July 26, 2002

Beyond the Numbers

After years of evolution, balanced scorecard applications now integrate strategy and management for competitive advantage

by Dylan Miyake

The balanced scorecard (BSC) was developed by Drs. Robert Kaplan and David P. Norton in 1992 to address a simple need: A more complete and balanced view of corporate performance. Unsatisfied by traditional measurement systems, Kaplan and Norton broadened the set of measurable items in an organization to encompass not only financial but also customer, internal process, and learning and growth.

The first-generation scorecards of the early 1990s revolutionized how organizations could think about corporate performance. Instead of relying solely on backward-looking financial metrics, they could now look at "leading indicators" — predictors of future success. This broader set of metrics enriched the measurement tools that managers used to understand their organizations.

Along with the first-generation BSC came first-generation BSC software. The first BSC applications out of the gate — tools such as Gentia (now Open Ratings) BSC, Panorama Business Views Inc.'s PBViews, and CorVu Inc.'s CorManage — were designed as reporting or management dashboard tools. While these tools have evolved considerably beyond this simple beginning, these early versions had an important contribution: They were the first applications to integrate financial and nonfinancial reporting, and, therefore, formed the basis for the integrated strategic management systems of today.

A key contribution of the first-generation BSC was the "red, yellow, green" reporting of achievement of targets. This simple report helped executives quickly understand the health of the enterprise and focus on the key areas that needed attention instead of burying themselves in a mountain of reports.

Around 1996, the BSC, through the guidance of Robert Kaplan and David Norton and several key early adopters such as Mobil, Cigna, and Brown & Root, began to evolve. Kaplan and Norton realized that the simple premise of the BSC — that measurement motivates — could be used to help organizations implement and manage strategy.

In fact, the BSC development process had been about strategy all along; after all, you can't have a discussion about which metrics are important to an organization without discussing strategy. Kaplan and Norton's development of the strategy map in 1997 formalized the relationship between the BSC and strategy implementation.

Map to Strategy

In short, a strategy map is a one-page description of the cause and effect drivers of a strategy. The strategy map transforms a strategy from a seldom-used document in a dusty binder into an actionable plan. (See Figure 1.)

At the top of the strategy map is the financial perspective of an organization. Generally speaking, the perspective entails both a growth strategy and a productivity strategy. For nonprofit organizations, this high-level financial perspective is often replaced by a mission perspective. In all organizations, however, it reflects how the organization will deliver value to its stakeholders — be they shareholders, constituents, or clients.

The second layer of the strategy map is the customer perspective. This perspective reflects how the organization will differentiate itself in the eyes of the customer — in short, the company's value proposition. This perspective is critical to the overall strategy of the organization because it clearly illustrates the choices an organization is making — for example, to be a product leader, customer intimate, or operationally excellent — and the key customer segments that the organization will focus on.

The third layer, or internal process perspective, is largely driven by the customer perspective. This perspective defines the key internal processes at which the organization must excel to deliver on its customer value proposition. The internal perspective shouldn't be based on existing organizational units such as marketing, finance, and distribution, but rather on how the organization can bring critical cross-functional teams together to execute the strategy.

Supporting the entire strategy map is the organization's plan for learning and growth. This perspective discusses the key elements of culture, technology, and skills that are critical if the organization is to execute on its internal processes — and, therefore, its strategy.

The key contribution of this second-generation BSC is the formal linkage of strategic management with performance management. The clear cause-and-effect relationships to the strategy map allowed organizations, for the first time, to effectively communicate the strategy across the entire organization.

In 1998, the Balanced Scorecard Collaborative (BSCol), the professional services company founded by Kaplan and Norton to promote awareness of BSC, developed functional standards for BSC applications based on these guidelines. The purpose of the standards program was to ensure that developers of BSC software moved beyond the executive dashboards into tools that could be used to implement and manage strategy. Since its inception, BSCol has certified 16 software applications as compliant with these functional standards. (See the sidebar, "Top of the Class.")

Certified second-generation BSC software and tools reflect this shift toward strategic management. These applications add drill-down and online analytic processing (OLAP) capability to BSC applications, with some leading developers integrating an interactive strategy map into their applications as well. This integrated strategy map lets executive users access the power of OLAP — as executives could, for the first time, drill down from the strategic objectives of an organization into the actual figures behind them. Instead of being captive to predefined reports, leading users of the BSC in the mid-to-late '90s could interactively analyze their strategies.

With the introduction of the strategy map, the BSC became a "chart of accounts" for an organization's strategy. Much like balance sheets and income statements describe an organization's financial health, the BSC and strategy map describe an organization's strategic health — and, therefore, its prospects for future growth.

Strategy-Focused

As the BSC evolved, it became clear that it could be used not only to describe strategy (with the strategy map) but also could become a framework for implementing and managing strategy. This framework — which places strategy at the center of the organization — formed the foundation of Norton and Kaplan's second book on the BSC, The Strategy-Focused Organization (Harvard Business School Press, 2000). In this book, they describe how the BSC can serve as a tool for integrating strategy with business performance measurement.

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