Pitfalls to avoid in implementing a balanced scorecard include the following:
MANAGERS SHOULD NOT ASSUME THE CAUSE-AND-EFFECT LINKAGES ARE PRECISE. The linkages are merely hypotheses. Over time, a company must gather evidence of the strength and timing of the linkages between the different measures, and use this feedback to inform future strategies and implementation plans. With experience, organizations should alter their scorecards to include those nonfinancial strategic objectives and measures that are the best leading indicators (the causes) of financial performance (a lagging indicator or the effect). Understanding that the scorecard will evolve over time helps managers avoid wasting time and money trying to design the “perfect” scorecard at the outset. Moreover, as the business environment and strategy change over time, the measures in the scorecard also need to be updated. For example, when the Novartis division Sandoz, a manufacturer of generic pharmaceutical chemicals, shifted its strategy to also produce biologic medicines that required significant investment in new technologies and patient trials, its balanced scorecard was updated from only emphasizing productivity and cost efficiency to including measures of innovation.
MANAGERS SHOULD NOT SEEK IMPROVEMENTS ACROSS ALL OF THE MEASURES ALL OF THE TIME. Managers should strive for quality and on-time performance but not beyond the point at which further improvement in these objectives is so costly that it is inconsistent with long-run profit maximization. Cost–benefit considerations should always be central when designing a balanced scorecard.
MANAGERS SHOULD NOT USE ONLY OBJECTIVE MEASURES IN THE BALANCED SCORECARD. Chipset’s balanced scorecard includes both objective measures (such as operating income from cost leadership, market share, and manufacturing yield) and subjective measures (such as customer- and employee-satisfaction ratings). When using subjective measures, however, managers must be careful that the benefits of this potentially rich information are not lost by using measures that are inaccurate or that can be easily manipulated.
DESPITE CHALLENGES OF MEASUREMENT, TOP MANAGEMENT SHOULD NOT IGNORE NONFINANCIAL MEASURES WHEN EVALUATING MANAGERS AND OTHER EMPLOYEES. Managers tend to focus on the measures that are used to reward their performance. Excluding nonfinancial measures (such as customer satisfaction or product quality) when evaluating the performance of managers will reduce their significance and importance to managers.