Introduction to the balanced scorecard

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CHAPTER 1

Introduction to the Balanced Scorecard
Roadmap for Chapter One Before you can begin developing a Balanced Scorecard for your organization you must have a solid foundation of Scorecard knowledge and understanding from which to build. This chapter will provide that base. We’ll begin by considering just why measurement is so importantto the modern public and nonprofit organization. We’ll then look at three factors that have led to the rising prominence of the Balanced Scorecard since its inception over a decade ago. You’ll learn that accounting and business scandals in the for-profit world have led to a demand for greater accountability and disclosure from all organizations. Next we’ll examine financial measurements and theirsignificant limitations. The final factor escalating the growth of the Balanced Scorecard is the inability of most organizations to effectively execute their strategies, so we’ll also review a number of barriers to strategy implementation. The Balanced Scorecard has emerged as a proven tool in meeting the many challenges faced by the modern organization. The remainder of the chapter introduces youto this dynamic tool. Specifically, we’ll examine the origins of the Scorecard, define it, look at the system from three different points of view, and consider just why the word “balance” is so important to the Balanced Scorecard.

WHY MEASUREMENT IS SO IMPORTANT Recently I read about an historical incident that I’d like to share with you. In the dense fog of a dark night in October 1707, GreatBritain lost nearly an entire fleet of ships. There was no pitched battle at sea; the admiral, Clowdisley Shovell, simply miscalculated his position in the Atlantic and his flagship smashed into the rocks of the Scilly Isles, a tail of islands off the southwest coast of England. The rest of the fleet, following blindly behind, went aground as well, piling onto the rocks, one after another. Fourwarships and 2,000 lives were lost. 3

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Introduction to the Balanced Scorecard

For such a proud nation of seafarers, this tragic loss was distinctly embarrassing. But to be fair to the memory of Clowdisley Shovell, it was not altogether surprising. Though the concept of latitude and longitude had been around since the first century B.C.,still in 1700 no one had devised an accurate way to measure longitude, meaning that nobody ever knew for sure how far east or west they had traveled. Professional seamen like Clowdisley Shovell had to estimate their progress either by guessing their average speed or by dropping a log over the side of the boat and timing how long it took to float from bow to stern. Forced to rely on such crudemeasurements, the admiral can be forgiven his massive misjudgment. What caused the disaster was not the admiral’s ignorance, but his inability to measure something that he already knew to be critically important—in this case longitude.1 We’ve come a long way since Clowdisley Shovell patrolled the seas for his native Great Britain. If sailing is your passion, today’s instrumentation ensures that anyfailure of navigation may be pinned squarely on your shoulders. But for those of you who spend your days leading public and nonprofit organizations, and not cruising the high seas, how far have you come in meeting the measurement challenge? Can you measure all those things you know to be critically important? Today’s constituents and donors are better informed than at any time in history. Thatknowledge leads to a demand of accountability on your part to show results from the financial and human resources with which you’ve been entrusted. To do that you must demonstrate tangible results, and those results are best captured in performance measures. Over 150 years ago the Irish mathematician and physicist Lord Kelvin reminded us: “When you can measure what you are speaking about, and express...