What about the other 50 percent of companies? Are they misdirected?
Norton: The approach has probably moved through the large organizations [first], because they tend to be more in tune with current management concepts.
Kaplan: We find that there needs to be a style of openness and transparency present [in order for the scorecard to be adopted]. Senior executives must want to communicate the objectives of the organization to everybody. Not all executives have that style. And, of course, until the new book came out, there had not really been any documentation that this works.
What are the main features of an organization that successfully uses the balanced scorecard to identify strategic goals and realize them–a so-called “strategy-focused organization”?
Kaplan: Each organization we studied did it a different way, but you could see that, first, they all had strong leadership from the top. Second, they translated their strategy into a balanced scorecard. Third, they cascaded the high-level strategy down to the operating business units and the support departments. Fourth, they were able to make strategy everybody’s everyday job, and to reinforce that by setting up personal goals and objectives and then linking variable compensation to the achievement of those target objectives. Finally, they integrated the balanced scorecard into the organization’s processes, built it into the planning and budgeting process, and developed new reporting frameworks as well as a new structure for the management meeting.
But how do you know it works?
Norton: Take Mobil. When they started the process in 1993, they would conduct an annual employee survey and ask questions such as, “Do you understand the strategy? Do you understand what we’re trying to do with our customers, with quality, safety, and things like that?” Initially, they found that only 20 percent of the workforce understood the strategy. Five years later, that number was 80 percent. And the foundation for Mobil’s subsequent success was its ability to get that 80 percent of the workforce to understand what the corporation was trying to do, and then tailor their own jobs and their own priorities to support that strategy.
But, unlike Mobil, firms often hesitate to link the scorecard to compensation.
Kaplan: They should hesitate, because they have to be sure they have the right measures [on the scorecard]. They want to run with the measures for several months, even up to a year, before saying they have confidence in them. Second, they may want to be sure of the hardness of the data, particularly since some of the balanced scorecard measures are more subjective. Compensation is such a powerful lever that you have to be pretty confident that you have the right measures and have good data for the measures [before making the link].
What about data integrity? You mentioned that the nonfinancial measures are often eyed suspiciously because they can’t be audited. At least with financial measures, we have the SEC and FASB standing guard.