How to Conduct a Balanced Scorecard Review to Create ...

1 How to Conduct a Balanced ScorecardReview to Create Strategic Alignmentby Bob PaladinoArticle Reprint No. B0011 EHARVARD BUSINESS school PUBLISHINGB alanced Scorecard ReportSubscriptionsBalanced Scorecard ReportCustom ReprintsPermissionsFor a print or electronic catalog of our publications, please contact us: Balanced Scorecard ReportSubscription Box 257 Shrub Oak, NY 10588-0257 Telephone: (800) 668-6705 Outside and Canada: (617) 783-7474 Fax: (914) 962-1338 Internet Address: Express, MasterCard, Visa accepted. Billing inquire about our custom service and quantity discounts. We will print your company s logo on thecover of reprints or collections in black and white or two-color. The process is easy, cost effective, and : (617) 783-7626 or Fax: (617) 783-7658 For permission to copy or republish please write or call:Permissions DepartmentHarvard Business school PublishingBox 230-460 harvard WayBoston, MA 02163 Telephone: (617) 783-7587 harvard Business school PublishingCustomer Service, Box 230-560 harvard WayBoston, MA 02163 Telephone: and Canada (800) 668-6705 Outside and Canada: (617) 783-7474 Fax: (617) 783-7555 harvard MANAGEMENT UPDATE harvard MANAGEMENT COMMUNICATION LETTER Balanced Scorecard REPORT harvard BUSINESS Review HBS CASES HBS PRESS HBS VIDEOS AND INTERACTIVE MEDIAH undreds of companies have successfully used the BalancedScorecard to align the actions oftheir employees with the aspirationsand goals of top management.

2 Yetmany of these companies also reportthat after their initial success withscorecards, order can return to chaosif senior management is not vigilantabout updating the Scorecard another way, organizations are alot like bad backs: you have to keepre-aligning can companies do to keep theirorganizations upright and aligned?We recommend a BalancedScorecard Management Review (BSMR), which senior managersundertake when they need to recalibrateorganizational focus in the face ofvolatile macro and micro-economictrends. Call it the corporate chiro-practic adjustment. In this article, I will discuss how aBSMR can Create alignment by takingthe vital signs of the Scorecard and all its component parts strategymaps, measures, targets, and initiatives to Create a Strategy-FocusedOrganization. (For those familiarwith writings about the Strategy-Focused Organization, this processcan be useful in Step 5, Feedbackand Learning.)

3 Losing FocusToday, companies are changing theirstrategies and business models at anincreasingly accelerated rate toremain competitive. As they do, orga-nizational alignment problemsresurface continually. There can bemany different kinds of problems:misalignment between business unitsand corporate strategies, betweenbusiness units themselves, betweenshared service units and businessunits, and between measures and theorganization in which they the following at a leading diversifiedenergy company believed the goal of their shared service units was toenhance the competitiveness of othercompany business units by providingthem with low-cost services. Theyquickly discovered, however, that thestrategies of the shared service unitsand the business units were notaligned. The shared service unitswere operating as a profit center, asopposed to a cost center, giving theman incentive to push up transferprices.

4 This meant higher costs forthe business units at a time whenthey needed to keep costs low toremain , even with a BalancedScorecard in place, business units canfind themselves pursuing differentstrategic objectives, working at cross-purposes with each other, andsub-optimizing overall shareholdervalue. The reasons are many: measuresmay not be fully understood orimplemented; targets may be out of date or off base; or key initiativesand investments may not be prioritizedor adequately funded. (See Figure 1, Six Reasons Companies LoseStrategic Alignment. ) This ongoingproblem speaks to the need for thecreation of an ongoing Review processthat helps the company s right handknow what its left hand is Management ReviewTo better understand how to conducta management Review , it helps tounderstand what we mean by align-ment. Our definition of alignment is as follows: When a company s corporate strategy, business unit strategy, work group, and individual3 How to Conduct a BalancedScorecard Review to CreateStrategic Alignmentby Bob Paladino, Global Utility & Telecommunications Practice Leader, Balanced Scorecard Collaborative Sometimes, even with Balanced Scorecards in place, the cor-porate left hand can lose track of its right hand.

5 The solution,says an experienced BSCol consultant, resides in the BalancedScorecard Management Review , which helps companies movefrom Scorecard users to Strategy-Focused 2000 by the President and Fellows of harvard College. All rights project is not driven by asenior executive team; , itbecomes a middle one or a few individuals areinvolved in the project instead of a broad team fromall areas of introductions and Scorecard -focused managementmeetings are delayed because ofmissing measurements, targets, does not incorporatechanges in strategy or performanceoutcomes into updated strategymaps, measures, targets, and initia-tives; as a result, the organizationlacks a continuous learning continues to dictate actions instead of lettingemployees improvise to achievedesired are for management seyes only, not shared with 1. Six Reasons Companies LoseStrategic Alignmentobjectives are synchronizedand heading towards a common goal,the company is aligned.

6 As detailedin Figure 2, What Alignment LooksLike, these interlocking aspects ofthe aligned organization cascadedown through progressively smallerunits of the company until theyinform the work of each basic goal of the BSMR is to determine if the Scorecard has successfully aligned the disparateparts of the organization. To facilitate the BSMR process, we havecompiled a set of standards for eachkey implementation area within theBalanced Scorecard . (See TheBalanced Scorecard ManagementReview. ) Careful Review of thesestandards and diligent follow-uphelps to ensure that corporate strategies, measures, targets, and ini-tiatives are cascaded and aligned withbusiness units, work groups, and indi-viduals. The Review is broken up into fiveparts. In the first part, top manage-ment reviews the degree to whichthe strategy has been developed andarticulated. In this part, managementis reviewing and regularly resolvingkey strategic issues.

7 In the second,managers Review the company s strategy map and how effectively itintegrates the four Scorecard perspec-tives and the different areas of thecompany be they business unitsor shared services units. The third part of the Review assesseshow well a company has designedand implemented its scorecardmeasures. This part focuses on thevalue of information obtained fromboth leading and lagging measures,and how the company has linkedmeasures to compensation to rein-force , the transition from measuresto targets is tested to ensure there is astrong connection between the company understands and appro-priately selects different types oftargets ( , experiential, benchmarks)and sets a range of targets ( ,minimum, maximum, and stretch targets). Lastly, management is askedto determine how well initiativeshave been linked to the measures andtargets for the company. This partfocuses on how initiatives have beenranked during the strategic budgetingprocess to support reaching stretchtargets.

8 Taken together, these fivesteps constitute the the BSMRTo illustrate how to bring organizationsinto alignment, we offer the followingtwo Vanguard Group, one ofthe world s largest mutual fund companies, implemented the BalancedScorecard and rolled it out to its10,000 ,Vanguard discovered that long-timeindustry financial measures such as fund performance and fundexpense ratios were not aligned withtrue value creation for its example, Vanguard s expenseratios dropped from (of themarket value of funds) in 1995 in 1998, so one might concludeexpense management was was this decline in expense ratiovalues due to improved operatingefficiencies or other factors? Further analysis revealed fundexpenses (numerators) were beingspread out over significantly appreci-ated fund balances (denominators)due to the bull market. Since initia-tives and incentive compensationwere tied into these misaligned mea-sures, the potential for dysfunctionwas high.

9 To remove the distortionscaused by appreciated stock values,Vanguard developed a market-adjusted expense ratio where thedenominator consisted of actual cashreceived from investors. Thus, imple-mentation of the Balanced Scorecardsurfaced and resolved misalignmentin the measurement of value multi-billion dollar utilityapplied the Balanced Scorecardapproach to align its three informationtechnology organizations. Previously,IT had operated with traditional ITmeasurements, but this approachlacked strategic and customer orien-tation. The company recognized thechanging role of IT and its differentfunctions or businesses, so it adoptedthree different but interconnectedbusiness models and BalancedScorecards: The CIO or corporate IT functionadopted a cost center businessmodel and focused on strategic governance for all three scorecardsto enable the company to achieve its strategic objectives and targets.

10 Network Services adopted a servicecompany business model andfocused on the company s IT infra-structure. Applications Development adopteda for-profit business model andfocused on providing IT consultingservices for off-the-shelf, packagedsolutions to both internal and external customers. Implementation of the BalancedScorecard elevated the strategic component of IT and brought focusto its constituent businesses. Thecompany s ongoing alignmentprocesses have reduced overlappinginitiatives and focused IT TeamScorecardBU BalancedScorecardLevels of StrategyFigure 2. What AlignmentLooks Like5 The BenefitsIn sum, the Balanced ScorecardManagement Review offers manybenefits to companies that are willingto undertake it: 1) corporate and business unit strategies become morefocused and aligned; 2) business unitstend to work with each other towardthe same purpose; 3) targets are clearand uncompromised; 4)measures are more fully understoodand implemented; 5) key initiativesand investments can be prioritized,optimized and adequately funded;and 6) costly corrections are avoidedthrough the continuous realignmentof current and new initiatives.