Professor Robert Kaplan and Dr David Norton were in Edinburgh last week to receive honorary fellowships from CIMA, marking 20 years of the Balanced Scorecard (BSC) system.
Back in 1992, the performance management landscape was an “ugly picture” with around 90% of organisations failing to execute their strategy and 95% of employees not knowing what the strategy of their organisation was.
Fast-forward to 2012 and now more than 70% of companies across the world now claim to use the BSC. But what will the next 20 years hold for the scorecard?
Speaking at a CGMA event at the University of Edinburgh, the BSC creators were on hand to map out the next phase in the performance management saga.
Dr Norton took on the big question of whether the BSC was now “obsolete” and put forward the major challenges facing performance management going forward.
He said the BSC “must adapt to remain relevant” to a world that demands greater transparency, corporate responsibility, better risk management and changing patterns of human capital management.
He added that the key to its longevity and popularity was its ability to adapt and provide solutions to changes in the broader economy.
“The management system cannot lead change, it adapts to these broader macroeconomic things,” he said. “The question about whether the Balanced Scorecard is obsolete – the answer is ‘yes’. Every day it becomes partially more obsolete, as do the management systems in general that you are using.”
Norton laid out the “five major challenges” performance management systems must overcome to remain relevant:
- Managing human capital
- Networked economy
- Transparency
- New role for corporations
- Risk
Managing human capital
Norton explained that managing human capital will become a greater issue over the coming years, due in part to the “stratification of knowledge work”.
One solution could involve organisations carrying out certain functions in countries where they can derive the best value.
“That’s going to be a big deal and is probably the ultimate challenge for people who measure. How do I measure whether or not my human capital is adequate?” he said.
He added that the "cause and effect" logic that underpins the BSC describes how delivering performance on a perspective, such as financial success, can only be achieved by delivering on another perspective, such as customer satisfaction.
“It's a clear set of ‘cause and effect’ relationships that you find when you learn what a company's strategy is.”
What is the Balanced Scorecard?
· A strategic performance management tool developed in the early 1990s
· A performance measurement framework that adds strategic non-financial performance measures to traditional financial metrics to give managers and executives a more balanced view of organisational performance
· It provides performance measurements, and helps planners identify what should be done and measured
· It enables management to execute strategy
· It is used extensively in business and industry, government, and non-for-profit organisations to align business activities to strategy of the organisation
Networked economy
This describes the growing interdependence companies have with internal and external suppliers.
Norton said management systems of the last generation were designed with the idea of the legal boundaries of an organisation as being the domain for which strategy and measurement was related.
“With outsourcing, you find the legal boundaries start to become meaningless,” he said. “If your IT department reports to you, it’s inside the legal boundaries. But if it is outsourced, it reports to you in a different way.”
Transparency
A growing trend is the need for non-profit and governmental organisations to become transparent, with many committing their governance systems to the BSC.
Norton said the challenge was to ensure performance management systems adapt to evolving strategies.
New role for corporations
Management systems of the future must be designed for corporations to recognise their impact on the environment and society.
Norton said that it’s not enough anymore to make money: “If you broaden the responsibility of an executive, think about the implications of that on the measurement system, instead of narrowly focusing on one dimension as a success indicator.”
Risk
Perhaps most importantly the management system of the future must take into consideration that organisations are becoming increasingly risk averse.
Norton explained that through a combination of “randomness and forces”, we are seeing problems in the financial system, rogue traders, hurricanes and disasters all around us.
“That’s created an awareness that more time has to be spent on dealing with risk and particularly strategic risk.”
At the same event renowned management thinker Robert Kaplan, and co-creator or the BSC, commented on three new pieces of research from the field, which he stressed were “all based on data from real organisations”.
The research included: