Case Study: The Case Of The (UN) Balanced Scorecard

CASE STUDY
The Case Of The (Un)Balanced Scorecard

By R Chandrasekhar

Illistration Synopsis: On balance, it proved to be a disaster. When a software start-up adopted the Balanced Scorecard to track its non-financial performance, it implemented this innovative concept on its own. Two years later, its developers were sure that the Scorecard was forcing them to conform while its managers were convinced that their TQM program had rendered it redundant. And Evergreen's CEO, Milind Pant, didn't care whether the problem lay in the technique or the implementation. Renaissance Consulting's Sanjiv Anand, Ashok Leyland's R. Seshasayee, KPMG's Atul Pradhan, and Godrej-GE Appliance's Vijay Crishna debate Evergreen's disillusionment with the Scorecard. A BT Case Study.

Nineteen hundred and ninety-six had been a good year for Evergreen Software (Evergreen), the Rs 125-crore financial services software-developer. Still, Milind Pant, Evergreen's 36-year-old founder-CEO, was not a happy man as he pulled into the parking-lot in front of his office in central Mumbai one April morning. He was returning from a meeting with Assessors India (Assessors), one of the country's 3 credit rating agencies.

Just over 5 months ago, Pant had decided that a $40-million (Rs 16.80 crore) Euroloan was the best way to finance Evergreen's expansion plans. And a high credit-rating would help. The problem? While Assessors had factored in the fundamentals, it had ignored Evergreen's superb performance on non-financial parameters--specifically, its 6 per cent employee-turnover rate, and its 80 per cent customer-retention ratio--resulting in a modest rating of B+, which meant good, not excellent.

However, Assessors' CEO, Sunil Pande, 41, had thrown up his hands in despair: "I do not have any objective way of measuring Evergreen's performance in the areas you have highlighted. Why, even internally, you don't have such systems."

That explained Pant's pique. Pande was right. They didn't.

Evergreen's Euroloan came through without much difficulty in July, 1996. The effective rate of interest worked out to 8 per cent--2.25 per cent over the LIBOR (London Inter-Bank Offered Rate). But Pant neither forgot--nor let any of his managers forget--that a better credit-rating may have shaved a point off the premium. And even a rate of interest of 7.90 per cent would have reduced the company's interest-burden by $40,000 (Rs 16.80 lakh) a year.

Tired of his criticism, his A-team renewed its quest for a yardstick that could help them measure Evergreen's non-financial performance, which would also be invaluable from the strategic perspective. Then, someone suggested the Balanced Scorecard. While Pant was sceptical, that did not stop him from calling up William Robertson, a 31-year-old consultant who had earlier worked with the company, but had returned to Boston for a year-long teaching assignment at a B-School.

"Bill, someone told me that I could use the Balanced Scorecard to measure our performance on non-financial parameters. Do you know anything about it?" he asked.

Robertson, who had just woken up, promised to e-mail Pant a short note on the Scorecard. Next morning, Pant had his answer.

"Dear Milind," began Robertson's missive, "You can't go wrong in using the Scorecard. It is particularly relevant in a knowledge-intensive business like Evergreen's, where employee-retention and customer-satisfaction are critical. Most companies that adopt OE techniques--such as TQM, BPR, and TPM--find that, often, the results do not match the promises. Several factors contribute to this: the initiatives may be fragmented. Or they may not be linked to the company's strategy. Or they may not be focused on specific outcomes. I have my own theory: you can't use yesterday's performance tools to navigate your way to tomorrow. Financial measures provide no more than a historical snapshot of performance. But business is more complex than that. You need to bring a wider set of measures together so that managers use indicators that measure their performance against the critical success-factors that drive their business. That is why you need the Scorecard."

"The Scorecard combines several performance-evaluation measures: the customer perspective; an internal perspective, which assesses the quality of people and processes; a financial perspective, which looks at the way shareholders view performance; and a future perspective, which measures how effectively a company learns, adapts, and grows. All 4 are combined to provide a balanced, integrated view. That, in a nutshell, is the Scorecard for you. However much I would like to work with Evergreen on this, I do not plan to return to India for at least the next 2 years. I think you should find a consultant who has had some experience with the Scorecard to help you."

The rest of the year passed by in a blur. Evergreen's senior managers read everything there was to read on the Scorecard. They discovered that it was a fairly simple technique at the bottom of it all. In effect, the Scorecard provided answers to 4 basic questions:

How do customers see us (the customer perspective)?

What must we excel at (the internal perspective)?

Can we continue to improve and create value (the learning and innovation perspective)?

How do shareholders see us (the financial perspective)?

Evergreen's senior management team was quick to notice the technique's dual benefits. First, it brought together, in a unified report, the disparate elements of the company's competitive efforts: reducing lead-times, meeting customer needs, improving quality, reducing time-to-market, and emphasising teamwork. Second, it guarded against sub-optimisation by forcing them to consider all the crucial operational measures together.

Around the same time, Pant met several consultants to identify someone who could help Evergreen deploy the Scorecard. None met his criteria: some were merely cost accountants masquerading as Scorecard experts; others wanted to reengineer the company before starting work on the Scorecard; and yet others wanted to rework the company's strategy. Finally, Pant decided to go it alone. A few of his senior managers had attended workshops on the Scorecard, and he believed that Evergreen had acquired the in-house expertise to implement such a project.

Pant addressed all his people before launching the initiative. At each meeting, he would say the same thing: "We already have a vision statement: To Be The Best Infotech Solutions Provider In The Global Software Industry And To Consistently Achieve Excellence In Everything We Do. As an organisation, we are also aware that the only way to realise our vision is to build long-term relationships with our employees and customers. Each of us knows what the key success factors in our business are: people, speed of response, and cost-effective delivery. I am aware that we are half-way through the implementation of a TQM program. We have also been examining the possibility of putting a number to our brand-equity, and our intellectual capital. But these can go hand-in-hand with the Scorecard project. Let's do it."

Evergreen faced its first problem in March, 1997, when some of its software-developers--different, as that breed normally is--felt that the company was using the Scorecard to get them to subsume the individual's objectives to those of the organisation's. As Adite Khanna, a 26-year-old programmer, put it: "There is some dichotomy between the stated objective of the Scorecard to build an open organisation, and the culture of acquiescence that it indirectly encourages."

Pant presumed these were teething problems. Every employee in future would, he decided, be given the run-down on the Scorecard by either himself, or one of his senior managers. And to ensure that his top team's resolve to implement the Scorecard did not waver, Pant factored it into the performance appraisals of all his managers. For almost a year after that, Evergreen's initiative did not encounter any major hitches. The training-sessions seemed to have helped, and the Scorecard evaluation-sheet that Pant received every month indicated 2 benefits: employees were not just aware of the company's strategy, they knew the roles they, as individuals, and they and their peers, as departments, had to play in implementing it.

Then, in February, 1998, everything went wrong. The trouble began at Evergreen's annual Strategy Development Conference. Rajesh Vyas, 29, the strategic planning consultant Pant had hired, made a presentation in which he highlighted 2 factors that could affect Evergreen's competitiveness: "Historically, 50 per cent of our revenue comes from overseas projects. Our competitiveness in this segment stemmed from our low wage-costs. While the absolute numbers are still in our favour, salaries in the software sector have been jumping by 40 per cent a year as opposed to between 10 and 20 per cent in the US. Secondly, 5 large clients--3 overseas and 2 domestic--account for 60 per cent of our revenues. We should find a way to minimise this concentration without diluting our focus on infotech-intensive organisations."

Even as Pant was trying to understand the Scorecard's inability to shed any light on these aspects of Evergreen's competitiveness, his executive assistant, Sanjay Salwan, 28, who was responsible for ensuring that the right numbers went into the Scorecard, came up with another problem. "You know, Milind," he started as he placed the month's evaluation-sheet in front of Pant, "there seems to be a fundamental flaw in the technique. I think what gets measured is, often, what is easier to measure--not what should actually be measured. Look at how we measure our marketshare. Evergreen has a presence in several distinct segments in the software market. Ideally, we need to monitor our share in each but, since such micro-level data is not available, we measure our overall marketshare."

"I think what you are saying does make sense. But my approach was a little different. Just as you prepare a Scorecard evaluation-sheet every month, Vijay Mehta, down at quality, prepares one on our TQM initiative. As you must be aware, we use the European Foundation of Quality Management (EFQM) Model to assess our progress on that front. Here, take a look at this month's evaluation-sheet," replied Pant, and waited for Salwan to go through the sheet.

"As you can see, there is some similarity between this and the Scorecard. Vijay, for one, believes that we do not need the Scorecard at all when we have a TQM model that measures our performance on several non-financial parameters too."

"By that logic, we should also look at the Flamholtz Model that we used to put a number to our human capital," ruled Salwan.

"I was coming to that. Last year, for instance, we valued our people at Rs 120 crore. And there's more. We also have the annual Employee Satisfaction Survey. I believe what the Scorecard has actually done is contributed to the information-overload. We are generating far too much data. Sometimes, I feel this Scorecard thing has not worked for us. It has not helped us improve strategy-generation; we already have techniques that measure some of the parameters it purports to measure; and our people are neither happy with the process nor with us. It has created its own bureaucracy. I think I should call it quits with the Scorecard," concluded Pant.

Why is Milind Pant facing so many problems in implementing the Scorecard? What are the problems companies typically encounter while employing the technique? What kind of training do employees need to go through to be ready for the Scorecard? Is Evergreen facing an information-overload because of the sheer number of initiatives it has launched? Is there a conflict between the objectives of a TQM model--like the EFQM Model Evergreen uses--and those of the Scorecard? Does the genesis of these problems lie in Evergreen's reluctance to seek professional assistance to implement the Scorecard?