Why the Balanced Scorecard Fails

Would you buy a car that has a history of failing 60% of the time?

One of the top four international management consultant practices is reported to have tagged the Balanced Scorecard’s (BSC) overall failure rate at 70%. Other research suggests this high level of failure might be understated. Yet the BSC is still one of the most heavily promoted strategy control methodologies around: a product that has spawned a whole cottage industry built around it. Maybe that is why it survives in the market place.

Web posts on ‘Why the BSC fails’ often present a case for its adoption – not the alternate. The BSC garners considerable space on the web – and on closer inspection, many contradictions therein.

The heavily promoted mantra about the cause of failure is “…the lack of buy-in by management!”

This mantra just does not make sense!

The core of this argument is that a CEO (with the support of the Board of Directors) decides to adopt the BSC and allocates considerable capital towards its installation; only to then not support its implementation.

Not a sustainable argument!

So, why is it so frequently abandoned?

It is damn complex to implement and the metrics (Key Performance Indicators – KPIs) are proxies for the real thing. Why use proxies when the real deal is readily available?

An argument for writing better KPIs?

In addition, the BSC is considered by some to be based on a faulty premise and imprecise research data on which conclusions are based. Furthermore, the conclusions drawn by some proponents appear not to be supported by credible independent research. In fact, some researchers draw just the opposite conclusions about the effect of KPI drivers to those drawn by some BSC proponents.

The core of the BSC is a cause-effect relationship where associated KPIs are presented in a cause-effect chain. KPI cause-effect relationships are often cascaded down through the organization to the individual level. The BSC was never intended to be cascaded down to individual level; team level was the lowest level proposed, yet much of that written by proponents is about individual level KPIs.

Take net margin as an example of why a cause-effect relationship at the individual level cannot be made. Herein lays an example of why Cascading KPIs down to individual level does not make sense. No individual employee can ever be held responsible for substantive cause-effect impact upon Net Margin as it is both internally and externally driven; thus the cause-effect relationship at employee level, let alone team level, just does not exist!

This is one of the major weaknesses of the BSC and independent research has confirmed the fallacy of the claim that such a cause-effect relationship can exist – even more so in an environment where cause-effect relationships do not have a short time relationship.

Take for example a major retail chain with over 1 million employees across thousands of stores. One person within one store in such a large network of stores in a highly competitive market place and acting ethically can never impact ROE or Net Margin. The cause-effect variables to be managed are not within the individual’s, or even the manager’s, control. For example, a competitor store starts a price war or a supplier changes their pricing structure, or a new policy is imposed from a parent corporation. No individual employee can control for any of these outcomes as there are far too many links in the chain of responsibility; and they are not hierarchical links.

The BSC is a cumbersome strategy control instrument that chews up considerable IT infrastructure!

Imagine an organization of say 30,000 employees where KPIs are cascaded down to individual level. Given each employee is assigned 5 to 10 KPIs; then there would be a total of 150,000 to 300,000 KPIs in the organization.

Also contemplate the systems and process capacities and IT infrastructure required to manage and manipulate 150,000 to 300,000 KPIs. A national supermarket chain with 1m plus employees would need to manage around 6,000,000 KPIs. In one known organization of 30,000 employees a senior manager was assigned 25 KPIs. Let’s assume there are job families with teams of five people that are all assigned the same KPIs. The overall number of KPIs might be reduced to 30,000; but still a massive number of KPIs to manage. One might ask, if there are job families, then “..why cascade down to individual level in the first place?”

Cascading down to the individual level is a recipe for failure. It is too complex and cause-effect relationships are rarely (if ever) contiguous (i.e., adjoining).

If the BSC was a simple and coherent instrument, then why do many organizations (assuming under the guidance of their advisers) get tied up in knots in the implementation phase; and then after considerable expenditure and frustration abandon it?

The BSC is often abandoned due its unworkable complexity, its requirement for a cause-effect relationship that cannot possibly exist, as well as, high IT infrastructure costs – let alone the often misguided belief that the BSC will be cost-effective in such a large corporation.

In one study of over 190 corporations that had implemented the BSC: 75% improved profitability by only 2% and 64% achieved revenue growth of 2%. None achieved cost savings!

Finally, adoption of KPIs fix the strategic framework and restricts responsive emergent strategies, therefore, it restricts flexibility, adaptability and, thus, organizational learning.

As one former strong adherent stated:

“It all falls apart due to its damn complexity, and questionable capacity to deliver on its’ much hyped promise”.

Maybe an argument for a much less cumbersome and far more flexible methodology.


2 thoughts on “Why the Balanced Scorecard Fails

  • Clive, Thanks for the post. As for being provocative, the data to which I refer was sourced from highly credentialed global professional corporations’ research, as well as research from academics with credibility in the subject area. As for the most widely touted statistic available suggesting that 50% of large companies in the USA use the Balanced Scorecard, these stats were first published in the year 2000. The Bain Management Tools & Trends 2011 ranks the BSC as having the third lowest projected growth (at 16%) out of 25 management tools in use for the coming year. The same report states BSC use in North America is ranked 12th, in Europe 8th, in Asia 10th and 5th in Latin America. That same report further adds that ‘one-third’ of the established market organizations are using the BSC. These statistics suggest a fall from around 50% use to approx 33% over a decade. In regards to the BSC not being an ‘operational tool’, this is in contrast to what is widely stated in some of the research papers.
    Hope this helps.
    Kenneth

    Comment from: Strategic Outcomes

  • I have to admit that I have not seen the research that backs up the statements made in your article. The most widely touted statistic available suggests that 50% of large companies in the USA use the Balanced Scorecard (Gartner). A recent global study by Bain & Co found that the Balanced Scorecard is one of the top-ten most widely used management tools around the world. I suspect your article is using just a little poetic-license to be provocative 🙂

    The comments you make about numbers of KPIs are well made but I think you are missing the point a bit. The Balanced Scorecard primary function is not to be a vehicle to measure everything that can be measured. The clue is in the phrase ‘key’ performance measure. These are the measures that really matter to the business, not every operational measure. More than that though, the measures should only exist if they are contributing to a Strategic Objective. And here is the real point. A Balanced Scorecard is used to assist in setting a company strategy and associated strategic initiatives. It is not an operational tool and therefore does not need to be cascaded down to an individual level. Yes it should be used to ‘communicate’ a strategy and set of objectives and thus get everyone on the same page, but it should not be used to ‘measure’ everyone.

    In my experience (and this is anecdotal, no evidence other that years of experience), a Balanced Scorecard approach fails (and yes it does fail, sometimes) when the formula is stuck to at the cost of good business sense. All businesses are different and therefore need to be treated differently. The Balanced Scorecard provides a great set of guiding principles. These need to be applied based on the maturity and needs of the business and need to be applied flexibly so that when things change, the business can respond. If applied too rigidly things will fall apart quickly and the methodology will be the first thing that is blamed.

    Comment from: Clive Keyte

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