The Imbalanced Balanced Scorecard

As amazing as it may seem, the Balanced Scorecard has been with us since the 1990s. When it was first introduced, it was made out to be a means of viewing company performance as a whole rather than only through a financial lens. The goal was to identify the organizational processes that made the implementation of its strategies possible.

It was also hoped that it would identify the weaknesses in those strategies so that they could be corrected.

 

How it was structured

The structure of the Balanced Scorecard wasn’t novel. Even then, it sounded like an elaborate description of what managers had been trying to do for years. The basic idea was to identify the work that employees did every day and determine how it was connected to the long-term goals that organizations had set.

It was a nice, but impractical theory.

Identifying cause and effect with certainty is challenging to say the least. Even those who make their living constructing questionnaires and scoring them with advanced statistics aren’t able to do this consistently. There are too many variables to contend with, not to mention the threat of built-in bias which can annul the value of anything that is discovered. That means that managers, who already have many other things to think about, really are out of their depth on this both in time and training.

 

What was supposed to happen?

The Scorecard was intended to function in much the same way as a typical change programme does today. Internal, and sometimes external, processes were broken down into their discrete tasks. Action that resulted in particular outcomes were identified, and together these things determined the core competencies of the organization.  It was believed that this analysis provided a series of paired causes and effects that senior managers could then blend together such that the various strategies needed to achieve organizational objectives could be created and then implemented.

From the bottom up, pairs of cause and effect were supposed to be combined with other perceived causes and effects. The entire process was reminiscent of a play-off chart where there are a large number of individuals or teams that start out at the beginning are then gradually reduced to one.

Theoretically, the process then could be reversed. If this person did this, then that would happen. If that person did something else, then there would be a different result.

This is what was intended throughout the organization; to identify causes and effects to the extent that outcomes could be identified with this degree of clarity. Then when something went wrong, they’d be able to look at the connection and discover why what was planned didn’t work.

That was the theory.

 

What actually happened

In practice, the Scorecard was in trouble from the outset. Notwithstanding the problems already mentioned, it focused on short-term results. This was in spite of the fact that it was intended to consider the long-term as well.

In psychometrics, we say that a test is invalid if it fails to measure what it claims to measure. The Balanced Scorecard claimed to measure both the short and long term, but in reality, it only measured the former. That alone was enough to deep-six this “tool”.

There were other problems, too.

One was that it was unable to identify faulty strategies. In other words, it assumed that the means by which managers expected to accomplish their goals were sound and that the obstacles were limited to putting them into practice. This could easily have led to a situation where a perfect Scorecard supported a defective mechanism.

 

How the Scorecard is imbalanced

There are too many weaknesses in the Scorecard to discuss here;  but one stands out. It’s the thing that makes the Scorecard imbalanced.

The central problems that the Scorecard were intended to overcome were the focus on short-term financial results. We’ve already seen that long term organizational results had been ignored in the very design of the tool; but what of the criteria? What did it measure? What did the score mean? You may be somewhat shocked to learn that it not only measured short-term financial performance, but that the authors determined that it should. They say so in their book. This shouldn’t surprise you because one of the authors is an accountant.

Perhaps both he and his accomplice were hoping that no one would read what they had written.

 

What does it mean to be balanced?

To be truly balanced, it would be reasonable to expect that any component in a tool would carry no more weight than any other; that all parts would be measured equally.

If there were five things, then the financial element would contribute 20%. If there were ten things, then the financial part would be worth 10%.

In practice, the Scorecard draws on dozens of contributing factors; but at the end of the day, the only thing that matters is the organization’s financial health, and the creators of the Scorecard make it clear that this is what they intended from the beginning.

Although every organization must remain on a solid financial footing to survive, you do yourself a disservice when you pretend to evaluate everything equally, when in reality only one thing matters to you.

Moreover, if all you do is focus on the finances of your enterprise, then you will lose the cooperation of those who work with and for you. That’s because your passion isn’t theirs; and if truth be told, it’s probably not the reason that they’re working with or for you.

The point is that if you want to apply a balanced approach to evaluating your organization, then you can do a lot better than to rely upon the imbalanced Balanced Scorecard. It was only ever designed to measure short-term financial performance.

If you want to learn anything else, then you’ll need to find another way to do it.

 

 

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