Knowing the score.

AuthorKaplan, Robert S.
PositionUse of balanced scorecard in evaluating management tools

Does your company try every management fad under the sun? By using the balanced scorecard for planning and budgeting, you'll learn which ones advance your overall strategy - and which ones don't.

Several years ago, we introduced the concept of a balanced scorecard for measuring and motivating business-unit performance. The scorecard, with four perspectives - financial, customer, internal business processes and learning and growth - provides a balanced picture of current operating performance as well as the drivers of future performance (see box on page 31).

While some companies use their balanced scorecards just for performance measurement, some managers have begun to integrate the scorecard into their planning and budgeting processes. Used this way, the scorecard helps managers align their business units, as well as their financial and physical resources, to the company's strategy. The integrated planning and budgeting process directs capital investments, strategic initiatives and annual discretionary expenses to achieving ambitious targets for the strategic objectives and measures on the business unit's scorecard.

Companies that use the scorecard in this way can greatly strengthen the links between their overall strategy and the programs they implement to attain their goals. For example, a commercial bank, shortly after a major merger, launched more than 70 different programs. Each program was intended to produce a more competitive and successful institution, but none was integrated into an overall strategy. After building a balanced scorecard, the bank executives tried to determine the linkages between each of the 70 initiatives and the 25 scorecard measures.

Many initiatives couldn't be tied to improving any scorecard measure. These were dropped or consolidated. And, despite the plethora of initiatives, several scorecard measures were not addressed by any initiative. As a result, the bank decided to launch new initiatives directed at achieving breakthrough performance on the previously neglected scorecard measures.

But you can't achieve this level of cohesion in a hit-or-miss fashion. To embed the scorecard into an integrated long-range strategic planning and operational budgeting process, you need to take the following steps.

* Set ambitious targets for balanced-scorecard measures that all employees can accept and buy into. The cause-and-effect relationships in the scorecard help identify the critical drivers that will allow breakthrough performance on important outcome measures, particularly financial and customer measures.

* Set priorities and rationalize strategic initiatives and capital investments. The gaps between the ambitious targets for scorecard measures and the current performance on those measures enable managers to set priorities for capital investments and action programs intended to close the gaps. Managers reduce or eliminate initiatives and investments that won't have a major impact on one or more scorecard objectives.

* Link to annual resource allocation and budgets. Managers link the three-to five-year strategic plan to discretionary expenses and budgeted performance milestones for the upcoming year. The milestones enable managers to track the business unit's trajectory along its strategic journey.

EYE ON THE PRIZE

The balanced scorecard is most effective when used to drive organizational change. To communicate that need, managers should establish targets for the...

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