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Balanced Scorecard founder: In recession, think risk management

Risk management is among the key performance indicators to measure for strategic success, says Robert Kaplan, co-developer of the Balanced Scorecard methodology.

Just as the economy is shifting corporate strategies, it is also causing Robert Kaplan to add new measurements...

for strategic success. For example: risk management.

Kaplan co-developed the Balanced Scorecard nearly two decades ago to introduce a corporate strategy methodology that measures more than financial results and aligns business units with corporate objectives.

According to the Balanced Scorecard framework, in addition to marketing or sales budgets and overall revenue and profits, enterprises should measure intangible assets such as customer relationships, excellence in process operations, employee skills, data and information systems and even the corporate culture.

"If you can't measure, you can't manage and you can't improve upon your corporate success," Kaplan said during a presentation at the recent Gartner Business Intelligence Summit in National Harbor, Md.

And today, organizations need to include risk management among the key performance indicators that they measure.

"Financial performance is a lag indicator. … Now we're seeing the consequences of not making risk management a strategic part of strategy," he said, such as the riskiness of corporate investments that have resulted in huge losses to financial services firms.

The principles of the Balanced Scorecard can be applied to any business unit, including IT, but it is critical that a department's internal scorecard link to the corporate strategy, Kaplan said. He has encountered IT departments that have created balanced scorecards "for their own world" that don't achieve this connection to business objectives.

Kaplan estimated that two-thirds to three-quarters of companies attending events he speaks at globally are using the Balanced Scorecard or a variation of it.

A recession means short-term focus but with long-term perspective

In these troubled economic times, Kaplan advises companies to focus on four or five key strategic initiatives, though not lose sight of long-term corporate strategy.

"In a recession you need to focus on short-term goals and the three Cs: reduce costs, rebuild capital and watch your credit," he said.

For long-term corporate strategy success, Kaplan's Balanced Scorecard focuses on several key areas:

Aligning the organization with strategy and objectives. Create balance and a sense of common purpose. Take a rowing team, for example: Does it win because it has the eight strongest rowers? No, it wins because all the rowers have the same course and speed in mind. And the coxswain, or leader, makes sure the boat stays on the right course so the team can function as one.

The same unison should apply to your business units and executive team when it comes to corporate objectives. "Is the [leader] just going along for the ride? Just added weight in the boat? [The executive] needs to do something to justify the space he's occupying, and that's having individuals work as one," Kaplan said.

Mobilizing change through executive leadership. Everyone in the organization needs to understand why a corporate strategy is changing, and only the leaders can drive that change. For example, after 9/11, the government established an office of strategy management to develop new objectives for agencies like the FBI. The office changed the bureau's agenda from one that restricted information and shared only what it had to, to one whose objective is to share information and restrict only what it must.

The danger for those in any organization is that they will go back to their comfort zone. "The head of the FBI carried around a laminated change agenda so everyone could see that agenda, and he could pull it out if things were starting to shift back to the old ways," Kaplan said.

Linking strategy to business users. Make everyone accountable for individual excellence. But for this to work, every individual needs to be able to visualize the role he plays in making corporate objectives and overall strategy a success. Kaplan advises giving everyone in the organization a strategy map.

"Even people far from the headquarters need to be able to visualize what their role is and how they contribute to understand what they should do day in and day out," he said.

One CEO using the Balanced Scorecard methodology randomly visits employees at their desk with a strategy map in hand and asks three questions:

  • Do you know what this is?
  • Can you explain to me what this is?
  • Can you explain what you were just doing on your laptop, and how it applies to our strategy?

We're seeing the consequences of not making risk management a strategic part of strategy.

Robert Kaplan, co-developer, Balanced Scorecard

After each visit, internal email correspondence exploded, and the CEO accomplished his goal of making sure employees knew the corporate strategy and their role in making it a success.

Making strategy a continual process. Develop strategy maps and even dashboards for employees so they can drill down and see the links between objectives, how individuals and teams play a role in that end goal, and how the success of that objective is measured. Visual strategy maps allow employees to see links between objectives and how they are measured.

For example, Southwest Airlines had an objective of faster ground turnaround times for planes. Executives measured this not by timing takeoffs alone, but by how many ground crew employees were stockholders. In other words, being a stockholder would motivate ground crew to get the planes off the ground faster. More importantly, they measured the success of this objective based on how aware the ground crew was of this objective and how it related to the airline's overall corporate strategy. The connections were all displayed on a strategy map.

Let us know what you think about the story; email Christina Torode, Senior News Writer.

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