Balanced scorecards
Using balanced scorecards as a tool for partnership analysis
Since the concept was developed by Kaplan and Norton* in 1992 balanced scorecards have become a standard part of the business planning tool-set for large companies and have accumulated a large fan base across large segments of the private and public sectors. Proponents of the balanced scorecard's case is made significantly easier by the fact that they can point to some notable success stories. Tesco, the highly successful British retailer, for example has credited the balanced scorecard with being integral to its successful business strategy.
So what is the balanced scorecard and what relevance does it have for alliance and business development professionals? The balanced scorecard aims to measure important aspects of the organisation's performance and to present those measurements in one simple snapshot. This snapshot is designed to show senior management exactly where the organisation is meeting its goals and where it needs to improve in order to do so. The very simplicity of the scorecard is part of its attractiveness.
The classic scorecard expounded by Kaplan and Norton balances ratings across four main categories: financial, customer, internal business processes and learning and growth. The relevance of this type of analysis for alliance professionals is immediately apparent when we rewrite those categories into alliance goals and milestones, partner-related measures, internal processes and learning and growth. The balanced scorecard enables alliance professionals to capture both the progress towards concrete milestones with other factors such as knowledge-sharing, culture and trust in one easy to read chart. Part of the attraction of the scorecard for alliance and partnering executives is that it attempts to measure at least some of those cultural and communication skills that studies point to as having a strong correlation with the success or otherwise of the alliance.
Balanced scorecards are a potentially powerful tool for alliance management business development but what are the potential pitfalls of relying on balanced scorecards to assess the success or otherwise of a portfolio of alliances and business development relationships?
The potential traps fall into five broad arguments.
Balance The balanced scorecard is, well, balanced. It gives exactly the same weighting to financial measures as it does to, for example, learning and growth. Whilst this balance is aesthetically elegant it is not clear why the four categories chosen should be afforded the same weight in all units, all sectors, all circumstances and at all times. Are the situations in which the organisation would benefit from the scorecard becoming unbalanced?
Selection bias It is not clear why Kaplan and Norton have chosen to use the four categories of financial, customer, internal business processes and learning and growth as the basis of the analysis as opposed to other three, four, five or six part categorisations that are available in the literature.
Aggregation By aggregating all units the balanced scorecard suffers from the same design fault that all averaging measures suffer, the reliance on the mean as a measure of success or otherwise. By failing to capture the distribution of the data the measure leads to the counter-intuitive result that a group of units, all of which are performing averagely well, are treated as on a par to a group where half of the units are succeeding spectacularly and half are failing, equally spectacularly.
Measurement The balanced scorecard is based upon the dictum that 'What cannot be measured cannot be managed'. Again this is intellectually elegant but is it actually correct? Most executives would argue that they are frequently asked to manage things that they cannot or do not measure, for example, disputes between partners or the fall out from bad publicity. What if there are a number of ways of measuring something, for example, knowledge sharing in a partnership that come up with different results? How do you know that you are measuring the right things?
Evidence There seem to be no empirical or statistical basis for the weighting in the original Kaplan and Norton article and post-hoc evidential proof, if it exists, would be less than convincing. Plenty of case studies are put forward but the general applicability of each case study is not discussed. So alliance and business development executives in, for example, the medical devices industry are left scratching their heads and trying to decide if a case study based upon nursery schools in New Zealand has any relevance whatsoever to their own business model.
So what does all this mean for alliance professionals? In defining and capturing internal and external measures of success and linking those to cultural and people-related factors such learning, the balanced scorecard is a useful starting off point for thinking about how to measure the performance of a portfolio of alliances. However, in order to generate any real value from the exercise, alliance professionals need to look long and hard at what measures are being captured, how they are being captured, how those measures relate to the organisation's business and partnering goals and what important factors, if any, are being missed by the scorecard.
* The Balanced Scorecard: Measures that Drive Performance, Robert S. Kaplan and David P. Norton, Harvard Business Review January-February 1992 71-79.