The importance of true balance

Designing scorecard systems for success

By Raef Lawson, William Stratton, and Toby Hatch

In the last issue of CMA Management, we discussed the macro issues faced in the implementation of a scorecarding system, including choice of the framework around which to organize the scorecard’s performance measures, the levels of the organization at which to implement the system, and linking the measures to the organization’s strategy.

Once these issues have been resolved, additional and more in-depth items need to be addressed. These include the number of performance measures tracked by organizations, the proportion of these measures included on scorecards, linking these measures to employee compensation and motivation, the process of updating scorecards, achieving scorecard balance, and linking scorecards to an organization’s goal setting process. We now examine these items, drawing on insights provided by the results of our scorecarding survey of over 150 service, manufacturing and governmental organizations. Sponsors of the study include the AICPA, CAM-I, CMA Canada, IQPC, Targus Corporation, and Hyperion Solutions.

Measures tracked

The appropriate number of measures to track on scorecards is a contentious issue for implementers. Half the organizations surveyed track 50 or fewer measures (see figure 1), but some track a much greater number.

Industry classification had an effect on the number of measures tracked, with organizations in the governmental sector tracking fewer measures than those in the manufacturing and service sectors.

Many (30%) organizations put almost all (76 - 100%) of the measures they track on their scorecards. As might be expected, the more measures an organization tracks overall, the smaller the percentage of those measures that appear on the scorecards. In the extreme case, organizations that track more than 500 measures generally use fewer than 10% of the measures on their scorecards.

In general, our survey results indicate that neither the number of measures tracked nor the percentage of the measures put on scorecards affect the degree of benefit achieved by organizations from the use of scorecarding. An exception to this was the significant benefits reported by organizations tracking more than 1,000 measures.

Balancing the scorecard

When it comes to deciding what measures to put on an organization’s scorecard, most organizations do indeed have “balanced” scorecards (in the sense that there is a balance between financial and non-financial measures). Regardless of the number of measures tracked, most organizations report that fewer than half of the measures on their scorecards are financial indicators.

Balanced scorecards are associated with achieving benefits such as better communication of strategy, organizational alignment, cost savings, increased revenues and volumes, and better and more efficient performance from the scorecarding system. Organizations whose scorecards consisted of 26-50% financial measures reported the greatest benefit from scorecard use, while those whose scorecards were 51-75% financial reported the least benefit. This is a welcome change from previous years when many companies were evaluated and managed solely by financial measures.

One respondent of the study, a large medical centre, indi-cated that it realized the following benefits using a balanced set of measures:

• Length of stay reduction
• Customer satisfaction improvements
• Cost reduction
• Volume increases
• A proven method of linking general objectives to goals and processes.

Another respondent, a large manufacturer of batteries and related products for non-medical use, stated that scorecarding with balanced measures “has helped drive improvements in the non-financial measures related to safety, scrap reduction, and customer satisfaction.”

Most organizations believe that their scorecards have a well-balanced set of measures, with about an equal number of measures in each of the categories represented in their framework. Yet a significant portion (20%) of the scorecarding organizations surveyed didn’t believe this to be the case.

Identifying key financial measures

While a majority of organizations responding to the survey believe they have identified the key measures of their overall financial performance, 19% didn’t believe they had accomplished this task.

Both scorecard balance and identifying key financial measures are important to scorecard success, and one can be achieved without the other. Of those survey respondents who didn’t think they had a well-balanced set of measures, most (57%) still believed that the key measures of financial performance had been identified. Conversely, of those who didn’t think that the key financial measures had been identified, most still thought that there was a well-balanced set of measures. Accomplishing both of these objectives is important, and we found both to be related to achieving scorecarding benefits.

Compensation & motivation

When using a scorecarding system as a tactical tool, it’s important that the system motivate employees to work in concordance with the organization’s goals. The clearest way to do this is to link performance measures to an organization’s compensation and reward system.

The results of our survey indicate that scorecarding organizations are attempting to do this, have achieved some success, and still have a ways to go. Nearly two-thirds of our respondents strongly agree or agree with the idea that the scorecard measures motivate employees to work in concordance with the organization’s objectives, with another 22% somewhat agreeing with this proposition. Yet 15% of the respondents believe that the system doesn’t motivate their employees to act in concord with the organization’s goals.

For many organizations, motivation is by means other than monetary rewards. Only 43% of the respondents agreed or strongly agreed that the performance measures on the scorecards were linked to compensation and rewards, with another 30% somewhat agreeing and 27% disagreeing.

The advantage to having this link is clear: organizations with this link are much more likely to agree that the scorecard’s measures motivate its employees to work in concord with the organization’s goals. They’re also more likely to agree that their scorecarding system had yielded significant benefits. A large bank participating in the survey noted the benefits from scorecarding included the “alignment of employee measures to corporate objectives” and “employee receptivity for balanced measures linked to compensation.”

Updating scorecards

Ongoing updates of an organization’s scorecards are necessary to keep up with the evolution of the organization’s strategy and objectives. It’s important for organizations to have a well thought out process for making these changes.

Part of this process is having well thought out criteria for adding and removing measures from scorecards. Our survey results indicate that most organizations do possess these criteria: 90% agreed, to some extent, that their organization used well thought out criteria when adding a measure to a scorecard, and 86% agreed they had the same for the removal of a measure from a scorecard. (The responses to these two items are highly correlated.) Again, there is room for improvement in the process for a substantial number of organizations: 11% of the respondents believed that the criteria for adding measures was better thought out than those for removing them. An additional 20% thought the same about removing measures versus adding them.

This is all important. Organizations with well thought out criteria for adding and removing measures are more likely to believe that their scorecarding system is yielding significant benefits. Many of our respondents indicated that they had not yet removed any measures from their scorecards.

Having an effective process in place for updating scorecards involves more than just specifying criteria for adding and removing measures. Despite the prevalence of these criteria, more than half (58%) of the respondents agreed to some extent that their scorecard measures had just evolved over time. Fifty-one per cent of the respondents thought that their organization had well thought out criteria for adding measures and yet, at the same time, thought that their measures had just evolved over time.

CEO measures

A large insurance carrier participating in the survey indicated that their board of directors is now more focused on key performance indicators presented on scorecards than presentation of purely financial data. Given the importance of scorecards in motivating employees and their use as a strategic and tactical tool, design of the CEO/President’s (or most senior officer) scorecard is especially important.

One variable that may be of concern is the number of measures to put on the CEO’s scorecard. We found widely varying results, with 16% of the organizations reporting five or fewer measures, 28% having six to 10 measures, 33% having 11 to 20 measures, and 24% having more than 20 measures. We didn’t find, however, that the number of measures on the CEO’s scorecard correlated with the organization achieving significant benefits from its scorecarding system. Clearly, it’s the relevance of the measures chosen, and not their quantity, that’s important.

Links to goals

For most organizations, there is a strong link between the scorecards and the organization’s goal setting process. The vast majority (71%) of the surveyed organizations agreed or strongly agreed that the measures on their scorecards are the same ones on which annual and longer-term goals (or objectives) are set during the planning process. Another 21% somewhat agreed with this statement, and only 8% disagreed. The stronger the agreement with the statement, the more likely the organization was to agree that it had achieved significant benefits from its scorecarding system.

One survey respondent, a government defense agency, stated, “To date, the networking between bases and sharing of actions and measurements [on their scorecards] to achieve the vision (most did not even know our mission/vision) has made this effort a huge success already.” Another respondent, a semiconductor manufacturer, found that: “Employees use their organization’s scorecards to identify their personal job related goals to align their goals to the organizational goals.” This link resulted in the following benefit: “The scorecarding system has facilitated the effective communication of our organization’s vision, mission, strategy, key business processes, and critical business results, i.e. performance metrics.”

Finally, a utility employees credit union participating in the survey indi-cated, “very early in the program (nine months), the scorecard has helped to align much of the staff with the organization’s vision and strategic goals.”

By linking their scorecards to their organizations’ goals, these organizations were able to achieve substantial benefits from their scorecarding systems.

Having decided on the framework around which to organize their performance measures and the levels at which to implement scorecards, organizations need to consider several factors in their choice of performance measures. Our survey results show that neither the number of measures tracked by an organization nor the percentage of those measures used on scorecards are a factor in determining scorecard success.

What is important is that a balanced set of measures be chosen, both financial and non-financial. It’s also important that the system be integrated into the organization’s overall planning and performance evaluation systems, and that a process exist to update the scorecarding system as the needs of the organization change. Organizations can enhance the benefits achieved from their scorecarding efforts by designing a system that meets these criteria.

Dr. Raef Lawson and Dr. William Stratton are the supervisors of this study. Dr. Lawson is a professor at the University at Albany, State University of New York. Dr. Stratton is a professor at Pepperdine University. Toby Hatch is the study coordinator. For further information regarding the study, contact Raef Lawson at Lawson@albany.edu or Bill Stratton at William.Stratton@pepperdine.edu.

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