In most companies the fundamental expectation from the annual financial budget is that it will guide and control the many managerial decisions that determine the companies’ steady progress towards its long-term goals. But, this standard practice of drawing up only financial measures undermines the companies’ interests. This is because measures like sales, inventory costs etc., are lagging indicators and using these as control points means that managers can only react post facto – when ability to course correct is limited.
Dr. Robert Kaplan and Dr. David Norton of Harvard University studied this “problem” extensively and presented their findings in their many books and articles. The duo strongly propagates the use of non-financial metrics in addition to financial ones for more effective management of companies. The tool they developed for this is called the Balance Scorecard (Kaplan & Norton, 1992).
The Verbalized Problem
Kaplan and Norton, proposed the Balanced Scorecard to solve the following chronic problems in managing and controlling organizations (Kaplan & Norton, Using the balanced scorecard as a strategic Management system, 2007)
- Vision Translation Problem: For most companies, the progress toward long-term vision is excruciatingly slow. A key reason is the operating team’s inability to translate long-term vision into short term actions. For example, as a long-term vision, a company might want to be recognized amongst the top five in its industry. However, a local sales manager may not have a clue about how his or her daily actions contribute to the overall vision.
- The problem of communication: How can everyone in the company be brought to the same page? How can they all be encouraged to work towards the same objectives? Without clarity on what the company is trying to achieve and how, it is very common for managers to work at cross-purposes with other managers in the same company!
- Issues with alignment of individuals: Even if everyone is aware of the direction the company is pursuing, how can employees’ personal interest be aligned with the company’s objectives?
- Filtering initiatives: At any point in time, the system has multiple initiatives competing for resources. Some of them may not be aligned to the goals of the company or some may be actively in conflict with others. In such an environment, is there a mechanism by which judicious decisions can be made?
- Feedback & Learning: How can a company enable continuous learning, and give up or modify initiatives which do not yield results?
The Balanced scorecard framework
Balance scorecard has three main features to solve the above problems
- Additional measures were added for viewing the progress of the company from the perspective of customers, internal processes and learning. These are meant to not only provide better overall alignment with the long-term vision but also to serve as “leading” measures. For example, deterioration of a non-financial measure like on-time delivery performance can give an early indication of eroding customer satisfaction, which in turn can eventually impact sales.
- Cascading of overall scorecard down to operating departments and individuals to align operating team with the organizational strategic direction. This is further strengthened by converting personal dashboards into targets which can be linked to incentives and rewards (Speckbacker, Bischof and Pfeiffer, 2003)
- Focus on identifying enabling initiatives to improve measures. This link, between measures and initiatives, serves to eliminate initiatives which are not aligned.
Gaps in the tool
Since the BSC combines financial measures with non-financial measures into a granular strategic map that can be shared with the whole company, on the face of it, the BSC seems a comprehensive management framework. However, closer examination of the concept and analysis of some of the literature and case studies on the subject reveals several lacunae that make it inadequate as an integrated strategic management tool.
1. Communication without systematic buy-in: The reason why employees in a company do not align with the vision and mission is less a communication issue and more a buy-in problem (Norreklit, 2014). Buy-in of local managers is very important as they will be held accountable for implementing the suggested actions (Jakobsen, M. and Lueg, R. 2014).
As a possible consequence, Kaplan and Norton (2008, p. 77) report on resistance of local regional managers: after the strategy had been planned top-down, they decided to act based on their own judgment after returning to their units. “Candidly, not all managers walked the talk after they returned to their local units. Several reverted to their narrow regional or functional focus.”
Buy-in on any company initiative or even a strategic direction can come only when following the layers of resistance are overcome:
- Don’t agree on problem or why an initiative is needed
- Don’t agree on direction of solution
- Don’t agree on the tactical steps ( may have alternative ideas)
- Tactical steps may have major obstacles or negatives (Cox & Spencer, 1998).
As a tool, BSC does not address these layers of resistance and leaves it to the users to decipher and settle contradictions on their own. As a result there is a high chance of the tool being used as a top down mandate which can trigger resistance to change in different units and at operating levels.
2. Possibility of erroneous vision translation and initiative selection: While in each of the four perspectives, objectives and initiatives (actions) are cascaded down by asking the question “how”, the tool not does enforce cause-effect logic (the sufficiency and necessary logic). So, the strategy maps of BSC shows visual arrows linking causally across various objectives. However the assumptions behind those arrows are not made explicit. The tool also allows the action items to be listed below the objectives, but again the causality is not expressed for critiquing. In order to validate the logic between the proposed cause and effect, the tool has no structure to answer following questions:
- Why a specific strategic objective and not another?
- What problem is one solving by selecting a specific strategic objective?
- Is that the core problem or just a symptomatic problem?
- What is the underlying conflict in improving the objective?
- Will the initiatives or action plan deliver the strategic objectives and why does one think so?
- Can these initiatives contradict with others or cause negative ramifications on some other strategic objective?
- Do we have enough resources to do all the initiatives? Is it practical?
- What is the sequence of implementing the action plans and why that specific sequence?
Without an explicit structure for validation, maintaining the rigour of good cause and effect is impossible; this can make these links vulnerable to interpretation, intuition and emotion (Nørreklit, 2003; Albertsen & Lueg, 2014). Ittner &Larker, 2003, discusses a BSC case where a fast food chain implemented expensive employee retention initiatives believing that this was necessary to improve motivation and in turn, to improve customer satisfaction and profitability. They eventually realized that this causal relationship which looked ‘self-evident’ led them to waste a lot of resources since what distinguished customer satisfaction in their business was only supervisor retention and not lower level worker retention.
Moreover, when companies are confused about causality they feel compelled to measure and simultaneously pursue too many things, trying to take care of every eventuality. A leading home finance company is reported to have implemented an executive dashboard with nearly 300 measures (Ittner &Larker, 2003)!
In the absence of a rigorous logical framework, it is also very likely for the chosen initiatives to be managed with local optima thinking and to be conflicting with each other (Francioli & Cinquini 2014; Rillo, M., 2002). For instance, simultaneously pursuing the objectives of increasing process efficiency and improving cycle time may seem to be perfectly okay. However, an initiative of cost reduction by increasing batching and reducing number of set-ups can often fly in the face of the latter objective! As discussed, the BSC does not have mechanisms to surface these contradictions.
3. Problem of alignment of individuals: The initially proposed BSC framework translates the initiatives into measures (or KPIs); it links targeted performance to individual appraisals. Later, possibly after a number of attempts at implementation, the authors themselves realized that this practice leads to system tampering behavior in companies comprising interdependent systems where multiple variables are closely linked (Merchant, and Van der Stede, 2007). For example, sales can often be increased at ever burgeoning levels of receivables. Or, in order meet his target, a purchase manager may negotiate hard with vendors and bring down the raw material costs and, inadvertently, compromise the quality of end products. Ittner &Larker, 2003, report on how managers of an automobile components manufacturer managed to meet the company’s quality targets by reclassifying as ‘acceptable’ certain flaws that once would have caused a part to be rejected. In their Harvard Business Review article, these authors suggest that “self-serving mangers are able to choose-and manipulate- measures solely for the purpose of making themselves look good and earning nice bonuses”. So, in their later work, Kaplan & Norton suggest that minimum target thresholds be used or that these targets be abandoned altogether in favor of subjective evaluations of individuals (Kaplan & Norton, 2007).
But, even though Kaplan realised the flaws of converting balance score card into individual targets for performance appraisal, they never explained the flaws in doing so explicitly. As a result one of the abiding attractions for BSC adoption is still to try to solve the problem of accountability or answerability by using individual targets (Speckbacker, Bischof & Pfeiffer, 2003). But the problem is, in an environment of variability and interdependencies, “measures when converted into targets stop being good measures” (Goodhart Law). This is because the need to meet targets somehow, very often triggers undesirable system tampering behaviour in individuals and groups. For example, the need to improve sales may lead to offering of temporary discount schemes which in turn can lead to a bull whip effect in supply chain. Consequently upstream organisation units get an erroneous perception of demand and capital expenditure planning goes haywire for such companies.
4. Limited Feedback and learning: The BSC framework, rather ambitiously, incorporates double loop learning from the initiatives implemented. In reality, however, no learning for course correction or even implementing fresh initiatives is possible in an environment ruled by targets. In this environment, often there is no clarity about why the envisaged target was not achieved – no one is able to really tell if a particular case of non-adherence is because of poor intent or genuine obstacles.
Even if companies adopt the ‘no individual targets’ policy, and are able to manage, with subjective evaluation of initiatives as suggested by Kaplan, the BSC has no provision to verbalize assumptions based on which the framework is drafted so as to enable a questioning of the chosen direction. Paradigm changes happen only when assumptions are well verbalised, after which they are open for scrutiny. According to Rillo, M., (2002), Nørreklit (2003), the framework is inadequate for enabling double loop learning in the fast paced contemporary businesses.
It was expected that in its second decade, the concept of the BSC would have matured and its application easily replicated across organizations. This has not been the case (Parmenter, 2012). The limitations in concept and in practice have led to persistence of problems during BSC implementation and to high rates of implementation failure (Pessanha and Prochnik, 2006). But the problems Norton and Kaplan tried to address are real. There is definitely a need for a tool or framework that offers its advantages while avoiding its pitfalls. We propose that the strategy and tactic tree, which is used while implementing the Theory of constraints methodology for continuous improvement in organisations, (Goldratt, Goldratt, & Abramov, 2002) offers the answer.
The Strategy and Tactics tree
The Strategy and Tactic (S&T) Tree was conceptualized by Dr. Eliyahu Goldratt to address the same set of issues that Kaplan and Norton had noted with traditional practices of managing companies. He proposed the S&T so that the right strategies and tactics for all units and levels can be identified and communicated in such a way that all are synchronized and focused towards achievement of the desired growth, stability, and harmony in a company (Goldratt, Goldratt, & Abramov, 2002).
While developing the S&T tool, Goldratt questioned that if “Strategy” is really at the highest level of an initiative and dictates all activities in the company and if “Tactics” are lower level initiatives that are needed to implement the strategy, then where does “Strategy” end and where do “Tactics” begin? He realized that to answer this question, the words “strategy” and “tactic” had to be defined differently from how they are commonly understood. He decided to define “Strategy” simply as the answer to the question “What for?” (the objective) and “Tactic” as the answer to the question “How to?” (the best initiative to achieve the objective). When defined thus, it becomes clear that every Strategy (What for) should be associated with a Tactic (How to) and therefore Strategies and Tactics have to exist at every level of a company as “pairs”.
Addressing the BSC gaps with S&T
– Strong cause-effect logic between Strategy &Tactics at each level
The way that the S&T creates a tree of strategies and tactics is similar to the cascading links of ‘objectives’ and ‘initiatives’ in the BSC. But unlike the BSC, the S&T specifies not only “What to change to” (the objective) and “How to implement the changes” (initiative or set of initiatives), but also more importantly it addresses “Why to change” and “What not to change”. This is because any strategic road map is only as valid as the assumptions on which it is based. So each S&T node which drills down to the next layer of objectives answers:
1. What the change or objective is for? (called the Necessary Assumption)
2. What is the specific measurable objective of the change? (Strategy)
3. Why it is claimed that the Strategy is possible and what specific requirements, potential negative ramifications or obstacles must be considered when selecting from alternative ways (tactics or initiatives) for achieving the Strategy? (Parallel Assumptions linking Strategy with Tactic)
4. How to best achieve the objective of the change? (Tactic)
5. What advice/warning should be given to subordinates, which, if ignored, will likely jeopardize the sufficiency of the steps they would take to implement this tactic or which is likely to be ignored (without the warning)? (Sufficiency Assumption)
– Logical Sequence of implementation specified
Further, while the BSC and S&T both specify the need for enabling initiatives, the “How” part of the S&T additionally lays down the sequence of implementation. This unique logical structure of the S&T is not only able to bring about alignment of the entire company’s operations with its vision (due to its drill down feature to every level of the organization) but also helps limit the number of tactics undertaken at a point in time.
– Real alignment of individual interest with company goals ensued through management by tactics
As Kaplan has rightfully concluded, using individual targets (with incentives) can lead to system tampering behavior, poor control over operations and blocking of opportunities for learning. Instead, S&T brings about individual alignment by ensuring ‘buy-in’ on the chosen enabling tactics (and no other tactics) at the operating level. The tool is designed to deal with the ‘layers of resistance to change’ (Cox & Spencer, 1998). This, and its structured approach to the questioning of assumptions behind the tactics, enables one to conclude the debate on efficacy and adequateness of selected tactics (Mohanty, 2014).
In organizations that implement this methodology, the only place targets are allowed to function is at the collective level. This promotes collaboration as individuals desist from typical turf protection behaviours and will instead strive for global team goals.
– Measurements which are ‘signal’ and not ‘noise’
But the absence of targets does not mean that there are no measurements needed. After building a clear, logical roadmap of strategy and tactics, measures can be easily identified for checking effectiveness and speed of deployment. For instance, in a large consumer durable company, the measure of primary sales was substituted by tactic based measures such as number of retailers billed, number of lines sold daily, number of DSOs deployed etc. Creation of a good dashboard of multiple such measures, which are tracked and reviewed at high frequency, ensures validation of chosen tactics or initiatives.
Even though there are clear measures on this dashborard, these are not many. The Theory of Constraints approach is to have a good enough set of measures to detect effectiveness of tactics. Many variables which are considered relevant –motivation level of employees, sales loss, loyalty of trade partners etc – may not be easy to measure directly. However, interconnectedness of variables allows one to use indirect measures for them. For example, low return on their investment is directly linked to and responsible for poor loyalty of distributors. While ROI is easy to measure, loyalty is not. So, developing and tracking a measure for distributor loyalty is, in most scenarios, a wasteful exercise.
– Quick feedback and learning enabled with High frequency management
Even while a company is being managed by a carefully selected set of tactics, occasionally, implementation of these tactics may result in surprises or roadblocks that may delay the deployment or even invalidate the tactics. Individual managers may encounter situations where they may not be able to resolve all issues associated with the implementation of tactics on their own.
Hence, a process of high frequency review of implementation of tactics or initiatives is required to make available timely help to managers. This would ensure stronger alignment of individuals to company objectives. Moreover, the process also gives the opportunity and systemic structure for learning and course correction when needed. Thus, this facilitative engagement, along with recheck of assumptions, creates a perfect learning organisation.
Conclusion
The lure for balance scorecard in organisations, at times, emanates from two of the most widely circulated myths of management –
- that we can improve only what we can measure and
- that individual accountability or answerability can only be established by individual targets.
Both paradigms are not just incorrect but also have damaging consequences.
In conclusion it has to be said that while the balance score card has correctly identified problems of weak control and alignment in using only the financial perspective to manage companies, the tool has serious gaps while dealing with these problems and is a poor change management tool (Rillo, M., 2002). Strategy and tactics tree and the philosophy of management by tactics address these gaps.
References
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Cox, J. I., & Spencer, M. (1998). The TOC handbook. Boca Raton,FL: St. Lucie press.
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