But, unlike Mobil, firms often hesitate to link the scorecard to compensation.
Kaplan: They should hesitate, because they have to be sure they have the right measures [on the scorecard]. They want to run with the measures for several months, even up to a year, before saying they have confidence in them. Second, they may want to be sure of the hardness of the data, particularly since some of the balanced scorecard measures are more subjective. Compensation is such a powerful lever that you have to be pretty confident that you have the right measures and have good data for the measures [before making the link].
What about data integrity? You mentioned that the nonfinancial measures are often eyed suspiciously because they can't be audited. At least with financial measures, we have the SEC and FASB standing guard.
Kaplan: That's an important issue. Many organizations are defining metric owners--a department or an individual in charge of collecting the data, who is typically somewhat independent of the line business units that are being measured. Ultimately, the scorecard should have some degree of auditability and [require] an expanded role for the internal audit function.
Some finance executives say they won't implement the complete scorecard because of the rigorousness of the theory. They'd rather adopt a KPI [key performance indicator] system because it's more flexible.
Norton: When you have KPIs, you can have 20 or so random measures. From that point on, you're still going to have to do the same amount of work. You're going to have to build an information system, have management staff sit down and review the data every month, and tie it to compensation. The only difference between a bad balanced scorecard and a good one--which would be one that describes your strategy--is the effort that has to go into the front end, with the executive group coming together to agree that this is the strategy and this is how they're going to measure it. If somebody doesn't want to do that, they're essentially viewing the scorecard as a measurement system as opposed to a system to manage change.
Kaplan: You've got us into an interesting area. What is the role of the CFO in this process? Speaking a little simplistically, I think we find two types of CFOs. The first, typically, likes the rigor and the discipline of the financial data. They feel uncomfortable with some of the more subjective data on a scorecard.
Others view the finance function as an indispensable part of defining how the organization creates value. The marketing people tell you where to sell. The product development people just launch new products and services. The operations people deliver products and services. It's really the finance function that helps bring this together and asks if it is creating value.
So it's potentially a very powerful role for that type of finance officer to play.
It sounds as if your view of finance executives has changed. In your first book, you wrote about their rigorous discipline, and you said that "these are not necessarily the traits required for managing a holistic, innovative, judgment-based, people-intensive management process" as in the balanced scorecard.
Kaplan (laughing): That's not fair, quoting from our first book.
Maybe not, but a finance executive reading that passage would say "ouch."
Norton: In the Old Economy, the finance function was the custodian of the system that set objectives, allocated resources, and then monitored how they were used. So now we move into the New Economy, and the system gets broader. You have continuous budgeting, [rolling forecasts,] things like that.
Now the question is, who is the custodian that runs the system, that manages the system, that updates the system over time? A new system is required, but I think the people [who] have the traditional finance background would logically inherit that responsibility.
In your new book, you note that CFO Jay Forbes of Nova Scotia Power proposed the balanced scorecard there. How often do CFOs lead the charge?
Norton: Maybe about 20 percent of the time. More often it comes from the strategic planning or human resources [departments]. Quality is another.
Kaplan: Because the CFO is sometimes not heavily involved, one aspect of the strategy-focused organization that has lagged is the integration with the budgeting system. It's just less developed than the objective setting or [the links to] incentive systems, human resource systems, or communication systems. I think, however, if we don't establish the link with budgeting, then the scorecard initiatives may wither.
Yet the balanced scorecard still starts with financial measures...
Kaplan: We start with the destination. What are we trying to achieve? We feel that what for-profit companies should be delivering is great financial performance.
Norton: If you look at the logic of the scorecard, the arrows all end up with financials, but they start with things like skills, technologies, and process design. Those are what you have to measure today to impact financial results tomorrow.
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