Francisco Trullenque. Professor. Instituto de Empresa. Executive Partner of Strategy & Focus
1 December 2004
The Balanced Scorecard (BSC) mixes traditional financial vision with the basic elements for sustainability in value creation. It is management aimed at the future.
Traditional management is based on financial statements. It is common to see how management in many large or small enterprises takes decisions based fundamentally on evidence offered by financial statements and budgetary compliance. If we have sold lots, earned profits and kept to our budget, we will be satisfied and continue along these lines; if not, we will make decisions to change direction.
The first thing one notices with this management method is that what really governs the company is its past. Let’s not forget that besides susceptibility to debatable and criminal financial engineering, financial statements show past performance and not future success. Furthermore, a budget is no more than an estimate of the future that we made in the past, and amid some uncertainty. Consequently, management based exclusively on these two elements implies acceptance of the hypothesis that the past explains the future - a concept more than questionable in surroundings that are not stable and controlled.
It is also common to see how these elements often include “executive games.” For example, many organizations appear satisfied when comparing their financial statements (“We grew 5 percent over last year and our margin improved 2 percent”). Yet they are surprised and fail to find words when asked rarely posed questions, like “How did our competitors do?” “Have we won or lost market share?” or “Are we more or less efficient than they are?”
As for budgets, I have always found it interesting to see how often what was said no less than one year ago (an eternity if ever there was one) eventually becomes reality. It’s almost frightening to think that we managed to get the future right with simply a few slight variations. No one knows what the future will bring - especially in dynamic times such as ours. The only way of keeping to budget is to play with reality in some way (anticipating or delaying expenses and income, spending on something that’s not necessary or not spending on something that is). And this always has a negative effect on transparency and the final generation of value.
The Balanced Scorecard as response to strategic management
There must be a better way of management, of looking up and at what’s ahead, focusing on the future rather than the past. Recent decades have seen many attempts, both conceptual and practical, to find a satisfactory solution (value-oriented management, dynamic budgets, organizations without budgets). Perhaps the most advanced is the Balanced Scorecard, proposed some years ago by R. Kaplan and D. Norton.
The Balanced Scorecard makes it possible to build a mechanism to monitor strategy and make it operative; it does not replace but rather integrates and balances traditional financial vision with factors key to future success and sustainability: Customers, Processes and Basic Capacities of the Organization.
Strategy management based on the Balanced Scorecard makes it possible to answer the following questions: What financial value are we building, and are we going to build in the future? What should be our customer focus (segments, markets, proposition of value, products) for it to be possible and sustainable? What is our customer's opinion of us? Are our processes excellent and in line? Do we have the basic capacities for success (people, alliances, technology, management model, material and economic resources)?
The Balanced Scorecard structures strategic thought and its continued monitoring, using these four perspectives as a reference (value, customers, processes and basic capacities), to build commitments and mechanisms for measurement and action. To these it adds the following elements:
::Strategy maps, which clarify and detail strategy, creating a common, operative mental model shared by the entire organization and balanced around the four perspectives;
::Indicators, to measure fulfilment of objectives set forth on the map;
::Objectives, establishing the main challenges for each indicator
::Initiatives, key actions that make fulfilment of the strategy possible and dynamic.
Accordingly, we move from a strategy that is often tacit, not specific and laden with “common areas” to something more tangible, shared and, above all, open to measurement, operation and management, oriented towards sustainability and the future.
In this way, management of the company moves away from being conditioned by the past and begins to take on a balanced, structured and shared consideration of the main factors and results to guide it toward future success.