years that, while they knowproject management worked, they didn’t have the hard data necessary to prove it. Call it the elusive “returnon management.” Just another stickymeasurement issue that won’t everreally be resolved? Not if researchersat the Center for Business Practices (a division of PM Solutions, Inc. inHavertown, PA) have their way.

Undaunted by the challenge of teasingout the role of project management

initiatives in making projects success-ful, a new study (discussed in “The Elusive ROI” by JeannetteCabanis-Brewin in the April 2000issue of PM Network, a periodicaldevoted to project management) seeks to determine the value of imple-mentations based on a balanced set ofmeasures. The measures in this studyare a mix of financial, operational, and social measures that show value to stakeholders. Sound familiar? Abalanced family of measures wouldinclude the following:

• For shareholders: earnings-per-sharegrowth, cash flow per share, eco-nomic profit, total factor productivity,percentage of new product sales.

• For customers: customer satisfaction,product quality index, repair inci-dence, customer loyalty.

• For employees: employee satisfaction,employee turnover, productivity,diversity in management, trainingtime per year.

• For community: index of environ-mental impacts, safety record, community satisfaction, charitableand community distributions.

These researchers plan to survey several hundred organizations thathave implemented project manage-ment initiatives. We hope to share theresults of this study when completedby the Center for Business Practices.

In the News

Scorecard measures must be updated periodically.In the second year of its BSC implementation,Sears discovered that one-third of its measuresweren't yielding any useful insights. So itreplaced them with new measures.

11

Q: British Telecommunications (BT)is renowned as an exemplary user ofthe Balanced Scorecard as its primarystrategy implementation framework.Why did BT choose the scorecard?

A: Essentially the Balanced Scorecardencapsulated the “balanced” view ofmanaging the business that alreadyexisted at BT. As early as 1990, BT was experimenting with what we called a “balanced policy frame-work,” which focused on measuringthe satisfaction of stakeholders suchas customers, employees, and societyat large.

In the early 1990s, we also played a role in designing and piloting theEuropean Foundation for QualityManagement Business ExcellenceModel, or EFQM, (see Figure 1).This assesses performance acrossnine criteria, such as leadership, policy and strategy, customer andpeople satisfaction, and businessresults. (BT plc won the prestigiousEFQM Prize in 1996, and one of ourbusiness units, Yellow Page, won theEuropean Quality Award in 1999.)

During that time, BT’s chairman, Sir Ian Vallance, had articulated fivecore values that captured the keybehaviors and attitudes necessary for transforming the organizationalculture from a monopoly mindset(BT was privatized in 1984) to onethat would succeed in a competitiveenvironment. The five values are theglue that holds this large, complexorganization together. Essentiallythey are: putting the customer first,being professional, working as oneteam, respecting each other, andbeing committed to continuousimprovement. The scorecard enablesus to measure, on one piece of paper,whether we are practicing our values.

Q: To succeed with the BalancedScorecard, how important has it been to get the“culture fit” right?

A: It’s critical. Indeed, I would make“culture” the fifth Balanced Scorecardperspective. The scorecard — or any performance managementmethodology, for that matter — has to resonate with the fundamental values of the organization. If it doesn’t,it will be rejected.

A measurement culture already existedat BT when we introduced theBalanced Scorecard. But our peopleknew that they couldn’t manage the business through simplistic measures, that they had to look at the short-term and the long-term,inputs and outputs. The scorecardhelped us communicate why themeasurement system was so criticalto our success — and it helped uscreate a rapid and robust strategicfeedback mechanism.

Q: How exactly does an organizationon the scale of BT build a strategicfeedback process that is both rapidand robust?

A: In a fast-moving, competitiveenvironment like telecommunications,it’s crucial that you create a robustfeedback mechanism to mark yourprogress against strategic objectivesand alert you to competitive threatsand opportunities. That’s one of thekey reasons why we introduced thescorecard in the first place.

Within BT, the strategic flow beginswith the board of directors, who providegovernance to the organization — for example, defining our vision ofbeing “the world’s most successfulcommunications group.” This then travels through BT’s GroupExecutive Committee (GEC), which translates it into a set of strategicpriorities. An example here from the customer perspective might be“providing service excellence to ourcustomers.”

These priorities are devolved to operations, where the strategy hitsthe real world.

At this level, and given our corevalue of putting the customer first,we are obsessive about collecting and analyzing customer feedback.We may do up to 18,000 customerinterviews in a month, ranging fromresidential customers to internet services customers to multinationalbusiness clients.

INthe Trenches

Culture and the BalancedScorecard: Is Your CompanyPracticing What it Preaches?An interview with Ray Bell of British Telecommunications

by James Creelman

Global telecommunications giant BritishTelecommunications (BT) has been successfully using the Balanced Scorecardsince 1993. Ray Bell, BT’s director of organizational excellence, played a key role in the company’s original scorecarddesign and remains actively involved in its group-wide implementation. Bell shows

how BT’s culture, reflected in its five core values, has beencentral to the company’s success in leveraging benefits fromthe scorecard. He also explains how the culture and systemwork together to create a rapid strategic feedback loop.

Continued on next page

12

The challenge is to feed this databack up through the company quickly

and in a useful format. To do so,we’ve created information filters, or performance indices, at each levelof the organization. For the customerperspective we have a CustomerSatisfaction Index. Individual business unit performance is measured against a range of indicators.These are tailored to each unit’s customers, but are then indexedtogether at the divisional, or line-of-business level, and up through to thecorporate scorecard.

At the corporate level, the GEC cansee on one sheet of paper the indexedperformance of the whole organizationagainst a single strategically criticalmeasure. They receive index updatesevery month. This measure will bereported against performance levelsthat range from threshold (minimumaccepted) to stretch — and against anidentified world-class benchmark.

Underneath this corporate scorecardare pages that provide further perfor-mance detail. For each high-level

metric there’s a page showing a measure trend chart, measure analysis,

action plan,and imple-mentationand impactassessment.So the seniorteam is alert-

ed to problem areas and can monitorany corrective actions under way.

Q: Given the size and complexity ofBT, how do you ensure that strategicpriorities are devolved through theorganization in an understandablemanner?

A: What’s important here is that thepriorities capture the essence of thestrategy, while allowing for flexibilityand creativity at the front-line. Ifstrategic priorities are too precise,they can paralyze the organization.Ours are deliberately articulated sothey can be interpreted as each businessunit sees fit, allowing it to deviseinnovative ways to reach that priority.

Using the scorecard has taught usthat you can’t be too precise over thelonger term. We never do more thana year’s focus for the scorecard.Everything over that one-year periodhas to be as broadly stated as possible,while being inspirational, such as“being the world’s most successfulcommunications group.”

We have also found that the score-card works best when it has built-inmechanisms that enable flexibility.Without this, you will not be able tomove quickly. Indeed, it scares mewhen I hear companies explainingthe scorecard in an old mechanisticmindset. The days of treating busi-nesses mechanistically are long gone. Organizations today have to be adaptive, living things, and youhave to learn and adapt continually.

Q: How have you adapted theBalanced Scorecard to accommodatethe massive change that regularlyflows through your organization?Since introducing the scorecard, BThas undertaken several major changeinitiatives, culminating in the presentrestructuring into five lines of business.How does the scorecard remain relevant?

A: We accept change as an everydaypart of competing within our industry.Since the mid-1980s, we have investedconsiderable time and resources tocreating this change mindset. And this adaptability has been largelyenabled through our creation of“executive scorecards,” which isprobably our most innovative score-card development.

“The days of treating businesses mechanisticallyare long gone. Organizations today have to beadaptive, living things…”

Leadership¤100 points¤

People¤Management¤

90 points¤

Policy and¤Strategy¤80 points¤

Resources¤90 points¤

People¤Satisfaction¤

90 points¤

Customer¤Satisfaction¤

200 points¤

Impact on¤Society¤60 points¤

Processes¤140 points¤

Business¤Results¤

150 points¤

The Enablers¤500 points

The Results¤500 points

Figure 1. The 1998 EFQM Excellence Framework

13

Essentially we have created executivescorecards for the top 250 people atBT. Each consists of three elements,which are linked to the executive’sbonus system. The performance ofthe executive’s unit accounts for 40% of the score; the performance ofthe level above that unit (which maywell be the corporate scorecard) isalso worth 40%. The remaining 20%is allocated to the executive’s personalperformance against five or six bal-anced objectives. In a given year,the corporate or business unit score-cards will probably be modified only slightly, if at all. However, this“personal” element of the executivescorecard can change radically.Indeed, this year the objectives ofalmost every member of BT’s topteam have changed. These personalperformance objectives help ensurethat the executive stays focused onshifting strategic priorities.

Q: Given the existence of these executive scorecards, how importantis leadership to the successfuldeployment of strategic priorities?

A: If culture is critical to succeedingwith the scorecard, the most impor-tant element of culture is leadership.We have always believed this, andare presently working to create a culture of leadership that will serveus well for the early years of the 21stcentury. Forthis we havedeveloped12 leader-ship styles,each ofwhich has aparticular emphasis. For example:“focus on the big issues,” “coach and seek advice,” “maintain trans-parency, openness, and trust,” “havean outward, driven-by-the-marketsfocus,” and “operate as one, bigglobal team.”

In addition, we have a 360-degreeappraisal system in which executivescan be assessed by a range of people,including subordinates, customers,and partners.

Q: How does BT share relevant feed-back and learnings across businessunits or lines of business?

A: We are not a conglomerate. We’represently organizing into five lines of business, but we’re still going tobe sharing networks, for example,

so network quality will be common.And we will still share the same corporate culture and values. Thecorporate scorecard is made up of measures from all parts of thebusiness, so we all share a commongoal, and the GEC has shared owner-ship of that scorecard. And everyindex is very visible and can be used to benchmark units againstother BT units.

Reprint #B0007D (This reprint includes theprevious issue’s “Case File” article aboutBritish Telecommunications.)

Making the Leap to the Public SectorThe Balanced Scorecard has beenwidely embraced by private sectororganizations. Statistics reported inthis newsletter and elsewhere confirmthat approximately half of all busi-nesses in North America are adopting,or plan to adopt, this managementframework. However, there is someevidence that the rate of adoption may be somewhat slower for publicsector organizations. A recent article in Governing (“The Buzz OverBalance,” May 2000) explores someof the reasons for this slower rate ofadoption.

Public sector organizations often find it useful to modify the frameworkto accommodate their strategic per-spective. This often means that thefinancial perspective is de-emphasized

and, typically, the customer perspec-tive is assigned a more prominentposition. (An article by Robert S.Kaplan in the November – December1999 issue of the BSR discussed thissubject in some detail.) As govern-ments have begun to work with thefour perspectives, they have found that tremendous benefits await them.Once adopted, the BSC offers a clearway to connect bottom-line resultswith whether citizens feel well-served.According to Charlotte, NorthCarolina city manager Pam Syfert,“For us, just having a series of bot-tom-line performance measures didn’tmake sense. We wanted a way to com-municate and connect those measuresto citizens and employees.”

In spite of the well-documented benefits, organizations still need toconsider when and how to go aboutadopting the BSC approach.Organizations that are already perfor-mance-measurement savvy can proba-

bly take what’s helpful about the BSCand adapt it. For others, additionaleducation and training may be neces-sary to build a culture that is receptiveto a management approach based onmeasurement.

Ultimately, the decision is not somuch about whether or not it makessense for government organizations to adopt the approach. Assuming theorganization is ready to develop a newmanagement approach — one basedon performance measurement — the approach taken to educating theorganization is critical to success.According to Syfert, the last thing youwant to have happen is to wind up in adiscussion about methodology. Instead,“what you should be focusing on iswhat you want to get done and howyou’re going to accomplish it.”

In the News

“If culture is critical to succeeding with thescorecard, the most important element of culture is leadership.”

14

Corporate mergers and acquisitionshave become daily fare in the businesspress. The new economy is creatingopportunities for both consolidationand diversification. Several BalancedScorecard success stories describedin recent issues of this newsletterhave been involved in such transac-tions: CIGNA Property & Casualtywas acquired by ACE, Ltd. in 1998,Chemical Bank merged with ChaseManhattan in 1996, AT&T/Canadawas acquired by Metro NetCommunications in 1999, and MobilOil merged with Exxon in 1999.

Within a year of these mergers, the Balanced Scorecard was eithereliminated or de-emphasized.Financial reporting stays — and balanced reporting goes, in spite ofthe fact that the value of the acquiredcompanies had been significantlyenhanced by their use of theBalanced Scorecard. Why?

The Balanced Scorecard is still aleader-dependent tool. In the handsof the right leader, the approach hascreated dramatic improvement inshareholder value. Our question:will, or should, the BalancedScorecard move beyond being anelective management process tobecome a standard process, like abudget or a financial report?

“Should it?” is a question that willultimately be answered by the mar-ketplace. Is the BSC a better way tomanage? Do companies that use theBSC perform better than those thatdo not? The jury is still out on these

questions. But an increasing body ofevidence suggests the answer is yes.The question “Will it become stan-dard?” is based on an understandingof the role measurement plays inorganizations.

Measurement for Control orCommunication?

The success of the Balanced Scorecardto date has been associated with itsinternal use in helping organizationsimplement their strategies. Companiesthat succeed with the approach cometo understand that there are differentroles and purposes for measurementand reporting systems. Traditionalfinancial measurement systems weredesigned for control; budgets definetargets and feedback systems reportvariances. The objective is to eliminatevariances and meet the budget. These are excellent approaches tomanaging tactics. The BalancedScorecard, however, was designedfor a different purpose: to communi-cate. Its underlying premise is thatthe act of measurement conveys what is important and, consequently,

influences behavior. What gets measured, gets done. The BSC builds on this premise, asserting that measurement of the strategy provides a means of communicatingthe critical success factors to theorganization, thus focusing every-one’s efforts on the strategy.

A control system and a communicationsystem are fundamentally different.The former requires integrity,repeatability, and “audit-ability,”while the latter can use surveys, status reports, and anecdotal data toachieve its purpose. Some organiza-tions have trouble using BalancedScorecards because they confuse therole each of these approaches fulfills.One executive I know of proclaimed,“Hard managers use hard data!” He refused to allow soft data likesurveys for his scorecards. As aresult, he developed a BSC withfinancial measures in all four quad-rants of the scorecard.

So, will the Balanced Scorecardbecome a standard approach to measurement and managementreporting? Only if any of the followingconditions apply:

• Executives need a way to describeand communicate the strategy tothe workforce that must implementit. Budgets accomplish this in thecontrol system.

• Organizations need to ensure continuity in strategic management,despite turnover in the executiveranks. Financial plans accomplishthis in the control system.

• Organizations need a consistentframework that permits strategiccommunication. A chart of

Should Balanced Scorecards Be Required?by David P. Norton

Should the BSC become a standard means of communicatingwith external audiences, like a budget or financial report?Previously, this question was moot — there were no tools for creating the linkage. But now that's changing. Unions, profes-sional associations, researchers, and regulatory agencies areall waking up to the importance of nonfinancial measures ofperformance.

Control¤(Budgets/¤

Financial Reports)

• To manage tactics¤

• To ensure compliance¤

• To allocate resources¤

• To record past results

Communicate¤(Balanced Scorecards)

• To manage strategy¤

• To ensure alignment¤

• To prioritize investments¤

• To forecast the future

Use of the Measurement System to…¤

Figure 1. Measurement for Internal Audiences

15

accounts does this for the control system.

• Organizations need a commonframework and language to facilitatemergers and acquisitions. Incomestatements and balance sheetsachieve this in the control system.

The value of the Balanced Scorecardand its associated Strategy Maps is that it provides a consistent frame-work for describing strategy. TheBalanced Scorecard does for strategicmanagement what income statementsand balance sheets do for financialmanagement.

Balanced Scorecards forExternal Audiences?

The requirement for strategic infor-mation is not limited to internal audiences. The relationship betweenan organization and its external con-stituencies is rooted in expectationsof value to be created in the future.Investors, analysts, and boards allexpect growth and diversification in future revenue and profits.Unfortunately, most measurementstell them only about the past. Studiesindicate that professional investorsbase their decisions on such factorsas new product pipelines, recruitmentchannels, quality of management,and quality of the strategy. There are no standard ways in which tocommunicate this information. Thesame confusion about the role ofmeasurement that internal audiencesexperience also plagues external constituencies.

In the U.S., reporting to externalaudiences is further complicated bythe constant threat of litigation whencompanies don’t perform to expecta-tions. The argument presented by thelitigator is that the company misledthe investor, either by commission(through the information it presented)or omission (the information it with-held). Executives living under thisthreat are prone to providing less,rather than more, information topotential critics. The reality is, how-ever, that external audiences eachseek non-financial lead indicators intheir own way. Executives can electto leave themselves at the mercy ofthis (uncertain) process, or they canseize the initiative and provide thestrategic information in a way thatfacilitates a coherent and ongoingdialogue regarding strategy andfuture value. As Balanced Scorecardusers have found with internal audi-ences, open communication ultimatelybreeds understanding, cooperation,and teamwork — instead of the narrow, single-issue sub-optimizationthat occurs when constituents do nothave adequate information.

So, will the Balanced Scorecardbecome a standard approach to communicating with external con-stituencies? A number of trends seemto suggest we are moving in thatdirection.

• External agencies currently per-form third-party assessments ofcustomer satisfaction, quality, on-time performance, etc. J. D. Powerand Nielsen surveys have becomehousehold words.

• External constituencies aredemanding measurement reportingthat is relevant to their objectives.The Communications Workers ofAmerica pension fund asked AT&Tshareholders to require managementto measure human resource para-meters and link them to executivecompensation.

• Professional associations areincreasingly highlighting the use ofBalanced Scorecards. The Societyof Management Accountants ofCanada has recommended to itsmembers that all organizationsadopt a Balanced Scorecard.

• Research programs are buildinginsights into measuring intangibles.New York University’s IntangiblesResearch Center and Ernst &Young’s Center for BusinessInnovation are helping to definenew measurement frameworks tocomplement financial reporting.

• Regulatory agencies, including the Securities and ExchangeCommission and the Organizationfor Economic Cooperation andDevelopment (OECD), are likewiseconducting research to explore theuse of non-financial, qualitativeinformation in corporate disclosure.

When using the BSC for internalconstituencies, we have seen thetremendous power and economicvalue created by focusing everyoneon the same goals. The key is creatingalignment among everyone in theorganization. The question is, shouldthis alignment of interests stop at the boundaries of the organization, or should it be expanded to includeexternal constituencies? In the past,this was an academic question,because no tools existed to createthis linkage. The Balanced Scorecardhas eliminated that obstacle. We nowlook to the innovators who will showus how external alignment can createthe same kind of value as internalalignment. This will be the ultimateargument for making the BalancedScorecard a standard managementprocess.

Reprint #B0007E

Control¤(Financial Reports)

• To record the results¤

• To ensure integrity¤

¤

Communicate¤(Financial Forecasts/¤

Ad Hoc Briefings)¤(Balanced Scorecards)

• To describe the strategy¤

• To set expectations¤

• To ensure goal alignment

Use of the Measurement System to…¤

Figure 2. Measurement for External Audiences

Product #B00070

How do organizations successfullyimplement strategy? That’s the subjectof this very useful case study by

Chesley andWenger, whichexplores the co-evolution of

an organization — the NationalReconnaissance Office (NRO) — and the strategic model it is attempt-ing to implement. As the authorsobserve:

Not only must models be adaptedto fit the unique characteristics of an organization, but also organizations need to evolve to benefit from the lessons incorporated in the strategic models. At the end of the day,both the organization and themodel are changed.

Background

After 35 years as a super-secret organization, the NRO, whichdesigns and builds reconnaissancesatellites, “came out of the closet,”moving from its traditional clientbase (the CIA and Department ofDefense) to commercial-sector cus-tomers. Over the past five years itsbusiness environment has changeddramatically; it now faces budgetscrutiny, political pressure — andcompetition. As its customer basegrows, it must meet a federal mandateto develop strategic plans and perfor-mance measures. The authors use theNRO’s case to explore how models —in this case, the Balanced Scorecard— foster a strategic conversation.

Implementing the Scorecard:Establishing Credibility andIdentifying Ownership

The NRO began using the BSC in1996 to establish a strategic planningprocess based on performance mea-surement. Like many successfulplanning attempts, the process began energetically; as the monthsprogressed, however, the difficultrealities of implementation set in.One initial step was to devise perfor-mance measures based on the BSCframework but customized for theNRO’s needs. As the strategic conversation was established, management rearranged the four perspectives of the BSC to reflect the NRO’s new status as a public-sector organization. Modifyingthe labels and relationships in themodel spurred buy-in to the strategicprocess. This stage of adaptation isalways a critical first step in estab-lishing credibility of the frameworkand identifying ownership of theprocess.

The next step, for executives andemployees alike: to learn the com-mon, structured environment andvocabulary that would enable them to learn how to formulate strategy. In this phase the organization activelyadopted the foundation of BSCknowledge that carried it through the strategic process. For the NRO,understanding the role of the customer — a heretofore foreignconcept — became one of the centralstrategic conversations.

Another phase in scorecard adaptationwas resolving the question of owner-ship and responsibility for strategy

execution. Compared to traditionalstrategy planning efforts, the BSCtends to be a more inclusive process.With more people involved, imple-menting the strategy becomes, to alarge extent, everyone’s job. Throughthe process of developing measures,the conversation had become morerobust, detailed, and — in manyways — frustrating. One source of frustration was simply not beingaccustomed to measuring performance.But it’s also the case that measurescan be threatening, and resistancecan form in response to such changesin management approach.

Once the measures have been insti-tuted, the authors note, it’s crucial tobegin leveraging the feedback —about performance as well as aboutthe process itself — that the measuresprovide. The authors see this feed-back stage as crucial:

Indeed, this final level of adapta-tion is precisely the objective ofthe strategic implementation andthus, arguably, the most importantform of adaptation of all. Webelieve that understanding,observing, nurturing, and (whenpossible) manipulating all theother perspectives of adaptation is essential to achieve this finaloutcome.

The article explores the implicationsfor learning how to learn from differenttypes of information (process andperformance data). It concludes withan exploration of various managementimplications, based on their focus onthe strategic conversation. Whileshort on examples (understandable,given the NRO’s origins), the articlenonetheless provides a rich case history of an organization that usedthe BSC to transform its strategicplanning process into a strategyimplementation process — in theface of tremendous cultural challenges.

To Learn More:

“Transforming an Organization: UsingModels to Foster a Strategic Conversation,”Julie A. Chesley and Mike S. Wenger,California Management Review (Spring1999).

Learning to Learn: UsingModels to Launch theStrategic Conversationby Randall H. Russell

Whether the strategic focus is product or service innovation, or operational effectiveness, it’s very difficult to learn how toperform in new ways.

ARTICLEReview