Strategic focus — does your scorecarding system have it?

According to preliminary results of an international scorecarding study, many organizations around the world aren’t realizing the full benefits of their scorecarding systems. A failure to link the system to strategic planning may be the missing link between the winners and the losers.

By Raef Lawson, William Stratton, & Toby Hatch

Scorecarding systems are the subject of heightened interest in organizations wanting to improve their performance. These organizations approach the deployment of scorecarding systems from several directions. Some, spurred by Robert Kaplan and David Norton’s work in developing the Balanced Scorecard and strategy maps, are implementing strategy-focused systems. Other organizations take a more tactical approach, focusing on reporting results for key performance indicators (KPIs), often without explicit ties to strategy.

An unresolved issue is whether organizations that have strategy-focused scorecarding systems receive the same, greater, or fewer benefits as organizations whose systems are more tactical. In this article, we examine this issue using the six main principles identified by Kaplan and Norton as being important when building a strategy-focused organization. We also use these principles as a framework to explore possible causes of scorecard system success.

International scorecarding survey data

We address the issue using data from our international on-line scorecarding survey. This survey examines, among other things, the adoption and use of scorecarding systems worldwide (for more information or to participate in the study, go to www.graziadio.pepperdine.edu/shaps). Available on the web in eight languages, the survey is sponsored by CMA Canada and other professional and consulting organizations around the world. (Other survey sponsors include the AICPA, Balanced Scorecard Netherlands, CAM-I, CIMA, CompetitiveScotland.com, Deloitte Germany, Hyperion Solutions, IMA, Van der Leer, and Yacsa.com.) The role of these non-financial sponsors was to solicit their members’ or clients’ participation in the survey.

A total of 382 usable responses from 44 countries have been received so far. Of these, 193 (51%) respondents indicated that they had a scorecarding system. (Survey respondents were asked to use their own definition of a scorecarding system when responding to the survey questions.)

As part of the survey, a series of attributes were provided from which respondents could identify those they currently include in their scorecarding system, and those they think should be included (as possible future enhancements). Also included in the survey are a series of questions regarding the link, if any, of respondents’ scorecarding systems to their organizations’ strategies. We matched up the list of attributes and questions to the Kaplan and Norton six key principles of a strategy-focused organization. We then analyzed responding organizations in terms of the principles that they are (and are not) following, and the benefits received from their scorecarding systems.

Kaplan and Norton’s six principles

The Kaplan and Norton (hereafter K&N) principles and selected key attributes as they apply to a scorecarding system are as follows:

1. Build an executive leadership team to mobilize change. This includes developing a vision and strategy.
2. Translate strategy into operational terms. This includes creating strategy maps.
3. Link and align the organization around its strategy. This includes creating scorecards for various units and levels and linking them.
4. Make strategy everyone’s job. This includes communication and education to create awareness, personal alignment, and incentive compensation linked to targeted scorecard measures.
5. Link strategy and budgeting. This includes linking strategic initiatives and related costs during the planning process.
6. Make strategy a continuous process. This includes tracking performance against short-term and long-term goals and initiatives for improvement.

Defining and analyzing the groups

To investigate the impact of having a strategy-focused scorecarding system, we looked at two groups that reflect the extremes of the scorecarding experience.

The best practice group includes organizations that:

• have had a scorecarding system in place for more than one year (The average was 4.5 years),
• drive vision with the scorecard,
• have a scorecarding system that facilitates sustainable alignment, and
• realize significant benefits from their scorecard system.

The no-benefits group includes organizations that have scorecarding systems but answered somewhat disagree, disagree or strongly disagree to the statement “Our organization has realized significant benefits of our scorecarding system.”

The percentage of North American respondents in the overall survey is 35%. We might expect that the percentage of “best practice” and “no-benefits” organizations would be approximately the same. In fact, the percentage of best practice organizations from North America is 28% and the percent of the no-benefits group from North American organizations is 50%. Possible interpretations include:

1. Since the rest of the world lagged behind North America in implementation of scorecard systems, they learned from errors reported by North American organizations.
2. From a cultural perspective, North American organizations tend to be more tactical than strategic in focus; hence, they would have less success, given that strategic focus equates to better results.

The next step in our analysis was to investigate each group to measure the degree of compliance with K&N principles. The results of this analysis were revealing. While all six principles were captured in our analyses, we will highlight three: link strategy and budgeting; make strategy a continuous process; and link and align the organization around its strategy.

Link strategy and budgeting. We asked respondents of both groups if the measures in their scorecarding system are the same ones on which annual and longer-term goals or objectives are set during the planning and budgeting process. The average response to this question on a scale from 1 (strongly disagree) to 7 (strongly agree) was revealing. The best practices group had much greater integration of scorecard measures in the budgeting process. In fact, 83% of the best practice organizations strongly agreed or agreed that scorecard measures were used in the budgeting process. Only 25% of the no-benefits group agreed with the same statement (none strongly agreed).

Make strategy a continuous process. An important part of this principle is ensuring there is discussion about results and there is strategic learning. Strategy-focused organizations need mechanisms to continually assess, debate, and update their strategy. We asked respondents in both groups if their scorecarding system enhances feedback to responsible managers so that adjustments to their strategic plan can be made during the operating period. The average response to this question for both groups (on the same scale as before) demonstrates that this feedback exists to a much greater extent in the best practices group. Seventy-eight per cent of the best practice organizations strongly agreed or agreed that their scorecard system adhered to this principle. Only 17% of the no-benefits group agreed with the same statement (none of them strongly agreed).

Link and align the organization around its strategy. There must be a link from strategy to an organization’s human resources. We asked both groups to describe how their organizations link strategy to the scorecard system. If an organization used one or both of the methods below, the link was considered strategic:

• The responsibility for implementing actions or initiatives of the strategy is assigned to people (teams, departments, etc). Initiatives are supported by measures. These measures are on the scorecards of the responsible person(s) and therefore are aligned with the strategy.
• Each scorecard rolls up to the next level and therefore we believe this supports our strategy.

Seventy-eight per cent of the best practice group chose one or both of the strategically linked options versus only 33% of the no-benefits group.

Similar findings were discovered for each of the six principles. Figure 1 compares the number of K&N strategic-focus principles that were associated with each group. Those organizations that were in compliance with five or six were considered to have a strong strategic focus; those in compliance with three or four had a moderate strategic focus; and those in compliance with less than three had a weak strategic focus.

An overwhelming conclusion is evident from Figure 1. Organizations with a strong strategic focus to their scorecarding systems are more likely to achieve significant benefits from their systems than those that have systems that lack this focus. Many companies clearly aren’t using their scorecards effectively.

Seventy-eight per cent of the best practice group exhibited a strong fit to the strategic focus principles, while a mere 16% of the no-benefits group exhibited the same.

Figure 2 summarizes the findings by principle. In the best practice group, most of the K&N principles were in alignment with characteristics of their systems most of the time. The one principle that appeared slightly less frequently (73% of the time) than the others was principle 2 — translate strategy into operational terms (including creating strategy maps).

In the no-benefits group, the principle that appeared the most frequently (83%) was principle 3 (link and align the organization around its strategy), followed by principle 4 (make strategy everyone’s job, including communication and education to create awareness, personal alignment and incentive compensation), which was present in 58% of the systems in this group. All the other principles appeared only 25 - 42% of the time.

Benefits of a strategy-focused scorecard

There are many benefits that can be attributed to a strategy-focused scorecarding system. Organizations were asked to select the benefits they had realized from their scorecarding system. The most frequently cited benefits for the best practice group were: increased communication, the ability to measure performance, and understanding measure and strategy cause and effect. Other benefits included:

• Organizational alignment
• Increased revenues
• Decreased costs
• Ability to link performance to compensation
• Ability to align employee behaviour with strategy
• Ability to make strategic decisions faster with better data

Figure 3 summarizes the frequency of the cited benefits for the best practice group.

Survey participants were also encouraged to submit comments about additional benefits realized. One company from the best practices group commented that their scorecarding system “has facilitated a unified focus on office priorities through easily generated performance reports. It has also highlighted the interrelationships between different functions and how best to coordinate efforts to achieve goals.” Another organization noted: “It is much easier to allocate human and capital resources and share these resources across the organization now that everyone actually sees how this positively impacts the organization as a whole.”

Finally, along with conceptual benefits, other organizations in the best practices group were able to express the impact of scorecarding systems numerically. Some examples include:

• We had a productivity improvement of over 200% and a 75% reduction in unit cost.
• Focusing on scarce investments guaranteed an average annual growth of 36% in revenue with the same average margin.

The no-benefits group also submitted comments that were helpful in understanding why their scorecarding system had failed to produce benefits. In many cases a lack of strategic focus, a lack of understanding of the strategy by the employees, and insufficient management buy-in were cited as a contributing factors to the failure of the system. Some of the comments include:

• The system makes employees confused without specific strategy.
• Too many subjective measurables and the manager was given no input as to the measurables.
• Had acceptance at a high level, not accepted at departmental level as other [different] measures were tracked.
• Very basic — no real buy-in as the items in the scorecard were not thought through particularly well.
• Very little manager input into criteria and still have subjective portions of the scorecard.

In this article we used the data from our scorecarding survey to examine the impact of the existence of a strategy focus on the effectiveness of scorecarding systems. We found that the vast majority of best practice scorecard organizations have a strong strategic focus in their scorecard systems. These same organizations enjoy significant benefits from these systems. Most organizations that have not realized significant benefits from their scorecard systems have a weak strategic focus in their system. It is thus clear that organizations that are considering deploying scorecard systems should give close attention to the level of strategic focus when designing and implementing their system to optimize the value received.

Raef A. Lawson, Ph.D., CMA (IMA), CPA (rlawson@imanet.org) is director of research for the Institute of Management Accountants. Previously he was a professor of accounting at the University of Albany, State University of New York. William O. Stratton, Ph.D., CMA (IMA) (stratton@dixie.edu) is a professor of accounting at Udvar-Hazy School of Business, Dixie State College. He has held faculty positions at the University of Washington and Pepperdine University. Toby Hatch (toby_hatch@hyperion.com) is a domain leader for business modeling and performance scorecard with Hyperion Solutions.

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