To successfully implement a balanced scorecard, division leaders and subordinate managers require commitment and leadership from top management. At Chipset, the vice president of strategic planning headed the team building the balanced scorecard. The team conducted interviews with senior managers; asked executives about customers, competitors, and technological developments; and sought proposals for balanced scorecard objectives across the four perspectives. The team then met to discuss the responses and build a prioritized list of objectives.
In a meeting with all senior managers, the team sought to achieve consensus on the scorecard objectives. The vice president of strategic planning then divided senior management into four groups, with each group responsible for one of the perspectives. In addition, each group broadened the base of inputs by including representatives from the next-lower levels of management and key functional managers. The groups identified measures for each objective and the sources of information for each measure. The groups then met to finalize scorecard strategic objectives, measures, targets, and the initiatives to achieve the targets. Management accountants played an important role in the design and implementation of the balanced scorecard, particularly in determining measures that represent the realities of the business. This required management accountants to understand the economic environment of the industry, Chipset’s customers and competitors, and internal business issues such as human resources, operations, and distribution.
Managers at Chipset made sure that employees understood the scorecard and the scorecard process. The final balanced scorecard was communicated to all employees. Sharing the scorecard allowed engineers and operating personnel, for example, to understand the reasons for customer satisfaction and dissatisfaction and to make suggestions for improving internal processes directly aimed at satisfying customers and implementing Chipset’s strategy. Too often, only a select group of managers see scorecards. By limiting the scorecard’s exposure, Chipset would lose the opportunity for widespread organization engagement and alignment. Companies such as Citibank, Exxon Mobil, and Novartis share their scorecards widely across their divisions and departments.
Chipset also encourages each department to develop its own scorecard that ties into Chipset’s overall scorecard described in Exhibit 13-3. For example, the quality control department’s scorecard has measures that its department managers use to improve yield—number of quality circles, statistical process control charts, Pareto diagrams, and root-cause analyses (see Chapter 20 for more details). Department scorecards help align the actions of each department to implement Chipset’s overall strategy.
Companies frequently use balanced scorecards to evaluate and reward managerial performance and to influence managerial behavior. Using the balanced scorecard for performance evaluation widens the performance management lens and motivates managers to give greater attention to nonfinancial drivers of performance. Surveys indicate, however, that companies continue to assign more weight to the financial perspective (45–55%) than to the other perspectives—customer (15–25%), internal business process (10–20%), and learning and growth (10–20%). Companies cite several reasons for the relatively smaller weight on nonfinancial measures, including difficulty evaluating the relative importance of nonfinancial measures; challenges in measuring and quantifying qualitative, nonfinancial data; and difficulty in compensating managers despite poor financial performance (see Chapter 24 for a more detailed discussion of performance evaluation). Companies put more weight on nonfinancial measures that represent distinctive objectives, have strong ties to financial results, and can be measured reasonably well. For example, in evaluating its senior managers, Chipset places greater weight on the percentage of employees trained in process and quality management (a measure of employee process skills) and yield (a measure of improvements in manufacturing quality and productivity). That’s because Chipset believes that these measures create distinctive competitive advantage with strong ties to customer satisfaction and operating income.
A growing number of companies in the manufacturing, merchandising, and service sectors are giving greater weight to nonfinancial measures when promoting employees because they believe that nonfinancial measures—such as customer satisfaction, process improvements, and employee motivation—better assess a manager’s potential to succeed at senior levels of management. As this trend continues, operating managers will put more weight on nonfinancial factors when making decisions even though these factors carry smaller weights when determining their annual compensation. For the balanced scorecard to be effective, however, managers must view it as a fair way to assess and reward all important aspects of a manager’s performance and promotion prospects.