In your new book, you note that CFO Jay Forbes of Nova Scotia Power proposed the balanced scorecard there. How often do CFOs lead the charge?
Norton: Maybe about 20 percent of the time. More often it comes from the strategic planning or human resources [departments]. Quality is another.
Kaplan: Because the CFO is sometimes not heavily involved, one aspect of the strategy-focused organization that has lagged is the integration with the budgeting system. It’s just less developed than the objective setting or [the links to] incentive systems, human resource systems, or communication systems. I think, however, if we don’t establish the link with budgeting, then the scorecard initiatives may wither.
Yet the balanced scorecard still starts with financial measures…
Kaplan: We start with the destination. What are we trying to achieve? We feel that what for-profit companies should be delivering is great financial performance.
Norton: If you look at the logic of the scorecard, the arrows all end up with financials, but they start with things like skills, technologies, and process design. Those are what you have to measure today to impact financial results tomorrow.
But you do point out that financial measures have their limitations. Are some more limiting than others?
Kaplan: I don’t think we’re unhappy with the financial measures. They’re good for what they are. And we’re certainly very comfortable with the newer financial metrics like EVA [economic value added] and other shareholder value-based metrics as the overarching objective. If you were just using earnings per share or net income, you’d run into problems of overinvestment–investing too much in capital to generate earnings or net income.
What impact has technology had on disseminating the balanced scorecard information?
Kaplan: The major ERP [enterprise resource planning] vendors all have an application called Enterprise Management that aligns with the functional standards that we have established.
But one of the consultants at Gartner said that traditional [ERP] systems could only capture about 40 percent of the measures from the balanced scorecard. Is that true?
Norton: Yes. Traditional ERP systems are transaction-driven, whereas on the scorecard you get into things like competencies, critical skills, market surveys, employee surveys, or you’ll get into measuring on-time delivery and things like that. A high percentage of that information does not exist in transaction systems. On the other hand, it’s not that big a deal to build the databases for the high-level [data] because it is not transaction data, it’s summary data.
What benefit are companies getting from stand-alone software products?
Norton: Most of the software has just come to the market in the past 12 months. So it’s hard to say. I know there are hundreds of installations now. I think there are about 10 organizations that have gone through certification, including SAP and Oracle, as well as a lot of new niche companies that have come into the marketplace.