As many as 70% of all companies that implement balanced scorecards fail to generate real business value through their use, according to research from The Hackett Group, a business advisory firm.
While balanced scorecards are a potentially powerful forecasting and management tool, most companies fail by focusing on far too many metrics (on average, nine times too many). Companies also overweight scorecards with historical financial information rather than providing true balance by more heavily integrating forward-looking measures.
At their most effective, balanced scorecards can be powerful tools, providing concise, predictive, and actionable information about how a company is performing and may perform in the future, and world-class companies are 2.3 times more likely than typical companies to have mature balanced scorecards in place, according to Hackett’s 2004 Finance Book of Numbers research. But the benefits of effective balanced scorecards are not being realized for a number of reasons but primarily because they include too many metrics and overweight the scorecards with historical financial information.
According to Hackett, companies report an average of 132 measures to senior management each month ? nearly nine times the number of measures in most effective balanced scorecards. In addition, half the metrics companies rely on are driven by internal financial data, which places far too much weight on historical performance and not enough emphasis on forward-looking measures such as external financial and operating performance. According to Hackett’s research, 50% of the measures companies currently use are keyed to internal financial data. Other measures are incorporated, including internal operating statistics (33%), external financial data (13%) and external operating (4%). But clearly, internal finance data is too heavily weighted to make the scorecards truly balanced.
?Given the way the concept of the balanced scorecard has evolved in practice, it is no wonder that many financial executives look on the concept as an expensive, bloated and useless substitute for the traditional paper reports. Most companies get very little value out of balanced scorecards, because they haven’t followed the basic rules that make them effective,? says John McMahan, Hackett senior business advisor.
According to Hackett finance practice leader Cody Chenault: ?If you’re tracking nine times the recommended number of metrics, you’re confusing detail with accuracy and it’s going to be almost impossible to see indicators that might emerge from the data. Companies make the mistake of relying heavily on historical internal finance data. It’s what they understand best, and are the most comfortable with. But by putting little weight into forward-looking internal and external metrics, such as sales forecasts, market share, competitor pricing, and broad economic indicators, companies sabotage their own balanced scorecard efforts. They create a system that’s about as effective as driving with the windshield covered while looking in the rearview mirror.?
Hackett’s research found that the most effective scorecards have six characteristics in common:
Focus ? Effective scorecards are designed as a day-to-day diagnostic tool to guide executives actions and are not linked to compensation.
Balance ? Effective scorecards should include a balance of leading and lagging indicators keyed to internal and external financial and operating metrics. The mix is designed specifically to fit the company’s needs and focus on its strategic issues. These may change over time.
Scope ? This is a critical element, as many companies’ scorecards are both too wide, tracking too many metrics, and too narrow, in that too many of the metrics are keyed to internal financials. To be insightful, scorecards must define their scope based on their audience, and then provide a limited number of balanced metrics at the top and supporting metrics that can help explain the meaning or cause of the top-level measures. Metrics should be updated regularly, if not in real-time, particularly if the underlying data changes rapidly.
Audience ? If the use of scorecards extends beyond senior management, or if a company has more than one business, more than one scorecard may be required. Each scorecard should reflect the audience’s responsibilities and concerns, and provide the appropriate breadth and type of metrics.
Technology ? Technology is a significant element of effective balanced scorecards, but not a requirement. One of the most effective scorecards Hackett has seen was a single hand-compiled sheet of high-impact metrics compiled each morning by a card financing firm. But successful firms match technology delivery to the need for timeliness in reporting and analysis.
Implementation ? Effective balanced scorecards are far from simple, and successful organizations often start small by focusing on a top-level scorecard or a single division.
