This long term study by two independent professors matches companies that use Balanced Scorecards against those that don’t. Across 42 matched pairs of companies those using a Balanced Scorecard increase their financial performance by approximately 28%, but it doesn’t happen right away.
It comes up once in a while. You might be swapping business stories with someone while waiting at the airport or it might be a serious discussion among your team of “How are we going to improve business?” What you hear are mixed reviews about the Balanced Scorecard. Some companies make it work and others don’t.
You have probably heard that more than 50% of the Fortune 1000 use a Balanced Scorecard with a satisfaction rate greater than 70%. Bain & Co. reports that more than 70% of their international clients use it with a high satisfaction rate. You may have also heard that the Harvard Business Review proclaimed the Balanced Scorecard as one of the most important business ideas of the last decade.
But, then there are those stories on the street. “Yea, we tried it for six months and it didn’t work.” “We couldn’t get buy-in so we quit.” “The minute we had a change of leadership we stopped it.”
So what’s the truth? Does the Balanced Scorecard work? Does it make a difference?
Proof of Significant Performance Increase
For the first time independent researchers have completed a long term study of Balanced Scorecard use across multiple industries. Unlike previous studies that were based on short term findings, this survey looked at results over three years. And the team used a clear definition of “Balanced Scorecard” to filter out those companies that had ‘home brewed” a Balanced Scorecard when in reality they had nothing more than a few ill-picked metrics and dashboards.
This wasn’t a quick, off-the-cuff survey. It was an in-depth survey undertaken by two experienced independent researchers, accounting professors, Gerald DeBusk, University of Tennessee, and Aaron Crabtree, University of Nebraska. They wanted the answer to the question, “Did firms that adopted the Balanced Scorecard outperform those that did not?”
Their survey started with more than 1,000 members of the Institute of Management Accountants who were at director and management levels. First they removed companies that weren’t using “well- constructed” Balanced Scorecards. From the 23% defined as regular users of a BSC, 88% reported operating performance improvement, and of those, two-thirds indicated they had a profit increase.
Industry Segment Doesn’t Matter
To learn even more DeBusk and Crabtree studied matched pairs of companies, one of the companies using Balanced Scorecard and the other not. Two of the most important matching criteria were industry segment and size. Companies crossed industry segments, manufacturing, financial, utilities, service, and retailers.
Using three stock market criteria they found that Balanced Scorecard companies had, on average, 28% greater return to stakeholders. That is a lot of performance improvement.
I’ve heard executives say that the Balanced Scorecard takes a lot of effort, but a 28% greater return is a big incentive to make that effort.
Will You Quit Before Results Kick In?
One of the significant findings from this research is one you would expect. These results didn’t happen right away. Some studies of the Balanced Scorecard have only examined results in the first year. That’s like looking for the change of direction in an ocean liner in the first 30 seconds after turning the wheel.
Companies applying a real Balanced Scorecard find they need to instill accountability, change their meeting management, improve operating processes, increase customer awareness, refine metrics, and grow a high-performance culture. That doesn’t happen right away.
It took 18 to 20 months for the Balanced Scorecard adopters to “take off.” From that point onward they continued to accelerate beyond companies that had no strategic guidance or strategic execution.
How to Build Your Balanced Scorecard the Right Way the First Time
DeBusk and Crabtree have shown that companies using the Balanced Scorecard earn better returns than equivalent non-Balanced Scorecard companies. But many companies start using a Balanced Scorecard fail. They fail because they haven’t created a Balanced Scorecard with a well-defined approach:
- Strategic Destination Statement
- Strategy Map
- Tactical Action Plan
- Implementation Plan
- Automated Dashboards
And they didn’t stick to it. Inertia, politics, hidden agendas, or fear often gets in the way of creating a culture of high performance changing a culture.
If you want to read the original paper to help convince your executive team you can purchase the full write-up at:
“The effects of adopting the Balanced Scorecard on shareholder returns”
Advances in Accounting, Volume 24, Issue 1, June 2008, Pages 8-15 Aaron D. Crabtree, Gerald K. DeBusk
A synopsis is at: