Balanced scorecards: strategic performance management


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Balanced scorecards: strategic performance management

  1. 1. Balanced scorecards: the roadmaps of strategy driven companies<br />Summary<br /> <br />The balanced scorecard, a management tool, is meant to measure and improve performance in large and complex enterprises with multiple units like strategic business units, subsidiaries and the extended enterprise. Autonomous business units within a larger corporation have a life of their own far removed from the efficiency concerns of headquarters. The balanced scorecard methodology lets enterprises delve deeper into financial numbers to understand the root causes of their performance. Enterprises want to share the information with their employees to pinpoint problems much faster and use actionable intelligence to correct errors.<br />Above all, balanced scorecards make a major departure by considering non-financial metrics for performance measurement. These non-financial metrics are strategic variables, typically including intangibles like core competence, customer satisfaction and employee skills, influencing competitive strength and are the root causes of financial performance. As these variables are measured, companies are discovering unsuspected means for gaining competitive advantage.<br />Financial measures, on the other hand, have several problems when they are used for the operational management of enterprises. They are much too aggregated to help in the identification of sources of competitive advantage and in assigning responsibility to specific functional groups within a company. Financial numbers are, at best, a measure of the outcomes achieved in the past. These numbers are not helpful when managements are looking at means to achieve their future goals.<br />Balanced scorecards are a means by which companies align their strategies with work flows and resources. They help companies to scan their value chain and find means to lower their costs and speed up processes and improve quality in order to achieve their goals. When the outcomes fall short of the expected achievements, companies have the means to trace back the source of the problem and correct it quickly or better still anticipate it in time to take preemptive action.<br />Companies have to be careful to choose variables that have a significant bearing on performance in order to avoid unnecessary data processing and misleading conclusions. Increasingly, they have access to statistical analysis tools which help them to test the validity of the variables and identify new ones from patterns they observe in their business.<br />Technology, especially dashboards, is an aide to empower managements with the complex task of communicating strategies, measurement and processing of data and testing the validity of the assumptions companies make in formulating their strategy. Above all, dashboards make the information of their companies transparent and channel relevant information to the employees of their companies. This is essential at a time when tolerance for delays in decision making keeps declining and scenarios change even more rapidly.<br />Introduction<br /> <br />The origins of balanced scorecard date back to the first experiments with performance measurement in GE back in the 1950s. Over time, the balanced scorecard evolved from a performance measurement tool into an aid for implementation of strategy in companies with flat organizational structures. The information from balanced scorecards metrics is increasingly seen as a means to learn from experience and to achieve the desired performance.<br />Companies began to take recourse to balanced scorecards to find an alternative to their financial statements which were not providing them adequate information to manage their companies. Financial statements are useful for reporting purposes but have little use for strategic management.<br />The balanced scorecard does not abandon the traditional financial measures of performance, such as rate of return on capital employed, but it sees them in the context of other measures, such as customer satisfaction, in order to view the information in a perspective. Three types of non-financial measures supplement the data on financial performance to gauge the overall competitive strengths of the company. One of them is customer satisfaction with service received from the company. Secondly, measures of the efficiency of internal processes include cycle times and yield to assess excellence in manufacturing or services. Similarly, a company will measure engineering efficiency to assess strengths in design or product launch time if its strategy is oriented towards innovation. Finally, the balanced scorecards include learning and growth or the competence of the human resources to achieve the company’s goals.<br />In practice, companies do not rely on a single template for balanced scorecard measurements. They are advised to improvise based on the nature of their strategy. The learning and growth measures, for example, will vary between companies that favor innovation compared to those predisposed to produce quality products. An innovative company would value creativity while manufacturing quality is better achieved by diligence.<br />Similarly, the balanced scorecard does not necessarily weight each of the four sets of factors equally. Companies in the services industries, for example, will tend to value consumer satisfaction and learning and growth of its employees more than internal processes such as engineering efficiency.<br />Balanced scorecards are already part of the mainstream of the management of corporations in America. A recent Bain and Company survey found that 62% of a survey of 708 companies had adopted the balanced scorecard. Companies have also reported high levels of satisfaction with the balanced scorecard. The 2005 survey of the management tools, conducted by Bain and Company, reported a high level of satisfaction of 3.86 against a maximum of 4.<br />The hidden devil in those financial numbers<br />Executives searching for actionable information in the financial statements of their companies find few clues to understand how they can manage their organizations to improve their present or future performance. One study by the Harvard Business School found that 66% of companies, with over $500M in revenue, set targets that exceeded 9% real growth. The results were starkly unsatisfactory with less than one company in ten achieving their goals. In fact, only 13% were able to achieve 5.5% compound annual growth rates while providing shareholder returns in excess of their cost of capital.<br />Enterprises achieve their performance goals by first defining their objectives and the means they will use to achieve them. They need to galvanize their workforce and communicate the strategy in concrete terms. Typically, companies make decisions in uncertain environments with insufficient knowledge of the business climate in which they operate. Consequently, companies iteratively learn from their experience in strategy implementation in order to progressively improve their tactics to achieve their goals. Measurement of results by metrics is the means companies use to assess their achievements and reevaluate their strategies.<br />Companies define their goals in terms of market share gains, margins, customer satisfaction, quality ratings, brand image, etc. that will help them achieve their financial goals. Financial measures, such as NPV, IRR, and Rate of return on capital employed, etc., offer, at best, one measure of their achievements. In any case, companies need to know how they can increase their cash flows and lower their discount rates in order to improve their rate of return numbers.<br />The growing importance of the knowledge economy, consequently intangibles, is barely reflected in the financial numbers of companies. When assets like goodwill, intellectual property or reputation are valued in compliance with GAAP rules, their varying interpretations are barely useful for operating purposes. Intangibles such as customer loyalty or the customer life cycle values can have a critical impact on the future earnings of companies but barely receive a mention in most financial statements. Similarly, the reputation or the brand image of a company can influence a company’s ability to raise funds from capital markets and to sustain the interest of customers over an extended period of time. The confidence of capital markets and customers in the company ensures that it is able to raise money at relatively low cost of capital.<br />Financial statements can mislead because the traditional methods of classification of items are not applicable to knowledge based industries. Expenses in services such as marketing consulting are an investment in the business model of the company which can help a company seize new business opportunities. The traditional financial measures, on the other hand, see such expenses as costs and don’t even begin to measure the performance of investments in intangibles or as variables in the determination of the financial results achieved by the company.<br />What’s more, current accounting measures overlook several quantitative measures such as time of delivery, productivity, and quality and customer acquisition. When companies do have these numbers, they are often not detailed enough to indicate customers acquired for individual regions, product categories and by the time of the year. Companies need to compare the details of their performance with the best practices in the industry to be able to tell whether they have room for improvement.<br />Learning from experience is an important source of information for continually raising productivity, quality and time of delivery. Companies need to repeatedly measure the value of the resources invested versus the results achieved in order to learn the reasons from their successes and failures. They need detailed numbers that can be sliced and diced to extract insights about the determinants of their financial performance.<br />Financial statements such as the income statements and the balance sheet are much too aggregated to help pinpoint inefficiencies in manufacturing, supply chain or their marketing systems. Companies need to assign responsibility to individual departments for specific performance goals as well as the means to measure the results to keep track of their progress. Operational managers need guidance on how they can influence the variables under their control to contribute to the overall goals of the company as a whole. A factory manager, for example, needs information on specifics such as energy usage, production cycle time, rejection rates, etc., to plan for the design of production processes. Similarly, sales managers need information on territory coverage, orders received, deliveries, etc., to measure and control their performance. The financial statements, by contrast, measure the overall performance of the company which is much too remote from the world of operating managers.<br />Furthermore, financial performance is a narrative of the past leaving few clues for assessing the future performance. At best, financial numbers such as NPV, IRR or return on capital invested are a comment on the performance of past investments. They provide few hints about how investments currently underway will perform in the future. Non-financial indicators, on the other hand, are a measure of a company’s competitive advantage and resource strengths that are a predictor of its future performance.<br />In order to plan for performance improvement, companies need numbers that help them to determine reasonable expectations of what they can achieve in the future. With the financial numbers, the best they can do is to extrapolate past numbers. However, this is unlikely to be an effective method since the financial outcomes interact in complex ways with non-financial variables. Companies can use correlations between financial and non-financial variables to conduct scenario analysis and evaluate their decision options.<br /> Balance Scorecard: what can it do?<br /> <br />In a world where hierarchies are crumbling, companies do not any longer communicate and implement their strategies by bureaucratic fiat. Modern companies are complex systems in which the knowledge and motivation of all employees are crucial for the overall success of the company. Corporate executives have to be able to communicate compelling messages across several different departments, strategic business units and subsidiaries and make them work together. A recent survey finds that all the companies that have reaped significant benefits from balanced scorecards unanimously agree that communication is the most important raison d’être of implementation of the balanced scorecard while 39% who have not realized significant benefits also agree.<br />The senior managements and the boards of companies formulate the visions for their companies taking into account larger factors such as economic trends and the resource capabilities of the company. Most employees are preoccupied with the tasks assigned to them and the visions of the company are much too remote to move them. In order to execute their strategies, managements need to translate their strategy into concrete numbers intelligible to employees at all levels. Balanced scorecards help to communicate the larger goals of a company in the language of action plans to a variety of departments in a company. Financial and non-financial metrics are spelt out in the strategic context in which the tasks of the company have to be completed. They help to overcome the “cog in the wheel” mentality of employees that dampens enthusiasm; instead employees are encouraged to share in the excitement of achieving company goals.<br />Balanced scorecards use a weighted average of both financial and non-financial measures of performance. In the past, financial measures have been predominant and had encouraged managers to focus on short-term performance neglecting the non-financial metrics which are a better gauge of the long-term competitiveness of companies. The American automobile industry, for example, is a classic case where companies lost out to the Japanese car makers who had greater leeway to make investments for the long-term viability of their companies.<br />The financial and non-financial metrics that are a call to action by employees also spell out the causal relationships between the actions the company is taking and the outcomes that can be expected. In the service industry, for example, there would be a close link between customer satisfaction, brand image and the ability to acquire new customers and to retain them. The company managements can set goals in terms of revenue growth and the customer base they would need to achieve them. This can then be translated into objectives product designers and engineers would have to achieve in terms of product quality, call center representatives would have to achieve in terms of the quality of responses to customers and the messages that the marketing staff sends out to the customer base.<br />One example of communication of company strategy, with the use of balanced scorecard, throughout the company is the case of Franklin Park, Ill.-based metal distributor A.M. Castle. The company began by training six of its senior executives in the balanced scorecard methodology. Thereafter, a core team of eighty people were involved in the project who discussed balanced scorecards with their employees. The company also developed a board game on the Balanced Scorecard that was similar to Monopoly and sent managers to play the game with their business unit. These methods visually demonstrated the value drivers of their financial performance.<br />Just as communication within an enterprise has taken a subtle twist following the demise of bureaucracies, the control systems have their own nuances. Gone are the days of inter-departmental co-ordination committees which clumsily managed a sprawling enterprise. The company headquarters are disinclined to intervene in the operational strategies of individual units within the company. Instead, they design the strategy of the company, in consultation with the representatives of individual units of the company, and lay down the performance goals for each of them. This is well illustrated by the case of the Nova Scotia Power Inc. which designed the corporate scorecard to manage the individual units within the company. These scorecards describe the company strategy in measurable terms which is then extensively discussed with the employees of the company. In order to encourage the participation and active commitment to the company strategy, each unit within the company is encouraged to design their own cards which are consistent with the corporate scorecard. Each of the strategic business units within the company, such as the generating units, transmission units, etc identify one or more of the objectives, identified in the corporate scorecard, which they can influence and design their scorecard to achieve them.<br />Companies have to operate in uncertain environments and their knowledge of their business environment is limited. The best they can do is to begin with a hypothesis, based on the knowledge they have, and learn from experience. Balanced scorecards provide a quantifiable way to compare the expected performance and the actual to make sure that the results are not lagging. This can be taken a step further and the expected and actual results at several different points of time. Furthermore, the expected and actual can be measured for individual departments, strategic business units and subsidiaries of the company. Thus, companies receive a broad range of data points on any shortfalls that might have occurred. They can use them to call for any action plans, from those responsible for specific functions in the company that could help to overcome related problems. This can be repeated over and over again and the error rates in decision making lowered over time.<br />A classic case of the use of balanced scorecard as a diagnostic tool is Sears in 1992 when it was faced with a $4 billion loss. The customer satisfaction levels at Sears’ were below the industry average and 16 percentage points behind its leading competitor. After the implementation of the balanced scorecard program, Sears’ in 1996 had customer service levels above the industry average. In addition, an independent study of 203 companies found that in 1996 Sears made the second-highest improvement in customer satisfaction. In 1992, the company conducted both consumer and employee surveys to find out the underlying causes of the poor performance. It soon became clear that employee attitudes were an overriding influence on customer satisfaction. At a deeper level, the company recognized that the company culture was much too paternalistic to value its employees who were otherwise inclined to see an improvement in company performance. Also, the performance had to be rewarded more than effort. This data led to a change in corporate culture and to a substantial improvement in its performance.<br />The non-financial metrics in balanced scorecards are the leading or the predictive variables and the financial metrics are the lagging variables. Companies can use the leading variables to estimate the gains they can expect from strategic initiatives they undertake. The lagging variables, on the other hand, help to measure and confirm the validity of the assumptions made at the outset. They can use the data generated to evaluate the validity of their assumptions and learn to make better judgments in the future. Whereas in the past, bad decisions were shrugged aside as a professional hazard, companies can now use the data to make better decisions in the future.<br />In today’s constantly evolving environment, corporations have to guard against surprises and possible shocks that may do lasting damage to their companies. The balanced scorecard enables companies to keep track of the situation in real time and acquire the information they need to adapt to it.<br />Balanced Scorecard: issues of implementation<br />The implementation of the balanced scorecards involves several challenges in embedding the information systems and the culture that helps to receive, process, analyze performance information and to implement action plans in time to respond to unexpected turn of events. They have to select the relevant metrics, decide on their relative importance and take decisions on delegating resources and responsibilities to specific individuals in the company. In addition, they have to assign responsibility to individuals that is consistent with the overall strategy of the company. Companies have to be also rid of the command and control systems that adapt slowly, at best, to external challenges.<br />In the early years, companies experienced frustrations as they collected far more data than was financially viable or even to interpret meaningfully. This was not a trivial issue since companies had to spend time collecting the information, checking for its quality and then aggregating it as a single scorecard. According to one survey conducted by Towers Perrin, 25% of the respondents reported problems with the time and expense in implementing the balanced scorecard while another 44% encountered problems with building the information systems required to support balanced scorecards.<br />The challenge before companies is to choose a few strategic variables that are the most important contributors to their financial performance. They have to do this to economize on the effort involved in gathering data and to choose those variables which can be interpreted meaningfully. The best variables are those that incorporate several other determinants of performance. One classic instance was that of British Airways which selected on-time arrival and departure as the only key performance indicator which could also be conveniently communicated to the senior most executives. This single variable had an impact on all the four categories of variables that the balanced scorecard considers. Any delay in the arrival or departure of an aircraft affects the financial performance as extra costs of accommodation and food have to be incurred as courtesy to harried passengers besides additional costs on the staff. Similarly, customer satisfaction levels are affected by delays, employees have to spend extra time on the plane and internal resources are stretched as more time has to be spent to service each aircraft.<br />In some cases, the non-financial variables are hard to quantify or their impact is hard to ascertain. A clear case of an intangible variable is the notion of core competence which plays a critical role in the competitive strengths of companies but is hard to measure. The state-of-the-art in measuring these variables, however, has been lagging behind their increasing significance. In one study, 63 percent of firms rated innovation as highly important, but only 22 percent measured it; 76 percent rated morale and corporate culture as important, but only 38 percent measure them; and 76 percent of firms considered core competencies as important, but only 36 percent measure them. The knowledge that is uncovered from the measurement of these intangibles throws a great deal of insight on competitive dynamics.<br />Once the relevant variables have been identified, companies experience difficulty in determining the weights to use to arrive at averages. Companies have problems deciding on the relative importance of these variables. They have to consider the risks of a formulaic approach to weights against the more subjective alternative of a judgment call in order to adapt to changing circumstances. Managers are predisposed to game the system by using subjective weights to slant the numbers in their favor and help batten their chances of promotions and compensation. According to the Towers Perrin survey, 38% of the companies had problems with their decisions on the weights.<br />By its very nature, the balance scorecards work best when they are implemented across the enterprise especially when they are used for strategic purposes. As performance measures, they can be used in individual departments within relatively small companies. For large companies or those with several inter-dependent departments, performance parameters are hard to delineate for each department and have to be designed for the company as a whole. In any case, senior managements are rarely at the scene when problems or crisis occur and have to be addressed as they happen. Consequently, senior managements have to take into account the aspirations and motivation of each group of stakeholders in the company (defined broadly as the customers, employees and suppliers) and build a coalition to achieve the goals of the company.<br />The implication of the stakeholder approach is that the non-financial measures of performance for the company have to be so defined that tasks can be assigned to every group in the company in order to ensure their commitment to the overall goals of the company. Additionally, companies have to also ensure that each of these groups receive commensurate awards to motivate them to perform.<br />One classic case of the effective use of balanced scorecards, customized for each stakeholder, is the story of Southwest Airlines and the way it managed its ground crew to achieve shorter turnaround times for its planes. It recognized that its financial goals could best be achieved by working with fewer planes while keeping their idle time on the ground low. Like other airlines, ground crew in Southwest Airlines is unionized and is reluctant to accept management demands for raising productivity. In order to gain their loyalty, Southwest Airlines agreed to vest stock to its ground crew as reward for lower turnaround times for aircraft between flights.<br />Mobil US Marketing and Refining is the storied case of a company which achieved early success in the implementation of the balanced scorecard. Like other refineries, it has a sprawling network of gas stations which were hard to manage from its headquarters in Fairfax especially because market and business conditions vary between the Midwest, Northeast, central states and the West Coast. Mobil had a find a way to execute its corporate strategy consistently across regions yet grant enough autonomy to individual units to contribute.<br />Mobil’s strategic issue was to find a way to differentiate its service stations in an industry where price competition was the norm. It came to the conclusion that it needed to differentiate its offerings such that each type of customer received service valuable enough to disregard price. Mobil’s market research indicated that road warriors and true blues were potentially the customers who were willing to pay a relatively higher price for friendly service, superior coffee and better snacks.<br />The company’s challenge was to incorporate, in its performance criteria of its service units, measures that reflected the corporate strategy of improving service quality and responsibility to shareholders. The employees were given a choice of the parameters they could use to influence overall satisfaction with the Mobil brand. This exercise helped the employees to look beyond their service station world into the larger issues of company strategy as a whole.<br />The Benefits<br /> <br />Balanced scorecards are meant to create a culture of fact based decision making which scrutinizes processes at a much greater detail than is possible simply with financial data. When several departments of the company are involved, the data is visible to all of them and they all get to learn how their individual contribution is related to the overall company performance. Comprehensive measurement of process efficiency, productivity, human resources quality, customer satisfaction and financial returns are all quantified to uncover opportunities for efficiency gains. Kaplan and Norton, who pioneered balance scorecards, liken them to “the dials and indicators” of an airline cockpit. The continuous feedback with numbers helps companies align their strategies with their operational tactics and take corrective action before too much damage is done to their companies. A recent survey finds that two-thirds of the respondents who have used the balanced scorecard have reported a positive experience with them.<br />Above all, a pervasive culture of measurement helps to communicate better and to overcome the resistance to change that comes from a blinkered view of reality. Information technology investments have commonly been a black box in many companies and the IT staff has resisted any rigorous accounting of its costs and benefits. This was also the experience at BNSF Railway till 2002; at the time the company’s IT continued to grow while business was flat. When the company began to implement its balanced scorecard methodology, BNSF's cost per million instructions per second (MIPS) was reduced to $29 compared with $42 earlier. The company attributes this achievement to the improvement in the quality of communication that the balanced scorecard facilitated.<br />Companies using balance scorecards can evolve and adapt to their circumstances with greater ease. Equally, the visibility gained from measurement lifts the cloud of uncertainty that induces the insecurity in people. Instead, the numbers help people to see the scenarios evolving ahead of them with a degree of clarity to venture ahead with creative solutions. The shared information helps them to work together with a greater collaborative spirit which mitigates some of the resistance to change. Finally, the consciousness that external developments drive organizational evolution rather than managerial diktat from the top helps to understand change in a perspective that is conducive to problem solving. A recent survey finds that all the companies that have realized significant benefits from balanced scorecards agree that their use has helped to tie their strategies with their operational strategies while 43% among those who did not realize significant benefits. From the employees’ perspective, the survey confirmed that there is a closer link between reward and performance among those companies realizing significant benefits from balanced scorecards.<br />The success of the balanced scorecard is contingent on the precision and detail of the financial and other numbers that are available to the company. Unsurprisingly, the companies that report significant benefits from balanced scorecard are also more likely to have used activity based costing (ABC) and rate its value to be high while those who have not realized significant benefits are also less likely to have used ABC and also rate its value to be low. The reported figure for the first group is 60% likelihood of using balanced scorecards and 36% in the second.<br />A case of successful use of balanced scorecards for change management is CIGNA, an insurance company. In 1993, it lost a staggering $275 million and its combined ratio, i.e., the ratio of claims to premiums earned, was 1.40 or the claims were in excess of the earnings. When the management examined the work processes, the details showed that the company had poor relationships with its customers, with the distribution channel and the staff was not equipped with the technology it needed to perform well. CIGNA announced a new strategy of becoming a specialist insurance company instead of spreading itself thin over numerous businesses. It chose an electronic version of a balanced scorecard which communicated any weakness by sending out a red signal. If in any work process progress was lagging, the company identified the source of the problem and worked with the concerned employee to improve matters. By 1998, CIGNA turned around with high levels of profitability.<br />The mindset for change presupposes that the management and the employees are able to look outside of their companies at the macro events that shape their destiny. All too often, employees and managements have an ostrich like attitude and remain oblivious to the larger context till they are shocked into changing their ways. Modern managements increasingly expect their companies to remain resilient in the face of adverse course of events. FMC, a Chicago based conglomerate, was a typical cash cow with $4 billion in revenues in 1992 and a relatively high return of 15% with little prospect for rapid long-term growth. The performance of each of the businesses in the conglomerate was judged based on financial metrics but the actual experience showed that external factors such as market evolution and competitive factors were the critical factors influencing performance. FMC decided to change course and increasingly incorporated factors such as customer satisfaction, market position and the share of revenues contributed by new products in the metrics incorporated in the balanced scorecard. This was to ensure that the company would be fortified against adverse events.<br />The ability of employees to actively participate in the decision making process adds to the diversity of perspectives and the energy that they are able to contribute within the overall strategic context defined by their management. One instance of this is the success that was achieved by Crown Castle International, one of the largest cellular tower companies in the world. The key problem with the company was the customer churn rate of the company which added up to 24% for the entire year. By 2004, the company had reduced the cycle time of installation by 70%, entirely made possible by the initiative of its local employees, to be credible among clients. A variety of metrics allowed each of them to select the variables that they could best influence. The best practices from each of the regions are then communicated to others to accelerate the rate of improvement.<br />The combination of financial and non-financial measures of performance is also a means to weigh both the short-term and the long-term goals of a company. In the past, the bias was in favor of financial goals which persuaded companies to meet short-term quarterly goals which lead to a decline in the long-term competitive strength of the company. A mind-set which sees the non-financial metrics as leading indicators of the financial performance also encourages a consideration of the long-term strengths companies need in order to achieve their financial goals.<br />Best Practices<br />Strategic Maps<br />The growing use of balanced scorecards across the enterprise would not have been possible without a design for the workflows of the entire company. Strategic maps are the blueprints that help companies to align their strategy with their work flows as one seamlessly integrated system. In the past, systems were optimized for specific departments or worse they centered on specific resources such as computer hardware, networks or databases. Similarly, the planning in manufacturing industries revolved around processes such as production, logistics, supply chain management or marketing. Balanced scorecards would not serve their purpose of diagnosing problem areas in a company unless they have a way of tracing it to a specific element in the chain of processes that lead up to the outcomes that the company wants to achieve.<br />A case of the use of strategic maps is Nexstar Financial Corp., a mortgage services provider for banks and financial-services firms, already had management-software platforms in place to deliver online services and monitor performance. It lacked a system to track the implementation of procedures. Using a blueprint, the company designed systems to track the flow of activity from one end to another. A typical application would be tracking of the sequence of events from purchase of equipment to its installation.<br />Strategic maps mark a departure from the past when balanced scorecards were used for either performance management or for comparing the expected performance with the actual. This began to change when it became increasingly clear that companies needed to look at the working of all their departments in order to influence the relevant variables affecting their outcomes. Strategic maps are a means to tie the operational plans of a company with the goals it sets out to achieve. These maps are also a means to check the validity of the assumptions a company makes and reevaluate based on the information that is received.<br />Measuring the value of intangible assets<br />In the modern age in which knowledge matters, the quality of customer services, team collaboration, corporate culture, shared values, etc, are the driving forces of competitive strength, the measurement of these parameters is a challenge that balanced scorecard practitioners have to face. In businesses that earn their revenue solely from services, such as call centers, restaurants, R&D and consulting companies, the variability in the performance of companies is entirely explained by subtle contributions that people make by their behavior, good judgment, risk-taking ability, ingenuity, foresight and insight. While many companies are aware that these soft skills are a critical determinant of the performance of companies, they have to depend on quirks of human behavior for that to happen. Under the present circumstances, people are guided by their subjective judgments about the precise impact intangibles have on business performance and there is rarely an agreement. In order to institutionalize the salutary traits of human behavior, companies need to learn to quantify their impact.<br />One example of intangibles is competence of the staff which is generally presumed to be determined by the years of experience, education levels and track record of the person as judged by references, bonus earned, etc. Yet, it is hard to tell the value of the experience of a person especially in an environment where technological change is rapid and skills acquired from past work are often not transferable to current work. Similarly, people with similar levels of education show varying levels of personal initiative which affects their contributions on the job. In short, the perceived value of intangibles in the current environment is influenced by impressions more than by quantified measures.<br />A pioneering work to quantify intangibles has been done by Sweden based Karl Erik Sveiby who works with Celemi, a developer of learning processes for rapid adaptation of the business environment. The measures used to estimate the value of intangibles include the value of staff competence, the value of the internal organization, such as value of the management style, new products and systems and processes, as well as the external image including the value of its brand and relationships with customers and suppliers. The company uses the composite of these values as a leading indicator of the health of its business and compares this with the actual business performance to try and find ways to improve.<br />The measurement of the intangible variables is a means to empower the employees of companies and reward them for their soft skills. In the past, the power politics played a much greater role in the recognition people received in the hierarchy of companies. The measurement of intangibles makes progress towards diminishing the role of subjectivity in decision-making.<br />Causal Modeling<br />Companies need to ascertain the impact of the strategic initiatives that they take and the outcomes achieved. It is hard to disentangle the effect of any one variable on the overall performance of a company. Company leaders can learn to efficiently deploy resources if they knew with some precision the outcomes of their actions. Most companies have not integrated their databases in their CRM, financial, HR and manufacturing departments and are unable to create statistical models which take into account all the inter-dependence of the variables affecting outcomes. According to Wharton professors, Christopher Ittner and David Larcker found from their research of 157 companies that only 23% of the organizations had done sophisticated causal modeling to single out the non-financial measures that were related to their strategic and financial performance. The organizations that had invested in modeling outperformed their peers, who had not done the same causal modeling, showing, earned an average of 2.9% higher Return on Assets and a 5.14% higher Return on Equity.<br />A case of the effective use of statistical causal model is the Southeastern Savings and Loan Company, which had a network of 400 branches staffed by 6000 employees offering several different services to a variety of customers, had the daunting task of pinning down the specific causes of poor performance and identify the individual branches that needed improvement. It was not hard to guess that employee attitudes had an impact on the levels of customer satisfaction in the company. The challenge was to identify the initiatives that had to be taken by its employees to improve customer satisfaction.<br />When a causal model was constructed, it was found that tellers and loan officers need a different set of traits to service customers well. The most important variable for the performance of the tellers was their job training which led to fewer errors in transactions and increase in customer satisfaction. For the loans officers, on the other hand, the performance was influenced by their communication skills and autonomy. The company then used the information from its employee surveys to identify the branches where the employees were weakest in training or communication skills.<br />Causal models can go beyond simply confirming the contribution that non-financial variables are making to the financial achievements of the company. They can go a step further and uncover patterns that can help to identify strategic initiatives that went unnoticed in the past and considerably improve the financial performance of the company.<br />A case of how a company found an unconventional source of profit that was found from balance card measurements is that of E-trade. It was able to offer relatively lower rates of interest and compensated customers with greater convenience of on-line banking. Banking customers have indicated that they value on-line images of their checks and statements of their transactions as very important. Customers are less willing to switch when they receive related services also.<br />Technology: the enabler<br /> <br />Strategic maps are the blueprints for the design of balanced scorecards while technology makes it happen. Market feedback is faster today as e-commerce throws up data in real time. Equally, several decisions such as those pertaining to pricing, including raw material costs or competitors' price cuts need rapid response.<br />On the other hand, companies expand the size of their databases as they increase the number of metrics they evaluate. A more critical requirement is that the information is communicated to employees at all levels as quickly as possible and is customized for their specific requirements. The information needs to be drawn from its sources with an acceptable degree of accuracy in measurement and processed in time to be useful for action. Information technology becomes a pressing requirement once the strategic map and the associated parameters for assessing performance have been determined. According to one recent survey, 21% of companies had adopted business intelligence technologies in the sales domain, 19% in finance while the lowest rate of adoption is in human capital management at 8%.<br />A host of new technologies, with the center of gravity being a dashboard, help companies to manage their content, aggregate the information in a central store, use it for applications and customize for each user. Information technologies, specifically enterprise content and document management solutions, data warehouses, web services, messaging software, portals, business intelligence software help companies to complete the value chain from managing information and converting it into knowledge. The dashboard is the lynchpin as it helps a company to remain connected with all its employees and is the means to turn knowledge into strategic action.<br />The successful working of the balanced scorecard depends on the alignment of the strategic maps with the information flow of the company, its business processes and its people. This has to be done all across the enterprise without losing time. In the past, information was not liquid as it was scattered over several different systems but this is beginning to change with increasing use of web services to integrate applications and databases. Similarly, delays in processing of data have been overcome as analytical software is used to display information on dashboards. The response time is also lowered as the same data is available to all the stakeholders in the decision-making process.<br />A case of near real time decision making, enabled by information technology, is the semi-conductor division of Agilent which has to manage its sprawling supply chain across the world. The frequent changes in its design create problems for the management of its inventory. With the use of the “Live scorecard” feature of its business intelligence software, Agilent is able to keep track in real time of the performance parameters related to its inventory. In addition, the company uses the MRP simulation options to decide on how it is going to manage its inventory based on alternative scenarios. The business intelligence software also allowed it to disaggregate the bill-of-materials information for standard and customized inputs. This information allowed it to contract out the standardized materials while retaining the customized materials for in-house production.<br />A much more significant advantage of real time reporting is the ability to react to events as they happen and to respond to every turn in the consumer mood. Wal-Mart is one company which decided to use its point-of-sale performance data in order to make its inventory decisions. Typically, retail stores have to cope with unexpected changes in the mood of the consumer, demand patterns are affected by the location of their stores or the delivery patterns and currency fluctuations on the supply end change the profitability equation for the chain. In the past, retail chains had no option but to react after the fact. Increasingly, however, they see an advantage in anticipating consumer behavior based on the patterns they observe in their point-of-sale data. Wal-mart collects its data from 2,500 of its stores and looks for transient movements in the demand and supply situation and maximizes gains by price variation. The speed of response ensures that competitors are unable to match the price offers.<br />Companies are also able to differentiate their services based on their ability to process data in real time. A case in point is the ability of Owens Corning's to change the order size based on the customer data it receives in real time. Going beyond a pre-determined half truckload size delivery, it changed over to flexible order fulfillment system.<br />The implementation of the balanced scorecard requires a great deal of in-depth investigation of qualitative variables such as especially employee and customer satisfaction which has to be done repeatedly. In the past, companies were reluctant to collect such data due to its high cost as well as susceptibility to error. This has begun to change as result of a variety of on-line survey tools which are closely linked with business intelligence tools for convenient processing of the data that is generated. The data from these surveys can be used to find new sources of competitive advantage to cope with an untoward sequence of events.<br />