For more than 25 years, the “Balanced Scorecard” has become widely discussed and applied. However, the approach popularized by Kaplan and Norton, is fundamentally flawed and successful applications, like the Unicorn, are rare.

This article is part one of a two-part series on the Balanced Scorecard. Part one is a critique of the Balanced Scorecard, and part two will address how it can be fixed and made more useful.

THE BALANCED SCORECARD APPROACH

The basic notion of the Balanced Scorecard (“BSC”) is that organizational performance ought to be evaluated from more than simply a financial perspective. This core idea is sound and was an improvement over the traditional focus upon only financial performance. However, there are fundamental problems with the version of the BSC proposed by Kaplan and Norton.[1] Specifically there are three core issues with the existing version of the Balanced Scorecard:

Kaplan and Norton have not provided any empirical support for their proposed four “perspectives,”
There are problems with the “construct validity” of the four perspectives, “and
Successful applications of the approach are rare as the Unicorn.

Each problem will be discussed in turn.

The Fundamental “BSC” Flaw: No Empirical Validation of the Proposed Perspectives

The Balanced Scorecard version proposed by Kaplan and Norton is based upon the notion that “four perspectives” ought to be used to evaluate organizational performance: customer, internal business processes, learning and growth and financial. While this approach has intuitive appeal, the basic problem is that Kaplan and Norton have not provided any empirical support for these particular “perspectives.” We do not know whether these are the correct perspectives to be used as a basis for assessing organizational performance. This can have serious consequences for organizations. Managers are implicitly being encouraged to focus upon these “four factors,” when others might be more significant.

Meaningfulness of the Four Perspectives

In addition, this article also questions the meaningfulness or significance of the so-called “four perspectives” proposed by Kaplan and Norton, in terms of their “construct validity.” This is not just an academic quibble. The significance is that if the factors used in a strategic management system, such as a Balanced Scorecard, are invalid, managers can focus upon the wrong things and this, in turn, can potentially be damaging to companies, investors, and in turn, optimal societal resource allocation. And, as Marshall Meyer points out, the balance scorecard is often used in compensation decisions[2]. If it is incorrect, it can lead to unintended dysfunctional results.

There has been recognition of problems with the four perspectives employed in Kaplan and Norton’s version of the BSC for a very long time. For example, Marshall Meyer stated: “Although the scorecard was conceived as a means of communicating the firm’s strategy rather than as a template for performance measurement, today the scorecard dominates discussion of performance measurement….”[3] In addition, Turner pointed out that the perspective of “innovations and learning” in Nolan and Norton’s original version does not capture sufficient information about an organization’s human resources. He proposed using “Human Resource Accounting” to bring true “balance” to the Balanced Scorecard.[4]

“Look: The ‘BSC Emperor’ Has no Clothes”!

In addition, I have often met people whose organizations applied the Balanced Scorecard approach, and have never encountered anyone who reports a successful application. Instead what I hear is a version of the following comment made to me some time ago:

“Look, here’s the bottom line: We spent a great of money on the Balanced Scorecard. There is no way we want to embarrass ourselves by admitting publicly that it did not work and we wasted our money and time.”

Similarly, Marshall Meyer cited a detailed example of a failed application of the Balanced Scorecard in his insightful book, Rethinking Performance Measurement: Beyond the Balanced Scorecard,” published by Cambridge University Press.[5]

Objective

The intent of this paper is to help take steps to improving the Balanced Scorecard. First we shall “deconstruct” the BSC and show that it actually consists of two components: 1) an (implicit) model of organizational performance or success and 2) the “scorecard” template. Next, we shall critique the implicit success model in the version of the BSC proposed by Kaplan and Norton. Then, in a subsequent article, we shall propose an improved success model, which has been supported by empirical research. Our intent should not be viewed as totally invalidating the original concept of the Balanced Scorecard; but rather as the next logical generation or iteration of its development.

DECONSTRUCTING THE BALANCED SCORECARD

The Balanced Scorecard, as proposed by Kaplan and Norton, actually consists of two components: 1) the Scorecard template or format, which consists of the four columns labeled: objectives, measures, targets, and initiatives and 2) an implicit organizational effectiveness or “success model” (the four perspectives for balance).

The Scorecard Format

The format used for the Scorecard is itself useful, and does not depend upon the explicit or implicit success model used. We can easily use the same format or template with another set of performance or success factors.

The “Implicit” Success Model of The Balanced Scorecard

The second component of Kaplan and Norton’s version of the Balanced Scorecard is an implicit organizational success model. An “organizational success model” is, quite simply, any framework that, either explicitly or implicitly, purports to explain the key drivers or determinants of organizational success.

The initial notion behind the Balanced Scorecard was to broaden the perspective used to evaluate organizational performance by proposing a more comprehensive set of measures, or as stated by Kaplan and Norton (1992): “measures which drive financial performance.”[6] Four “perspectives” for measurements were proposed, as noted above. Since these are proposed as “drivers” of organizational performance, they are, by implication, an implicit model of the determinants of a successful organization.

It might be argued that the Balanced Scorecard is presented as a normative or prescriptive model; but since there is no empirical support for the so-called four perspectives presented by Nolan and Norton, managers are implicitly being encouraged to focus upon these four factors, when others might be more significant. The significance of this is that if the factors used in a strategic management system, such as a Balanced Scorecard, are invalid, managers can focus upon the wrong things and this, in turn, can potentially be damaging to companies.

The “OOPS!” Syndrome

As cited by Kaplan and Norton, many companies have applied the concept of the Balanced Scorecard. Accordingly, we have a situation similar to what occurred in the U.S. after the publication of the provocative (but ultimately invalid) book titled In Search Of Excellence by Peters and Waterman (1982)[7].

Readers of a certain age might recall that many companies throughout the world tried to apply concepts proposed by Peters and Waterman based upon their “research” at McKinsey & Co. Only two years after the publication of their book, Business Week (1984) published an issue with cover page showing a copy of their book and the title: “OOPS!” The cover also stated: “First published only two years ago, In Search of Excellence quickly became a best seller… The authors named America’s best run companies—and claimed to have found the reasons for their success. But some of those companies aren’t looking excellent any more”! The problem was the lack of any rigorous empirical testing of the framework proposed by Peters and Waterman. This is the same problem with Kaplan and Norton’s version of the Balanced Scorecard.

Lack of Empirical Validation of BSC

To be completely useful, the success model used ought to be sufficiently comprehensive to explain all of the major determinants (or factors) which account for organizational success. In addition, if we are to rely upon this scorecard there ought to be evidence that the implicit success model used is “valid,” in the empirical scientific sense of this term. Unfortunately, the four perspectives proposed by Kaplan and Norton, though conceptually a step in the right direction, do not satisfy these criteria. This four-factor or perspective model has not been empirically tested or validated.

Lack of Construct Validity

Another problem is that the four factors proposed by Kaplan and Norton seem to lack “construct validity.” Specifically, the four factors or perspectives proposed by Kaplan and Norton are vague and not well defined. First, it is not clear from a research standpoint what a “perspective” is. Is it a critical success factor? Is it an area of concern? Is it a “driver of financial performance”? Probably not--because the “financial perspective” is itself a perspective.

To examine the nature of the lack of construct validity underlying the BSC, consider that in their 1992 article Kaplan and Norton use the term “innovation and learning” as one of their four perspectives, while in their 1996 book they replace that term with “learning and growth” without any explanation.[8] Unfortunately for the validity and practical utility of the Kaplan/Norton model, learning and growth is significantly different from learning and innovation. Similarly, the earlier model uses the term “customer” while the later one uses “customer perspective;” the earlier article uses “internal business perspective” while the more recent version uses “internal business process.” Again, “internal business” perspective is significantly different from “internal business processes.” This suggests the casual use of constructs without the discipline of empirical testing and validation. This brings into question the validity of the “perspectives” (whatever they are) used to comprise the implicit organizational effectiveness model proposed by Kaplan and Norton.

FIXING THE BALANCED SCORECARD: INCREASING ITS VALIDITY AND USEFULNESS

As noted at the outset of this article, this article is part one of a two-part series on the Balanced Scorecard. Part one has been a critique of the current version of the Balanced Scorecard. As we have seen, the core idea underlying the Balanced Scorecard is sound and was an improvement over the traditional focus upon only financial performance. However, there are fundamental problems with the version of the BSC proposed by Kaplan and Norton. The key problems are that: 1) Kaplan and Norton have not provided any empirical support for their proposed four “perspectives,” 2) There are problems with the “construct validity” of the four perspectives,” and 3) successful applications of the approach are rare as the Unicorn.

In part two (forthcoming) I will address how the Balanced Scorecard can be fixed and made more useful.

[1] Kaplan, R.S. and Norton, D.P. (1996) “Using the balanced scorecard as a strategic management system, “Harvard Business Review, January-February, 75-85.

[2] Marshall Meyer, Rethinking Performance Measurement: Beyond the Balanced Scorecard,” Cambridge University Press, 2002, p. 42.

[3] Marshall Meyer, Rethinking Performance Measurement, p.42.

[4] Turner, G. (2000) Using human resource accounting to bring balance to the balanced scorecard. Journal of Human Resource Costing and Accounting, Vol. 5, No. 2, Autumn, 31-34.

[5] Marshall Meyer, Rethinking Performance Measurement: Beyond the Balanced Scorecard,” Cambridge University Press, 2002, pp. 86-103.

[6] Kaplan, R.S. and Norton, D.P (1992) “The balanced scorecard - measures that drive performance.” Harvard Business Review, January-February, 71-79.

[7] Peters, T.J. and Waterman, R.H. In Search Of Excellence. New York: Harper & Row, 1982.

[8]Kaplan, R.S. and Norton, D.P (1992) “The balanced scorecard - measures that drive performance.” Harvard Business Review, January-February, 71-79; Kaplan, R.S. and Norton, D.P. The Balanced Scorecard. Harvard Business School Press, Boston, Mass., 1996.