The Balanced Score Card

Robert Kaplan, Harvard Business School professor and coauthor of The Balanced Score Card, revealed his value system in a remark to The Speaker. He was listening to another speaker at the time. That speaker asked his audience: "What is your organization's most important asset?" Everyone volunteered the same answer: "Our people." "No, no," said the speaker. "Every organization has at least some good people. If good people are everywhere, they can't be a competitive advantage. "The correct answer," the speaker said, "is good measurements." Kaplan, who's spent his life as an academic and consultant preaching the power of good metrics, nodded in agreement. A good metric, he said, is like the laser pen he held up. It fits into the palm of your hand. You can take it with you wherever you go. Inside it is photons, and the photons keep the beam in phase and coherent. That's what good measurements do for you -- they keep you in phase and coherent. They do not break up over distances. They keep telling the truth no matter how far out you go. Diagnostic vs. Strategic When is a measurement good? When it measures what needs to be measured. When is a measurement great? When it, like the Balanced Scorecard is a powerful tool not just for diagnosis of the recent past (how're we doing?)but beyond that into for strategic implementation (where're we going?).

Diagnostic measures are the vital signs that tell you your current status. Strategic measures go beyond that -- they describe outcomes and drivers of long-term value creation. A good Balanced Scorecard, Kaplan said, tells everyone in your organization, in a single page, the story of your entire strategy:

Every measure is part of a chain of cause and effect linkages. All measures eventually link to organizational outcomes. A balance exists between outcome measures (financial and customer) and performance drivers (value proposition, internal processes, learning & growth).

And the key to strategy is efficient implementation. Fortune magazine estimates that fewer than 10% of strategies effectively formulated are effectively executed. And that statistic, says Tom Peters, is grossly inflated! 1.

Financial

Kaplan makes the case that organizations today are hung up on financial metrics created 75 years ago to track industrial corporations. These metrics are fine for their purpose, but that purpose does not extend to the new information needs organizations are having. To be precise, the world of Return On Investment accounting, developed by Dupont, has nothing to say about:

Customers -- whether they are happy or happy, where they are coming from, whether they are staying after the initial transaction, and whether they are in fact the right customers. The Balanced Scorecard tracks value to customers. Processes -- whether they are accomplishing what they're supposed to, delivering value to the right parties, whether innovation, quality, and responsiveness are alive in the organization. The Balanced Scorecard tracks the value chain of every organizational process.

Learning and Growth -- whether the company can learn from its mistakes, grow its own leadership, build skills and align individuals and teams to business objectives. The Balanced Scorecard monitors the health of organizational infrastructure -- staff competencies, technological assets, change climate and strategic management. It's not that financial statistics are no longer important, Kaplan said. Indeed, for a for-profit organization, shareholder return is the natural definition of success, its mission. Nor that finance is non-strategic -- Kaplan had strong words for companies that chase the wrong dollars, or behave like they are in mature Harvest mode when they should be ramping up for rapid Growth. (Most of us belong, he suggested, in the middle ground of Sustain, seeking to combine both profits and growth.) But the financial metrics of yesterday are like a rear-view mirror. They are best at measuring the past -- they give no insight into changes in our industry, or among our customers, or arising from new technology. And, they're not especially relevant for nonprofits. Kaplan told the story of how the City of Charlotte undertook to fulfill its mission of becoming "the best city in America to live in," using the Balanced Scorecard as a roadmap. By the end of the process, some city functions were disappointed not to be highlighted in the city plan -- schools, refuse hauling, the fire department. But the resulting list of priorities -- community safety, neighborhood development, government restructuring, transportation and economic development -- all came closer to the heart of what could best distinguish the city. Not that education isn't important, but that education is so foundational as to be "table stakes" to the game of excellence. Drum Roll Kaplan has been around more than a little bit, and he says that the organization best able to engage in and communicate

strategy through its ranks is -- the U.S. Marines. Instead of embodying the top-down, command-and-control organization, the Marines are adept at getting every member of the Corps to understand what the mission is, and what his or her part in accomplishing it is, from supply roles to battlefield responsibilities. "You can't pay people to risk their lives for performance," he said. Not surprisingly, two companies he has followed carefully, Mobil and Chemical Bank, that have done well with the Balanced Scorecard approach to strategy making and implementation, included ex-Marine senior managers. Both companies have been able to galvanize stakeholders and unite them in a compact of strategic resolve. This is no small matter when, as in Mobil's case, the stakeholders include dealers who for decades have had an adversarial relationship with the mother company. 2.

Customers

Kaplan appropriated the value discipline matrix of Michael Treacy and Fred Wiersema to show three different approaches to attract and retain target customers: Operational excellence: describes those companies that deliver a combination of quality, price, and ease of purchase no one else can match. Examples: Costco, McDonalds, Dell. Best Total Cost. Product leadership: companies defined by product innovation. Examples: Sony, Johnson & Johnson, Intel. Best Product. Customer intimacy: companies that build relationships with customers. Examples: Home Depot, IBM (1960-1970), and Kaplan's Mobil. Best Total Solution. You can't embody all three strategies, Kaplan (and Treacy and Wiersema) insist -- you must choose which of the three is right

for your strategy -- and not fall too far behind in the other dimensions. In Mobil's case, it meant defining five kinds of gasoline buyers: Road Warriors: high-powered, big-spending yuppies True Blues: brand-loyal, even in matters of commodity gasoline Generation F3: they are young, they want Fuel, they want Food, and they want it Fast Homebodies: usually housewives, buy whatever's convenient Price Shoppers: will drive 100 miles to save four cents on the gallon For years Mobil had tried to please all five groups, guaranteeing the lowest price in the area, thus guaranteeing the lowest profits. By turning its back on the last two groups and focusing on the first three -- improving its convenience stores, sending "mystery shoppers" to each outlet to check on quality, putting huge canopies over pumping areas, and guaranteeing a sanitary, survivable restroom experience -Mobil went from least profitable to most, in two short years. (They also had to patch up ragged relations with dealers.) Mobil could conceivably have gone the other direction, cultivating price-conscious customers as Herb Kelliher has with Southwest Airlines. But outcomes don't lie, and outcomes are what the Balanced Scorecard is about. 3.

Processes

Business processes are strategic in nature, Kaplan said, but we often fail to treat them that way. A technology that does not advance a value proposition is a technology that your organization might best leave alone. Still using the value discipline matrix, he showed how companies defining themselves by each needed to consider three important process issues:

Operational excellence companies need to focus on operations processes: supply chain management, customer service, and demand management. Product leadership companies must commit to innovation processes: invention, product development, and getting those products to market as rapidly as possible. Customer intimacy companies need to attend to the customer management process: solution development, results management, relationship management and advisory services. 4.

Learning & Growth

The final area that the Balanced Scorecard provides guidance with is learning, adapting, and growing, what Kaplan calls "organizational infrastructure." This is the asset described in the first anecdote of this report -- "Our people are our most important asset." Indeed, they are tremendously important (though not as important to Kaplan as a good measurement system). They are the ultimate source of all the good things on the scorecard -happy customers, efficient processes, and a bulging bottom line. At Chemical Bank, CEO Mike Hegarty makes trips to branch banks to see how the organization's strategy is implemented in the trenches. Kaplan cited a story Hegarty tells about witnessing a branch officer handling a new customer, who had just gotten a new job and wanted to deposit her paychecks automatically. The officer made the changes efficiently and courteously. Nevertheless, it was a terrible transaction, Kaplan said, because it fumbled the one opportunity that bank will ever have to look that customer in the eye and ask for other business -- investments, insurance, and retirement products. Here is a graphic for a Balanced Scorecard we liked:

Barriers to Success The ingredients to successful implementation of a balanced Scorecard plan are: 1. Leadership from the top. Organizations fail when top bosses take a flyer on the BSC. Senior management must create the climate for change. They play the roles of rationalizers and aligners of the organization. 2. Making strategy everyone's job Communication must be comprehensive, as in the Marine Corps -- everyone knows and understands, and there are no wild divergences of interpretation. Goals, and the incentives established to achieve them, are in alignment. 3. Unlocking and focusing hidden assets

Work processes are reengineered to make the most of people's energies, talents, and training. Kaplan urges the creation of "knowledge sharing networks" -- organization-wide crossfunctional communication. 4. Making strategy a continuous process Strategic feedback be non-blaming, and of the type that encourages learning. Mistakes are identified and learned from. Hypotheses are tested. Learning is like breathing, nonstop and vital to organizational life. When these four points are driven down and into the fabric of an organization, Kaplan said, successful, effective change -- of the sort that only 10% of organizations ever see -- becomes not only possible, but it comes rapidly, often in a year's time. But it requires a sea change in thinking at every level. Away from "controls" as a managerial metathemes, away from "detect and correct," and toward something much more imaginative, open-minded, and balanced -- but above all, meticulously measured!

Measuring the Contribution of Human Capital

(Balanced Scorecard Report, July/August 2001) If you can't measure it, you can't manage it. It's become the mantra of the Balanced Scorecard movement. With strategy maps we've built a reliable way to describe and measure an enterprise's strategy, and many organizations, linking BSC's to their management systems, have achieved dramatic results. But within the scorecard methodology, there's a weak link: the learning and growth layerin particular, the measurement of intangible assets. Two new programs at the Collaborative were launched to deal expressly with measuring information capital. Here, we look at the first, devoted to human capital. The measurement frameworks used in three of the four scorecard perspectives reflect generally accepted, tested management models. The financial perspective is based on the DuPont ROI model. The customer perspective is based on value propositions. The internal perspective is designed around value chains. But the learning and growth perspective, which encompasses

intangible assets like human resources, information technology, and organizational climate, has no generally accepted management framework. Every expert and practitioner has a different way of thinking about what's important. This is an important limitation. Studies show that 85% of the typical corporation's valuation is derived from its intangible assets. If we can't describe these assets in a reliable, consistent way, we have no hope of building a system to manage them. If you can't manage what you can't measure, you surely can't measure what you can't describe. At the Balanced Scorecard Collaborative, we have initiated two programs to deal with these limitations: a Human Resource Action Working Group (HRAWG), to focus on the measurement of human capital; and an Information Technology Action Working Group (ITAWG), beginning in September, to deal with the measurement of information capital.

The Human Resource Action Working Group

Human resource executives from over 20 organizations participated in a six-month program to find better ways to measure and manage human capital. The group represented diverse industries, including pharmaceuticals, healthcare, utilities, manufacturing, telecom, high tech, financial services, and personal services, as well as several agencies of the federal government. The thinking of the HRAWG was enhanced by human resource experts Dave Ulrich, Mark Huselid, Brian Becker, and Steve Kirn.1 The group had two objectives: (1) to describe and measure the impact of human capital on organizational strategy; and (2) to build programs to better manage the development of human capital. Each organization began by developing a strategy map of some piece of their enterprise. Human capital strategies were developed based on the Balanced Scorecard measures, targets, and initiatives. From this starting point, some participants were able to spread the HR BSC throughout their entire organization within three months. (Some went beyond the HR BSC, installing a complete BSC program.) Others limited the program to a prototype between HR and a single end-user. In all cases, the development of strategy maps and scorecards improved the understanding and communication between HR and the business about the use, priorities, and funding of HR programs. Thus, the learning and growth designs of each organization seemed an adequate representation of their strategies. However, when we compared the work of the 20 participants, a very different pattern emerged. Most identified leadership as an important component of their strategies, but several did not. Most organizations identified motivation as a key driver, but their definitions of motivation were wide-ranging and inconsistent. Most organizations identified the skills and competencies of the workforce as a strategic variable; one did not. Clearly, no two scorecards were alike. While we understand that every organization is different, and that their strategies must reflect these differences, we did not expect every organization to have completely different objectives and measures. If we looked at an organization's financial balance sheet, we would find common categories and measures, even though the individual strategies would differ. A common framework (or taxonomy) for describing a phenomenon is the first step in building a science. A shared framework permits the sharing of knowledgethe development of measures and benchmarks. It provides a common language for professionals. Today, such a framework does not exist to describe human capital. Thus, if the first level of science is description, then the management of human capital is decidedly still an art. To accomplish the broader objectives of the HRAWG, developing such a measurement framework was imperative. The Human Capital Chart of Accounts and the Human Capital Readiness Report described below reflect the results of our efforts to date.

What To Measure: A Strategic Perspective

HRAWG members provided a unique combination of assets to deal with this challenge. The HR professionals from these leading-edge organizations offered an HR-out view of the problem: an in-depth understanding of the human capital development process. Our Balanced Scorecard background provided a strategy-in perspective, which permitted us to get the subject focused.

Rather than invent yet another framework to organize our activities, we asked: What dimensions of human capital do executives think are most relevant to their strategies? To answer this, we examined the contents of 21 Balanced Scorecards from private sector organizations, some from HRAWG participants, others from the consulting work done by the Collaborative over the last few years. These scorecards reflected the best efforts of their organizations to describe their strategies. Each had developed a strategy map, clearly defining financial, customer, and internal process objectives. The learning and growth component of the scorecards reflected how executives mobilized human capital to support their strategies (see Figure 1, previous page). Five issues dominated their thinking: 1. Strategic Skills/Competenciesthe availability of skills, talent, and know-how to perform activities required by the strategy. (About 80% of the scorecards included such an objective, meaning that the executives considered this strategically important.) 2. Leadershipthe availability of qualified leaders at all levels to mobilize the organization toward its strategy. (Ninety percent identified this as a strategic priority.) 3. Culture & Strategic Awareness awareness and internalization of the shared vision, strategy, and cultural values needed to execute the strategy. (90%) 4. Strategic Alignmentalignment of goals and incentives with the strategy at all organizational levels. (70%) 5. Strategic Integration & Learning the sharing of knowledge and staff assets with strategic potential. (60%) The results of this survey are particularly significant. Our objective is to develop a generic framework for describing the components and drivers of strategy. Human capital is one of the fundamental drivers, but what are its specifics? Experienced executives look to these five factors most frequently to mobilize their organizations. Thus, this strategy-based view of human capital provides a prescriptive framework to guide the thinking on which strategy is based and to generate the measures to describe it.

Measuring Assets: From Liquidity To Readiness

The basic framework for measuring financial assets is the balance sheet. A chart of accounts defines different classes of assets (for example: inventory, cash, equipment). Each category has a unique definition; inventory, for example, can be classified as finished goods inventory, work-inprogress, or raw material. The concept underlying the chart of accounts is known as liquidity, or the ease with which the asset can be converted to cash. For example, finished goods inventory is more liquid than work-in-progress. Accounts receivable are more liquid than either. Assets that can be converted to cash within 12 months are considered short-term assets; all others are longterm. Long-term assets can also be thought of as the infrastructure that improves the liquidity of short-term assets (e.g., machinery helps convert raw material to finished goods). Human capital is an assetan intangible asset that is ultimately converted into a tangible asset, which, in turn, can be made liquid. An intangible asset only has value in the context of organizational strategy. A training program to improve quality would have a very different impact than a training program to improve negotiation skills. So which has greater value? It depends on the strategy. Thus, when we think about the value of an intangible asset, we must look to the strategy as the point of reference. Assets that will support the strategy have greater value than those that won't. The concept of strategic readiness can be used to describe the status of intangible assets. If you have described your strategy (i.e., developed a strategy map and Balanced Scorecard), you should then be able to describe the readiness of your intangible assets to support that strategy. As illustrated in Figure 2, strategic readiness is analogous to liquidity. The higher the state of readiness, the faster the intangible assets can be converted to tangible assets. The five asset categories we developed can be divided into short- and long-term components. Skills & Competencies and Leadership can be thought of as the assets (or intermediaries) that directly impact the strategy, and hence have the quickest impact on value creation (similar to liquidity). Culture & Awareness, Alignment, and Integration are all elements of infrastructure (Climate) that support the long-term development and use of human capital.

A Balance Sheet for HR

Just as the balance sheet is a periodic report that describes the status of financial assets, so the Human Capital Readiness Report performs the same function for the intangible asset of human capital. Figure 3 describes a prototype we developed in the HRAWG. Two criteria guided us: (1) the organization's strategy must be the point of reference; and (2) the measure must describe the readiness of each component to support the strategy. Strategic Skills/Competencies. The strategy map will identify specific skills for selected jobs that are viewed as strategic. The strategic talent gap is based on an inventory of the strategic skills available, relative to requirements. A talent gap of zero represents the highest level of readiness. Leadership. A model of leadership attributes emerges from the strategy map. Some are strategyspecific (merger integration) while others are generic (communicates the vision). The leadership gap is based on an assessment of leadership within the organization relative to the model. A leadership gap of zero would be the highest level of readiness. Culture & Strategic Awareness. The desired cultural attributes are defined. Employee and customer surveys are used to determine the alignment within and across groups. A cultural alignment index of 100% represents the highest level of readiness. Strategic Alignment. Through the BSC, team and personal objectives are linked to the strategy; incentive compensation can be, too. Organizations in which 100% of the staff is aligned to goals and incentives have the highest levels of readiness. Strategic Integration & Learning. The strategy map identifies the priorities for innovation, customer management, productivity, etc. Organizations that apply their knowledge to these priorities are more effective. Higher levels of knowledge sharing are correlated with higher levels of readiness.

Using The Human Capital Readiness Report

The Human Capital Readiness Report is built on the assumption that the organization's strategy is its source of value. We must be able to describe that strategy; this is the role of the strategy map. Given that description, we can develop strategies for human capital (and other assets like IT), which are aligned. The Human Capital Readiness Report is, then, the bridge between enterprise strategy and HR strategy. It provides a snapshot, at any given point in time, of the status of human capital relative to the requirements of the strategy. The Readiness Report can be a stand-alone document used by HR professionals to communicate with the enterprise. It documents the assumptions about the strategy and then shows, through measures and programs, how human capital is being developed. With such a stand-alone report, HR professionals now have a means to sit at the strategy table. The report provides the foundation for a quarterly or monthly review of HR's strategic challenges and contributions. The Report can also be a vehicle to communicate the strategy and progress within HR organizations. Since it describes the deliverables of HR to the enterprise, it becomes a source of organizational alignment. With it, HR professionals can take the initiative in helping to drive organizational strategy, instead of being reactive and getting lost in the details. It can allow HR organizations to reposition their roles and become true strategic partners.

Human Capital + Strategy

If you can't measure it, you can't manage it. If you can't describe it, you can't measure it. The Human Capital Readiness Report gives us a means to both describe and measure the way in which human capital interacts with organizational strategy. In the next issue of BSR, we'll describe how organizations are using this pioneering measurement framework to improve the way they manage human capital to create value for their stakeholders. 1 Dave Ulrich, professor, School of Business, University of Michigan; Mark Huselid, associate professor of Human Resource Management, Rutgers University; Brian Becker, chairman,

Department of Organization and HR, SUNY-Buffalo; and Steve Kirn, vice president of Innovation and Organization Development, Sears, Roebuck & Co. Subscribe to Balanced Scorecard Also Recommended: Performance Measurement Practices: A Long Way from Strategy Management Good Neighbors: Implementing Social and Environmental Strategies with the BSR The Strategic Impact of HR, Part I Building Strategy Maps, Part Four: Organizing to Create Value Building Strategy Maps, Part Three: The Importance of Time-Phasing the Strategy Q&A on the HR Scorecard Building Strategy Maps, Part Two: Testing the Hypothesis Building Strategy Maps, Part One: Planning the Campaign HR Measurement 2001: Tracking HR Thought Leaders The HR Scorecard: Linking People, Strategy, and Performance