There is a broad consensus over the need for KPIs in many of the operational businesses we work with. Often with KPIs comes discussion of objectives and measures and in turn a discussion about balanced scorecards. Indeed the balanced scorecard has been referred to as...
One of the most significant management ideas of the past 75 years
It struck me the other day that not many people know the origins (and original intended benefits) of the balanced scorecard as a management idea, so here I'll aim to put that right. In particular we'll tell a bit of the story of Art Schneiderman.
Origin story - or at least where it all started
The idea of a balanced scorecard began in a well read Harvard Business Review article back in 1992 written by David Norton and Robert Kaplan. Both Kaplan and Norton were electrical engineers by background with experience in operations research. Kaplan moved to the Harvard Business School and was instrumental in defining Activity Based Costing before developing and publishing the Balanced Scorecard with David Norton. Norton’s career was in consultancy, cofounding Nolan Norton & Co in 1975 until it was acquired by KPMG Peat Marwick. He left to found a new business to promote consulting with the Balanced Scorecard at its heart in 1992 once it had been published.
The original idea, it is suggested, tracks back to Art Schneiderman in 1987 who went on to work on a research project with Kaplan, and Norton’s firm Nolan Norton. Schneiderman claims in his own history that the first balanced scorecard was created in 1987 at Analog Devices, a mid-sized semiconductor company. One of his early assignments at Analog Devices was to facilitate the Group's Strategic Planning process which at the time was updated once every five years involving several hundred business and product line managers over an 18 month period. Schneiderman writes that
"To assure cross-functional integration, we utilized existing groups such as the Technology, Manufacturing, Human Resources and Marketing Councils as well as ad hoc groups and Strategic Planning Councils. We also created Product Strategy Task Forces (PSTF's as they were called) to provide cross-divisional integration...Like many organization's, Analog's written strategies quickly became dead documents."
Embedding the three basics of TQM
As Scheiderman sets out, the original corporate mission and vision of this 5 year strategy was set out using QDIP (Quality, Delivery, Inventory, Productivity) measures, borrowing from Lean Six Sigma. The Quality Improvement Process part of the strategic plan was in effect a Total Quality Management system, borrowing from Japanese TQM thinking but translated to be more team and problem-solving focused. At its heart Schneiderman hoped that all employees would learn "the three basics of TQM: customer (or more broadly stakeholder) focus, involvement of all employees and, and a commitment to continual improvement of all processes."
It was pretty obvious to Schneiderman that the QIP Strategic Plan, by itself, was insufficient to assure achievement of our overall strategic objectives. In 1987 the planning process was modified to include a scorecard, including financial and non-financial metrics in a single system. Combining the various metrics was an attempt to reduce tension in the way management teams reviewed the individual metrics. Previously the metrics towards the top had received the most focus and it was gradually appreciated that it was the overall set of measures that was more meaningful than any one in isolation.
So, by Scheiderman's account the resulting "Scorecard," became the first "official" balanced scorecard. Over time the Analog Devices communications team seized on the scorecard to share the strong performance focus amongst the academic community, suppliers and customers before Schneiderman left in 1992.
The original scorecard contained:
- Financial (revenue, revenue growth, profit and ROA)
- Customer (on time delivery, leadtime, outgoing PPM (quality))
- Internal (cycle time, yield, process PPM, cost, employee productivity) and
- Learning and growth (new product intros, new product bookings, new product booking ratio (% bookings from products introduced in the most recent six-quarters), new product average 3rd year revenues (average revenue in third year after into), time-to-market and employee turnover)
These constitute all of the elements that the modern balanced scorecard still promotes, although as ever, the scorecard has been adapted for other purposes.
Gaining popularity and ubiquity
In 1990 Schneiderman participated in a research study led by Kaplan in conjunction with consultancy Nolan-Norton and described the work at Analog Devices on performance measurement. Kaplan and Norton included details of this balancd scorecard in a 1992 article which became a popular success, leading to a book in 1996. As a result Kaplan and Norton have become identified as the creators of the balanced scorecard concept and Schneiderman relegated to the role of 'the fifth beatle'!
By the mid-1990s other business writers and academics had taken up Kaplan and Norton's work and modified the design of balanced scorecards, leading to other variations like the "performance prism", "results-based management" and the "third-generation balanced scorecard".
However you use it, you can't deny the value of the balanced scorecard. A well established balanced scorecard allows managers to look at the business from four important perspectives whilst limiting the overload effect of having too many measures. The balanced scorecard allows managers to consider all the important operational metrics together and using evidence, see whether improvement in one area may have been achieved at the expense of another. It also puts customers and employees front and centre of the measurement, which can surely only be a good thing.
In a future blog we'll look more closely at the balanced scorecard itself and some of the lessons to be learned from how to apply it to your business.