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Balanced Scorecard: The Benefits

Balanced scorecards are meant to create a culture of fact based decision making which
scrutinizes processes at a much greater detail than is possible simply with financial
data. When several departments of the company are involved, the data is visible to all
of them and they all get to learn how their individual contribution is related to the
overall company performance. Comprehensive measurement of process efficiency,
productivity, human resources quality, customer satisfaction and financial returns are
all quantified to uncover opportunities for efficiency gains. Kaplan and Norton, who
pioneered balance scorecards, liken them to “the dials and indicators?of an airline
cockpit. The continuous feedback with numbers helps companies align their strategies
with their operational tactics and take corrective action before too much damage is
done to their companies. A recent survey finds that two-thirds of the respondents who
have used the balanced scorecard have reported a positive experience with them.

Above all, a pervasive culture of measurement helps to communicate better and to


overcome the resistance to change that comes from a blinkered view of reality.
Information technology investments have commonly been a black box in many
companies and the IT staff has resisted any rigorous accounting of its costs and
benefits. This was also the experience at BNSF Railway till 2002; at the time the
company's IT continued to grow while business was flat. When the company began to
implement its balanced scorecard methodology, BNSF's cost per million instructions
per second (MIPS) was reduced to $29 compared with $42 earlier. The company
attributes this achievement to the improvement in the quality of communication that
the balanced scorecard facilitated.

Companies using balance scorecards can evolve and adapt to their circumstances with
greater ease. Equally, the visibility gained from measurement lifts the cloud of
uncertainty that induces the insecurity in people. Instead, the numbers help people to
see the scenarios evolving ahead of them with a degree of clarity to venture ahead
with creative solutions. The shared information helps them to work together with a
greater collaborative spirit which mitigates some of the resistance to change. Finally,
the consciousness that external developments drive organizational evolution rather
than managerial diktat from the top helps to understand change in a perspective that
is conducive to problem solving. A recent survey finds that all the companies that have
realized significant benefits from balanced scorecards agree that their use has helped
to tie their strategies with their operational strategies while 43% among those who did
not realize significant benefits. From the employees?perspective, the survey confirmed
that there is a closer link between reward and performance among those companies
realizing significant benefits from balanced scorecards.

The success of the balanced scorecard is contingent on the precision and detail of the
financial and other numbers that are available to the company. Unsurprisingly, the
companies that report significant benefits from balanced scorecard are also more likely
to have used activity based costing (ABC) and rate its value to be high while those
who have not realized significant benefits are also less likely to have used ABC and
also rate its value to be low. The reported figure for the first group is 60% likelihood of
using balanced scorecards and 36% in the second.

A case of successful use of balanced scorecards for change management is CIGNA, an


insurance company. In 1993, it lost a staggering $275 million and its combined ratio,
i.e., the ratio of claims to premiums earned, was 1.40 or the claims were in excess of
the earnings. When the management examined the work processes, the details
showed that the company had poor relationships with its customers, with the
distribution channel and the staff was not equipped with the technology it needed to
perform well. CIGNA announced a new strategy of becoming a specialist insurance

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Balanced Scorecard | Benefits http://www.balanced-scorecard-software.net/ScoreCard-Benefits.php

perform well. CIGNA announced a new strategy of becoming a specialist insurance


company instead of spreading itself thin over numerous businesses. It chose an
electronic version of a balanced scorecard which communicated any weakness by
sending out a red signal. If in any work process progress was lagging, the company
identified the source of the problem and worked with the concerned employee to
improve matters. By 1998, CIGNA turned around with high levels of profitability.

The mindset for change presupposes that the management and the employees are
able to look outside of their companies at the macro events that shape their destiny.
All too often, employees and managements have an ostrich like attitude and remain
oblivious to the larger context till they are shocked into changing their ways. Modern
managements increasingly expect their companies to remain resilient in the face of
adverse course of events. FMC, a Chicago based conglomerate, was a typical cash cow
with $4 billion in revenues in 1992 and a relatively high return of 15% with little
prospect for rapid long-term growth. The performance of each of the businesses in the
conglomerate was judged based on financial metrics but the actual experience showed
that external factors such as market evolution and competitive factors were the critical
factors influencing performance. FMC decided to change course and increasingly
incorporated factors such as customer satisfaction, market position and the share of
revenues contributed by new products in the metrics incorporated in the balanced
scorecard. This was to ensure that the company would be fortified against adverse
events.

The ability of employees to actively participate in the decision making process adds to
the diversity of perspectives and the energy that they are able to contribute within the
overall strategic context defined by their management. One instance of this is the
success that was achieved by Crown Castle International, one of the largest cellular
tower companies in the world. The key problem with the company was the customer
churn rate of the company which added up to 24% for the entire year. By 2004, the
company had reduced the cycle time of installation by 70%, entirely made possible by
the initiative of its local employees, to be credible among clients. A variety of metrics
allowed each of them to select the variables that they could best influence. The best
practices from each of the regions are then communicated to others to accelerate the
rate of improvement.

The combination of financial and non-financial measures of performance is also a


means to weigh both the short-term and the long-term goals of a company. In the
past, the bias was in favor of financial goals which persuaded companies to meet
short-term quarterly goals which lead to a decline in the long-term competitive
strength of the company. A mind-set which sees the non-financial metrics as leading
indicators of the financial performance also encourages a consideration of the
long-term strengths companies need in order to achieve their financial goals.

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