Why would you need the Balanced Scorecard if your BPM system offers a scorecarding capability? Some say it's necessary to control metrics mania.

Get your ducks in a row. That old advice clearly applies today to performance management within every type of business. Strategy and objectives must be aligned companywide, then performance metrics must track corporate progress toward those goals.

Lower-level measures should roll up into executive metrics, and all should fit neatly into the strategic plan. But achieving this type of alignment is easier said than done. Many experts recommend the Balanced Scorecard methodology as a means of managing corporate performance measures, but business leaders don't seem to be rushing to heed that suggestion.

The Hackett Group, a best-practice business advisory firm in Atlanta, says its ongoing research shows that only 50 percent of the companies it considers "world class" (those within the top quartile in terms of efficiency and effectiveness) use the Balanced Scorecard. That figure drops to 25 percent for companies that are not world-class. Finance managers may explain this poor result by pointing out that they're implementing business performance management (BPM) software systems which contain scorecarding capabilities. Why would they need to undertake a Balanced Scorecard initiative if they already have the same tool in their BPM application?

Brian Wood, research director, corporate performance management, with Gartner Inc. in Hope Valley, R.I., has an answer. "Scorecarding is broader than the Balanced Scorecard," he argues. "The Balanced Scorecard is the methodology for measuring company performance based on a company's four quadrants: employees, customers, innovation/growth, and process quality. Scorecarding can include the Balanced Scorecard within it, as well as a number of other performance methodologies such as Six Sigma, EVA [Economic Value Added], lean manufacturing, and so on." Because scorecarding technology encompasses much more than the original Balanced Scorecard concept, it can sometimes contribute to -- rather than resolve -- confusion surrounding performance measures.

Some BPM vendors offer a metrics library developed to fit the particular industry or market niche they target. "The Inea scorecard, for instance, includes a number of met-rics related to operational risks and fraud management because Inea targets financial institutions," Wood says. "Other BPM vendors include an employee-oriented scorecard because they specialize in employee-performance management."

In contrast, the Balanced Scorecard is industry-neutral and universally applicable. That's part of why it's an effective mechanism for controlling scorecard creators who might otherwise be tempted to go overboard. "When scorecarding goes wrong, it's often because the company is trying to juggle too many metrics," says Cody Chenault, senior director, finance practice leader, at The Hackett Group. "By adding the concept of the Balanced Scorecard, companies can reduce the volume of performance reports being spewed out because the Balanced Scorecard espouses a relatively small, manageable number of metrics."

Biased Scorecards

Crown Castle International Corp., a $1 billion Canonsburg, Pa.-based operator of more than 15,000 cell towers in the United States and overseas, has found that the Balanced Scorecard can make an entire business more manageable. Bob Paladino, senior vice president of global performance, says, "With our BPM system, which we bought from CorVu, we can open our management meetings with our BPM strategy map containing objectives in the four perspectives: financial, customer, operations, and learning and growth. The map is color-coded to highlight the successes in green and to call out areas for attention in yellow and red.

"Out of the 25 measures on our corporate scorecard, 20 of them have improved by 10 percent to 200 percent over the past year," Paladino adds. "The reason for those improvements has been focus. We're not focusing on hundreds of metrics, just 25 of them. And we've linked those 25 to compensation, which helps to reinforce the measures. All 25 metrics include targets for each of our 35 district offices." He claims that Crown Castle's scorecard is truly balanced because it includes objectives, measures and targets in each of the Balanced Scorecard's four quadrants.

But companies that use the methodology don't have to remain perfectly evenhanded. Experts agree that the Balanced Scorecard is a blueprint, a guideline for thinking about which strategies and supporting metrics a business ought to rely on. Organizations that focus their strategic objectives on the core drivers of their performance generally won't give equal weight to all four quadrants. What's important is that they give forward-looking measures, such as employee turnover rates and customer satisfaction ratios, as much consideration as financial metrics -- and that they focus their efforts on the handful of metrics which really matter.

John Talamo, vice president and assistant controller at Time Warner Inc. in New York City, understands that his company sinks or swims based on two broad performance categories: customers and creativity. "Within the last two or three years, we've improved our overall performance management by better defining our metrics within those two areas and by purchasing a BPM system from Longview Solutions," he says. "We looked at the Balanced Scorecard approach and what drives it, and it gave us a blueprint to work by. But we're not beholden to it, and it's certainly not balanced. For us, creativity and customers occupy the lion's share of our metrics."

Talamo adds that determining which metrics deserve the most attention is an ongoing balancing act for Time Warner. For example, financial integrity has taken on greater importance within the company since the passage of Sarbanes-Oxley. "Companies that excel in their use of the Balanced Scorecard make strategy a continuous process," says Michael Contrada, executive vice president and co-founder of the Balanced Scorecard Collaborative Inc. in Lincoln, Mass. "That means the scorecard, as well as your BPM efforts, need to be flexible enough to allow you to change metrics targets as your forecasts change."

Balanced BPM

Despite its strengths, the Balanced Scorecard can't stand alone. That's because although it can alert managers when something's wrong, it can't provide solutions. And ultimately, a company doesn't see the payoff from a Balanced Scorecard implementation until it solves the problems that its metrics identify.

"The Balanced Scorecard tends to be used only at the highest levels of the company, but you need to drill down to the everyday processes to find out how to correct the problem areas," explains David Silverstein, CEO of Breakthrough Management Group Inc., a consulting firm in Denver. "For instance, if the scorecard shows inventory is too high, I can't take action unless I drill down and find out what inventory-related processes aren't performing well -- by using Six Sigma or activity-based costing or lean manufacturing, for example."

Crown Castle incorporates Six Sigma and knowledge management into its Balanced Scorecard-based BPM system. "If our scorecarding dashboard indicates a red light on one of our metrics," Paladino says, "we'll begin an improvement program, sometimes using Six Sigma, in order to fix the problem. And if it indicates a green light, we'll capture the best practice ([which] we now call 'gems') in our knowledge management program so we can communicate these internally."

What's key in successfully tying the Balanced Scorecard to operations is ensuring close connections among all performance management initiatives throughout the company. Metrics need to roll up cleanly all the way from the front lines to the executive suite. "Oftentimes, there's only a Balanced Scorecard within one part of the company, such as the call center, so in effect that call center ends up working in a vacuum, apart from the rest of the organization. You need that strategic alignment companywide if it's going to work," says Wood.

The Texas Education Agency, an Austin-based state agency that funds and accredits 1,200 school districts and charter schools, was well aware of this need when it shopped for BPM software in early 2000. Before making a purchase, the organization developed a high-level set of metrics based on the Balanced Scorecard. Then, "after creating the corporate scorecard, we connected it to 10 to 15 lower-level scorecards that focused on more operational metrics," explains Dan Arrigona, deputy associate commissioner for strategy and grants management.

Crown Castle has taken connectivity among its various performance management systems even further. "Management teams can drill down into underlying data tables to understand trends, compare benchmarks and review supporting documents," Paladino explains. In addition, "managers can enter management discussion and analysis (MD&A) points into the system to support rich discussions."

The Chicken or the Egg?

So, if a company needs both BPM software and the Balanced Scorecard, which ought to come first? Most experts agree that introducing the Balanced Scorecard first helps managers and employees get used to the idea of moving toward a performance-based system. It enables executives to pin down their stable of metrics and gain consensus on what their performance targets should be. Then, when they're ready to make a BPM purchase, they have a pretty good idea of what they want it to do.

"A cultural shift needs to take place if your BPM system is going to be successful, because without that shift, BPM becomes just another reporting tool," says Tony Zecca, partner in charge at Cohn Consulting Group in Roseland, N.J. "Having a Balanced Scorecard [model] already in place makes the BPM implementation smoother because employees have already become familiar with and accepting of this cultural shift."

That is the strategy Crown Castle adopted. The management team developed a corporate scorecard three years ago. Eighteen months later, they introduced BPM into the company. Making the Balanced Scorecard stick required a lot of patience. "It took us about two years to gain complete acceptance," Paladino says. "At first, there were classic early adopters as well as passive resisters, but by year two managers contributed hundreds of suggestions and gradually took ownership of it. Some of them, stimulated by the BPM data, would say, 'OK, I like this measure, but why don't we try it this way?' Including them in the formation of the metrics made the metrics more meaningful to them." In the end, the cultural shift has been so effective, Paladino says, "I wish we'd implemented our BPM software solution sooner. We used Excel worksheets for those first 18 months."

Arrigona and his colleagues faced a sizable cultural challenge when they introduced the concept of BPM into their organization: Employees were not used to performance-based evaluations. "It changed the culture of the agency," Arrigona says. "We attached compensation to meeting performance targets, but we did so only on a voluntary basis. Otherwise, we felt, we'd be facing widespread resistance to it."

To smooth the transition, the Texas Education Agency initially attempted to customize the scorecarding feature in the PeopleSoft system it bought to match scorecards it had developed internally. "Then," Arrigona says, "we realized our customization wouldn't work when the time came to upgrade the system. Looking back on it, we'd have been better off just going with the scorecard right out of the box and skipping the customization because it would have lowered the time and effort required to maintain it."

Even if the only benefit the Balanced Scorecard provides in a given company is to get managers thinking about which nonfinancial metrics they need to monitor, then it offers value. Likewise, if it's employed to narrow an organization's number of metrics down to a manageable quantity, it serves a purpose. But the best use of the Balanced Scorecard is to light the way by which other performance management systems can support the strategic objectives of the business.

Scorecarding Truths

Two years ago, the University at Albany, State University of New York; Hyperion Solutions; and Pepperdine University began a joint research project to gauge the effectiveness of corporate scorecarding techniques. It is called the SHAPS International On-Line Scorecard Study (graziadio.pepperdine.edu/ shaps). So far, more than 150 companies, representing a broad range of sizes and industries, have participated. Among the findings:

  • Scorecard implementations usually take three to six months. "The study has found, however, that the longer it takes, the more successful it tends to be," says Raef Lawson, a professor at the University at Albany.
  • Pilot projects increase the chance of success with a scorecard.
  • Large companies benefit more from scorecarding than do small companies.
  • "C-level" sponsorship is critical, whether it's from the CEO, CIO, COO or CFO.
  • Spreadsheets are a starting point for many companies, but dedicated scorecarding software becomes more necessary as data volume grows.
  • Consultants should be chosen judiciously. "Don't rely on the consultant to handle all your scorecarding needs," advises Lawson. "The study indicates leaving employees out of the process tends to isolate them, producing a less useful scorecard as a result."
  • Employee buy-in is, not surprisingly, a key ingredient for success.