Are balanced scorecards fit for the disruption era?

New research adds risk assessment to a common performance tool

When Harvard professors Robert Kaplan and David Norton developed the balanced scorecard tool in the early 1990s, the internet was in its infancy and the term digital disruption was not in common parlance.

Some 25 years later, the performance-management methodology is still widely in use as managers try to measure and understand financial metrics, as well as other key factors including customer satisfaction, internal business processes and employee performance.

At its best, the methodology helps businesses determine strategy and achieve their goals. But some critics question the currency of balanced scorecards, given the dramatic changes to the modern business setting and the imperative of measuring important contemporary factors such as risk, digital data and employee incentives.

A new paper from UNSW Business School, The Interplay Between Strategic Risk Profiles and Presentation Format on Managers' Strategic Judgments Using the Balanced Scorecard, seeks to increase an understanding of the utility of balanced scorecards through a risk-assessment lens.

It is co-authored by Kerry Humphreys, an associate professor and scientia fellow, Mandy Cheng, a professor and head of the school of accounting, and researcher Yichelle Zhang.

Humphreys says managers are increasingly aware that strategic judgments need to be made in the context of risk assessments.

"But there's no clear view on how to best do this," she says. "Our study looks at this in an experimental lab setting where we can present performance and risk information in various ways without changing the reports generated within an organisation."

Risky business

The co-authors have investigated whether integrating strategic risk information in a scorecard affects managers' responses to different strategic risk profiles when they make strategy evaluation and recommendation judgments.

Their results show that managers make less favourable judgments with high-performance driver risks (for example, a breakdown in critical processes or equipment) than with high-performance outcome risks (for example, an adverse customer reaction to a social media strategy having a quick impact on finances) when strategic risk information is integrated in a balanced scorecard, but not when the strategic risks are presented in a stand-alone approach.

In practical terms, this means that organisations with high-performance driver risks, such as traditional energy and water utility operations, are exposed to risks that can accumulate gradually over time and eventually have a significant impact on financial performance.

"Therefore," Humphreys explains, "it becomes more important to be able to identify those driver risks within the operations when they eventuate, so that organisations don't experience a long-term slow burn with a major adverse impact."

'How to best capture this balanced set of measures that we have in a scorecard and then effectively link these to incentives is something we still need to know more about'

KERRY HUMPHREYS

'So-called softer measures'

Management consulting firm Bain & Company still ranks balanced scorecards in its top 15 set of such tools even though manager satisfaction levels have dipped recently.

"So we know that organisations continue to use the balanced scorecard framework," Humphreys says.

"The banks and financial services organisations are measuring a broad set of performance metrics, but their incentives have typically been linked to a smaller subset of financial metrics," Humphreys says.
To provide context about the need for performance-management tools to evolve, she notes that the poor behaviour by some Australian financial services companies, as revealed at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, has raised questions about which measures should be linked to bonuses in order to ethically motivate employee performance.

"The banks and financial services organisations are measuring a broad set of performance metrics, but their incentives have typically been linked to a smaller subset of financial metrics," Humphreys says.

"So how to best capture this balanced set of measures that we have in a scorecard and then effectively link these to incentives is something we still need to know more about."

Emma Grogan, a partner at PwC who specialises in executive rewards and performance alignment, says many leaders and managers are considering widespread reviews of their performance-management frameworks, or at least tweaking them to ensure they are leaner, more impactful and improve goal-setting processes.

She points out that balanced scorecards have been the predominant tool in many financial services companies.

"And a lot of what's coming out of the Royal Commission (and associated reviews) is that the assessment of performance was too swayed towards financial outcomes," she says.

"So there's now a focus on getting a more balanced set of performance measures, including customer and risk measures."

According to Grogan, many managers find traditional performance-measurement processes uninspiring, time-consuming, compliance-focused and backward-looking, while they worry about measuring "so-called softer measures" such as values and behaviours.

"They get anxious about making those kinds of judgments when they can't simply refer to a number."

Grogan expects it to take time for managers to shift from a focus on financial measures to others such as customers, people and risk. "There's still a way to go," she says.

Still powerful

Michael Court is managing director of Balanced Scorecard Australia, which provides training and consulting services related to the development and implementation of balanced scorecard systems.

He has no doubt the balanced scorecard methodology, when used properly, has moved with the times and still informs and empowers executives as they seek to execute their strategies.

"They've become more and more valuable as time goes on because as organisations have used them the deficiencies in the early versions became very apparent," Court says.

He explains that balanced scorecards have transitioned through five broad phases, beginning with the unveiling of first-generation scorecards that set key performance indicators (KPIs) for organisations but which were criticised for having conflicting targets and measures. Then came the rollout of improved strategy-focused scorecards, followed by the development of strategy mapping.

The fourth phase was the steady evolution of strategic management systems and offices of strategic management reporting directly to the CEO to drive systematic strategy execution. The fifth phase has been the use of modern balanced scorecards as integral components in strategic management systems that cascade down through an organisation and connect objectives.

"Unfortunately, most organisations that say they're using a balance scorecard are still using a simple KPI scorecard, which we know doesn't work," Court explains.

For balanced scorecards to be integrated successfully into a company, Court says three things are required. First, they must be part of an overall strategic management system and not just plugged into various parts of an organisation indiscriminately, "otherwise using scorecards can be very dangerous and just [annoy] everyone".

Second, they must have executive buy-in. "You've got to get ownership, understanding and strong support at the top of the organisation," Court says.

Third, in order to drive strategy execution, organisations must foster internal teams that take control of building a network of scorecards that are connected to corporate strategy and which, as mentioned previously, can be "cascaded" down through the organisation.

'[Managers] get anxious about making those kinds of judgments when they can’t simply refer to a number'

EMMA GROGAN

Watch this space

What is the future for balanced scorecards? Grogan says one of the clear challenges will be for such tools to accurately reflect modern employee roles and objectives at a time when the gig economy and a contingent workforce are growing rapidly.

"Historically, those kinds of employees aren't part of formal performance-management processes," she says.

Likewise, she says strict 12-month reporting periods present difficulties because "in many cases it's very difficult to forecast an accurate target against a performance measure 12 months out, especially if you're in a disrupted industry".

Some companies, Grogan adds, are moving away from static scorecards to more frequent and less formal performance settings.

Humphreys says her research with Cheng and Zhang shows that the way organisations choose to combine the reporting of strategic risk and performance information is important for managers as they make strategic judgments.

It strengthens arguments that leaders and managers must adjust to changing business markets, including higher risk environments, greater use of data analytics and questions about employee incentives.

"We hope this study will begin to open up that discussion as to how to most effectively link these factors to performance information."