Managing Complexity

Hundreds of major corporations are implementing a Balanced Scorecard in their quest to increase shareholder value. But success is in the details.

Companies that only a few years ago focused on cost-cutting, reengineering and restructuring have shifted their mind-sets toward growth, innovation and seizing new opportunities. Forward-thinking executives realize they must drive their organizations into new areas to create shareholder value. Many of them are using the Balanced Scorecard to help steer them in the right direction.

The Balanced Scorecard has come a long way since David Norton and Harvard Business School professor Robert Kaplan introduced it in 1992. Their philosophy was that financial measures weren't adequate for managing complex companies. By the Year 2000, at least 40 percent of Fortune 1000 companies are expected to implement the Balanced Scorecard, according to the Stamford, Conn.-based Gartner Group Inc. The common denominator? A focus on managing change.

A Balanced Scorecard provides a means for linking the strategies of different businesses within an organization to the overall corporate vision. It supplements traditional financial measures with criteria that measure performance from a variety of perspectives. But perhaps the most important aspect of a Balanced Scorecard is that it allows organizations to link long-term strategy with short-term actions.

For example, a Balanced Scorecard could be used from a customer perspective to measure the percentage of new product sales or the percentage of on-time product delivery, as defined by the customer during various time periods. It also could be used from an innovation or learning perspective to measure the time it takes to introduce a new product compared to a competitor's product. From the standpoint of product focus, a Balanced Scorecard can identify products that generate 80 percent of total sales, for example.

“When companies begin to put the Balanced Scorecard into practice, they learn two things,” says Michael Contrada, vice president of Renaissance Worldwide Inc., a Lincoln, Mass. consulting firm founded by Norton. “The first key idea is that the measurement system has to be associated with the strategy. The second key idea is that once you've worked out the framework, it's clear that it has many implications for other management processes.”