Why Balanced Scorecards Sometimes Fail
by Liz Murby & Stathis Gould

The balanced scorecard is a management framework which, since its inception by Kaplan and Norton in the early 1990s, has been adopted, modified and applied by hundreds of organisations worldwide. The key to the popularity of the scorecard may lie in its flexibility and adaptability. Undoubtedly, some organisations have been less than successful in using a balanced scorecard. Some problems that organisations have experienced in using the framework and their underlying causes are considered here.

Traditional issues

Major organisation changes
The balanced scorecard is not a 'quick-fix' approach to alleviate financial problems. Where large-scale structural organisational changes are driven by the need to remedy financial difficulties, the longer-term commitment required for successful balanced scorecard implementation may be sacrificed for the short-term hunger for apparent improvements in financial results.

A potential problem of such short-termism is that unless organisational strategy has been considered carefully, and measures to secure and manage its implementation have been developed and deployed in the 'new' organisation, the strategy is unlikely to be sustainable.

Changes in key personnel/management team
Leadership and management commitment to the balanced scorecard and its underlying principles determines the way it is used and its impact on performance. Existing scorecard initiatives can falter if, following a change in key personnel, new management does not explicitly continue to support its use.

Design failures

1. Confusion regarding primary performance drivers
Often, financial measures carry more weight within an organisation than non-financials, but to drive through a holistic, long-term and sustainable strategic re-alignment, the needs of non-owner stakeholders (service users, service delivery partners, etc) should also be considered. This is particularly important where:

• The business is adopting a value based management (VBM) approach;
• Shareholder value maximisation is the ultimate objective, and
• The needs of non-financial stakeholders are material to the business.

These requirements should be analysed explicitly and translated into scorecard measures.

2. Poorly defined metrics
Metrics can be classified as either Results Metrics or Process Metrics. Results Metrics are measures seen by the process customer. These are the most useful as a management tool, and are usually what appear on the scorecard. Process metrics are internal measures that cause the results metrics. Process metrics are most useful to improvement teams and focus attention on places where improvements will have the greatest impact.

Good metrics are:

• A reliable proxy for outcomes and stakeholder satisfaction;
• Weakness or deficit-oriented (have an ideal value of zero);
• Simple and easy to understand;
• Well-documented, unambiguous, and consistent, with sound operational definitions;
• Timely and accessible to those who can best use them;
• Linked to an underlying data system that facilitates the identification of root causes of gaps in scorecard results, and
• Have a formal process for their continuous review and refinement.

3. Negotiated, rather than stakeholder focused performance targets
Although performance targets should be set according to current knowledge of the means used to achieve them, it is argued that such means are rarely known at the time of target setting – a 'chicken and egg' situation.

4. Lack of a delivery-level target deployment system
Financial systems are able to consolidate data generated at the transactional level and all financial measures can be communicated using a single metric. The same cannot be true of non-financial performance measures, which may be difficult to communicate in a consistent denomination.

5. No state-of-the-art improvement system is used
In theory, the strategic balanced scorecard has an built-in mechanism for verifying the validity of the causalities from which it has been deployed. However, in practice, organisations seldom have the time or resource to develop and follow through any required strategic realignment, particularly where considerable resources are already deployed. Computerised balanced scorecard systems may address this perceived shortcoming.

6. There is not, and cannot be a quantitative linkage between non-financial and expected financial results
It has been argued that efforts to undertake a meaningful quantitative analysis of both the impact of actions generating non-financial performance measures and the expected financial results, are not only difficult, but may be pointless. Diverting resources to develop alternative strategies or strategic objectives may be similarly misguided, for the same reasons, notably:

• The impact of apparently insignificant decisions
• The operation of the 'chaos' theory within businesses, and
• The potential existence of unknown and un-quantifiable time-lags between action and impacts, even where causality does exist.

7. Being inward looking and examining the impact of external discontinuities
One criticism levelled at the balanced scorecard is that the framework encourages an internal focus, although advocates argue that the scorecard manages external forces in two ways. First, these are considered when managers performing a SWOT (and/or similar approach) and competitor analysis to formulate strategy, and secondly many scorecard measures are, by their nature, calibrated against competitors.

Where there are significant changes in external conditions, management should assess how these have an impact on the scorecard and whether it needs to modify the objectives, measures and targets.

Despite its perceived limitations, it is unwise to write-off the value of the balanced scorecard approach. Experience has shown that, as organisations have bought into the scorecard theory, it has evolved from a simple performance measurement device, into a powerful framework which may be used:

• As a communication device
• As a driver and conduit for organisational culture change, and
• To implement, reinforce and continually refine an agreed strategic focus and business model throughout an organisation.

At Shell, for example, the balanced scorecard approach has evolved into a robust framework that now forms the basis of employee appraisals.

This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it is an excerpt from CIMA's Technical Report on "Effective Performance Management with the Balanced Scorecard".