2001 American Accounting Association

Accounting Horizons
Vol. 15 No. 2
June 2001
pp. 147160

COMMENTARY

Transforming the Balanced Scorecard

from Performance Measurement to
Strategic Management: Part II
Robert S. Kaplan and David P. Norton
Robert S. Kaplan is a Professor at Harvard University and David P.
Norton is founder and president of the Balanced Scorecard Collabo-
rative in Lincoln, Massachusetts.

In a previous paper (Kaplan and Norton 2001b), we described the role for strategy
maps and Balanced Scorecards to develop performance objectives and measures linked
to strategy. With this paper, we show how organizations use their scorecards to align
key management processes and systems to the strategy. We also discuss the relation-
ship of the Balanced Scorecard (BSC) to other financial and cost measurement initia-
tives, such as shareholder value metrics and activity-based costing, and quality pro-
grams. We conclude with suggestions about opportunities for additional research on
measurement and management systems.

THE FIVE PRINCIPLES OF A STRATEGY-FOCUSED ORGANIZATION

When asked to describe how the Balanced Scorecard helped them achieve break-
through performance, executives of adopting organizations continually referred to two
words: alignment and focus (Kaplan and Norton 2001a, Chapter 1). Although each or-
ganization achieved strategic alignment and focus in different ways, at different paces
and in different sequences, each eventually used a common set of five principles, which
we refer to as the Principles of a Strategy-Focused Organization, portrayed in Figure 1.

Principle #1: Translate the Strategy to Operational Terms

Organizations translate their strategy into the logical architecture of a strategy
map and Balanced Scorecard to specify in detail the critical elements for their growth
strategies (Kaplan and Norton 2001b). These create a common and understandable
point of reference for all organizational units and employees.

Principle #2: Align the Organization to the Strategy

Organizations consist of numerous sectors, business units, and specialized depart-
ments, each with its own operations and often its own strategy. Functional departments,
such as finance, manufacturing, marketing, sales, engineering, and purchasing, have
 148

FIGURE 1
The Principles of a Strategy-Focused Organization

Source: Kaplan and Norton (2001a)

Accounting Horizons/June 2001
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 149

their own bodies of knowledge, language, and culture. Functional silos arise and be-
come a major barrier to strategy implementation since most organizations have great
difficulty communicating and coordinating across these specialty functions. For organi-
zational performance to be more than the sum of its parts, individual strategies must be
linked and integrated. The corporate role defines the linkages expected to create syn-
ergy and ensures that the linkages actually occur.
Figure 2 shows the linkages at the Mobil North American Marketing and Refining
division (NAM&R). The high-level strategic themes in #1 guide the development of the
Balanced Scorecards in the business units in #2, which are either geographic regions or
product lines, such as lubricants. Each unit formulates a strategy appropriate for its
target market in light of the specific circumstances it facescompetitors, market op-
portunities, and critical processesbut that is consistent with the themes and priori-
ties of NAM&R. The measures at the individual business-unit levels do not have to add
to a divisional measure, unlike financial measures that aggregate easily from sub-units
to departments to higher organizational levels. The business-unit managers choose lo-
cal measures that influence but are not necessarily identical to the divisional scorecard
measures.
Beyond aligning the business units, strategy-focused organizations must align their
staff functions and shared service units, such as human resources, information technol-
ogy, purchasing, environmental, and finance as in #3 of Figure 2. Often this alignment
is accomplished with service agreements between each functional department and the
business units. Management and cost accounting textbooks describe how to assign the
costs of support departments to production departments and selling units. The scorecard
approach is much more comprehensive. In addition to contracting on price or cost, the
staff functions and the line business units agree to the menu of services to be provided,
including their functionality, quality level, response time, and cost. This service agree-
ment becomes the basis of the Balanced Scorecard constructed by the functional de-
partment. The departments customers are the internal business units, the value propo-
sition is defined by the negotiated service agreement, and the financial objectives are
derived from the negotiated budget for the department. Next, the department identi-
fies the internal process and learning and growth objectives that drive its customer and
financial objectives.
When this process is complete, all the organizational unitsline business units and
staff functionshave well-defined strategies that are articulated and measured by Bal-
anced Scorecards and strategy maps. Because the local strategies are integrated, they
reinforce each other. This alignment allows corporate-level synergies to emerge in which
the whole exceeds the sum of the individual parts.
Linkages can also be established across corporate boundaries, as in #4 of Exhibit 2.
Several companies constructed Balanced Scorecards to define their relationships with
key suppliers, customers, outsourcing vendors, and joint ventures. Companies use such
scorecards with external parties to be explicit about (1) the objectives of the relation-
ship, and (2) how to measure the contribution and performance of each party to the
relationship in ways other than just price or cost. Sometimes, particularly in govern-
mental settings, scorecards are defined for high-level themes, such as salmon recovery
in Washington State and economic development in the City of Charlotte, that encom-
pass multiple departments and government agencies. No one department or agency
has complete jurisdiction or ability to influence the desired outcomes. The scorecard for
the high-level theme provides the mechanism that engages managers from multiple
 150

FIGURE 2
Aligning the Organization to Its Strategy

Source: Kaplan and Norton (2001a)

Accounting Horizons/June 2001
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 151

departments and agencies to discuss how they can contribute to achieving high-level
strategic objectives.

Principle #3: Make Strategy Everyones Everyday Job

The CEOs and senior leadership teams of adopting organizations understood that
they could not implement the new strategy by themselves. They wanted contributions
actions and ideasfrom everyone in the organization. The third principle of strategy-
focused organizations requires that all employees understand the strategy and conduct
their day-to-day business in ways that contribute to the success of that strategy. This is
not top-down direction. This is top-down communication. Senior managers understand
that individuals far from corporate and regional headquarters can create considerable
value by finding new and improved ways of doing business.
Executives start this process by using the Balanced Scorecard to communicate and
educate the organization about the new strategy. Some observers are skeptical about
communicating strategy to the entire organization, feeling that valuable information
would be leaked to competitors. Mobils Brian Bakers response was:

Knowing our strategy will do them little good unless they can execute it. On the other
hand, we have no chance of executing our strategy unless our people know it. Its a
chance well have to take.

Companies can educate the employees about surprisingly sophisticated business

concepts. To understand the scorecard, employees learn about customer segmentation,
variable contribution margin, and database marketing. Instead of assuming that the
workforce is incapable of understanding these ideas, managers make concerted efforts
to educate employees at all levels of the organization about key strategic components.
Peter Drucker (1954) introduced management-by-objectives (MBO) nearly 50 years
ago. But Druckers excellent concept was implemented poorly in practice, leading to
MBO in most organizations focusing on a myriad of local measures and initiatives not
linked to high-level organizational objectives or coordinated with each other. The Bal-
anced Scorecard enables personal objective setting to be integrated across the organiza-
tion and linked to high-level strategic objectives.
Companies communicate their strategy and scorecard holistically. Instead of cas-
cading objectives through the chain of command, as is normally done, they communi-
cate the complete strategy down to individual employees. Individuals and departments
at lower levels are challenged to develop their own objectives in light of the broader
priorities; in some cases, personal scorecards are used to set personal objectives. Many
pleasant surprises result from this process as individuals find new ways to do their jobs
and identify areas outside their normal responsibilities to which they can contribute.
Finally, most organizations link incentive compensation to the Balanced Scorecard,
typically after managing with the scorecard for a year. The executives must be confi-
dent that they are using sensible measures, have valid and reliable data collection pro-
cesses to support the measures, and have measures not easily manipulated. Once they
become confident about their measures and data, they turn the powerful compensation
lever on. Brian Baker at Mobil declared:

People got that scorecard out and did the calculations to see how much money they
were going to get. We could not have gotten the same focus on the scorecard if we
didnt have the link to pay.
152 Accounting Horizons/June 2001

Gerry Isom, CEO of Cigna Property and Casualty agreed:

It would be hard to get people to accept a totally different way of measurement if you
dont reinforce that change through incentive compensation.

A study of 214 companies reports that 88 percent of responding companies consid-

ered the use of Balanced Scorecard measures linked to reward systems to be effective
(Mercer & Co. 1999).
Incentive systems based on the Balanced Scorecard vary widely. Some companies,
such as Mobil, deploy a team-based incentive system, using business-unit and division
scorecards as the basis for rewards. Others use a combination of business-unit, com-
pany, and individual performance rewards. Compensation can be based on up to 25
strategic measures. Instead of promoting confusion, as many fear, the scorecard com-
pensation systems heighten the employees interest in all components of the strategy
and further their demand for knowledge and information about scorecard measures.
Strategy becomes everyones everyday job because employees now understand the strat-
egy and are motivated to make it succeed.

Principle #4: Make Strategy A Continual Process

Most organizations build their management processes around the budget and oper-
ating plan. The monthly management meeting reviews performance vs. plan, discusses
variances from past performance, and requests action plans for dealing with short-term
variances. There is nothing wrong with this, per se. Tactical management is necessary.
But in most organizations thats all there is. Besides the annual strategic-planning
meeting, no meeting occurs where managers discuss strategy. We surveyed partici-
pants at conferences and learned that 85 percent of their management teams spend
less than one hour per month discussing strategy.
The adopting BSC companies introduce a new double-loop process to manage
strategy. The process integrates the management of tactics with the management of
strategy, using three important processes, as depicted in Figure 3.
First, organizations link strategy to the budgeting process. They use the Balanced
Scorecard as a screen to evaluate potential investments and initiatives. At Chemical
Bank, where more than 70 different requests for funding were submitted, executives
found that over 50 percent of the proposed initiatives had no impact on any scorecard
measure. These were discarded as nonstrategic. They also found that despite having
more than three times as many proposed initiatives as scorecard measures, about 20
percent of the measures on the scorecard had no initiatives associated with improving
them. A new process for managing strategic initiatives emerged that included authoriz-
ing funds for strategic initiatives within the annual budget process.
Companies usually have an operational budget that authorizes spending for pro-
ducing and delivering existing products and services, and marketing and selling them
to existing customers. They now introduce a strategy budget that enables them to de-
velop entirely new capabilities, reach new customers and markets, and make radical
improvements in existing processes and capabilities. This distinction is essential. Just
as the Balanced Scorecard attempts to protect long-term objectives from short-term
suboptimization, the budgeting process must protect the long-term initiatives from the
pressures to deliver short-term financial performance.
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 153

Making Strategy a Continual Process

FIGURE 3

Source: Kaplan and Norton (2001a)

154 Accounting Horizons/June 2001

The second step to make strategy a continual process introduces a simple manage-
ment meeting to review strategy. As obvious as this step sounds, such meetings did not
exist in the past. Now, management meetings are scheduled on a monthly or quarterly
basis to discuss the Balanced Scorecard so that a broad spectrum of managers comes
together to discuss the strategy. A new kind of energy is created. People use terms like
fun and exciting to describe the meetings. One senior executive reported that the
meetings became so popular, there was standing room only and he could have sold
tickets to them.
Information feedback systems change to support the new management meetings.
Initially, these systems are designed for the needs of the executive team. But organiza-
tions can go further by creating open reporting in which performance results are made
available to everyone in the organization. Building upon the principle that strategy is
everyones job, they empower everyone by giving them the knowledge needed to do
their jobs. At Cigna Property & Casualty, a first-line underwriter sees performance
reports before a direct-line executive if she happens to be monitoring the feedback sys-
tem. This creates a set of cultural issues that revolutionize traditional, hierarchical
approaches to information and power.
Finally, a process for learning and adapting the strategy evolves. The initial Bal-
anced Scorecard represents hypotheses about the strategy; at time of formulation it is
the best estimate of the actions expected to create long-term financial success. The
scorecard design process makes the cause-and-effect linkages in the strategic hypoth-
eses explicit. As the scorecard is put into action and feedback systems begin their re-
porting on actual results, an organization can test the hypotheses of its strategy. Some,
like Brown & Root and Sears, did the testing formally, using statistical correlations
between measures on the scorecard to determine whether, for example, employee em-
powerment programs were increasing customer satisfaction and improved processes.
Others, like Chemical Bank, tested the hypotheses more qualitatively at meetings where
managers validated and refined the programs being used to drive service quality and
customer retention.
Still others use the meetings to search for new strategic opportunities that were not
currently on their scorecard (see Mintzberg [1987] and Hamel [2000] for discussions of
emergent strategy). Ideas and learning emerge continually from within the organiza-
tion. Rather than waiting for next years budget cycle, the priorities and the scorecards
are updated immediately. Much like a navigator guiding a vessel on a long-term jour-
ney, constantly sensing the shifting winds and currents and constantly adapting the
course, the executives of the successful companies use the ideas and learning generated
by their organization to fine-tune their strategies. Instead of being an annual event,
strategy formulation, testing, and revision became a continual process.
Using the Balanced Scorecard in this manner matches what Bob Simons (1995,
Chapter 5; 2000, Chapter 10) describes as an interactive control system, characterized
by four defining characteristics:
Information in the control system provides an important and recurring agenda
for senior management.
The system demands frequent and regular attention from operating managers
at all levels of the organization.
Data generated by the system are interpreted and discussed in face-to-face meet-
ings of superiors, subordinates, and peers.
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 155

The system is a catalyst for the continual challenge and debate of underlying
data, assumptions, and action plans.
Simons research reveals how managers choose one system, such as the budget system,
the revenue reporting system, or the project management system, and make it their
interactive system. After that research was conducted, the Balanced Scorecard emerged
to provide a general template for an organizations interactive system. Rather than
having to choose one from the many existing systems, executives can design their own
interactive system to focus intensely on strategy and its implementation. And the pro-
cess of constructing their customized interactive system provides the additional benefit
of team building and gaining coherence and commitment within the senior manage-
ment team for the strategy. This leads naturally to the discussion of the fifth principle
to create a strategy-focused organization.

Principle #5: Mobilize Leadership for Change

The first four principles focus on the Balanced Scorecard tool, framework, and the
processes to support it. To become truly strategy-focused, however, requires more than
processes and tools. Ownership and active involvement of the executive team is the
single most important condition for success. Strategy requires change from virtually
every part of the organization. Strategy requires teamwork to coordinate these changes.
Strategy implementation also requires continual focus on the change initiatives and on
the performance against targeted outcomes. If those at the top are not energetic leaders
of the process, change does not occur, strategy is not implemented, and the opportunity
for breakthrough performance is lost.
A Balanced Scorecard program starts with the recognition that it is not a metrics
project; its a change project. Initially the focus is on mobilization and creating mo-
mentum, to get the process launched. Once mobilized, the focus shifts to governance
to install the new performance model. Finally, and gradually over time, a new man-
agement system evolves, a strategic management system that institutionalizes the
new cultural values and processes into a new system for managing. Convergence to
the new management system can take two to three years.
In the mobilization phase, the leaders must make the organization understand why
change is needed; the organization must be unfrozen. Kotter (1996) describes how transfor-
mational change begins at the top and with three discrete actions by the leaders: (1) estab-
lish a sense of urgency; (2) create the guiding coalition; and (3) develop a vision and a
strategy. The leaders of successful Balanced Scorecard organizations clearly followed this
mode. Several of the adopting companies were experiencing difficult times. The obvious
threat of failure and loss of jobs was a motivator that created receptivity for change. But the
role for the Balanced Scorecard to drive change and breakthrough performance is not lim-
ited to distressed or failing companies. Often, executives at companies currently doing well
create stretch targets to ensure that the organization does not become complacent. They
use the Balanced Scorecard to communicate a vision for dramatically better performance
than the present. Executive leadership makes the need for change obvious to all.
Once the change process is launched, executives establish a governance process to
guide the transition. This process defines, demonstrates, and reinforces the new cul-
tural values to the organization. Breaking with traditional power-based structures is
important. The creation of strategy teams, town hall meetings, and open communica-
tions are all components of the new management approach.
156 Accounting Horizons/June 2001

Embedding the new strategy and culture into a new management system, however,
creates a risk that the organization fails to adapt to future shifts in opportunities and
threats. Good executives recognize that strategies must continually evolve to reflect
changes in the competitive landscape. The art of the leader is to delicately balance the
tension between stability and change.
This concludes the summary of the five principles to become strategy-focused. We
now turn to the relationship of the BSC to other improvement initiatives and to prom-
ising areas of future research.

RELATIONSHIP OF BSC TO OTHER ORGANIZATIONAL

IMPROVEMENT INITIATIVES
The BSC emerged in the 1990s just as two other approachesactivity-based cost-
ing and shareholder value managementwere being advocated as measurement sys-
tems to help managers improve organizational performance. The three approaches do
not compete with each other; in fact they are highly compatible and while each can be
implemented independently of the others, organizations will get the greatest benefit
from integrating all three.

Shareholder Value Management

Shareholder value metrics, such as residual income, economic value-added, and
shareholder value-added (Myers 1996, 1997), address two defects in traditional finan-
cial performance measurement: the overinvestment problem when only net income or
earnings is used as the aggregate performance measure, and the underinvestment prob-
lem when a ratiosuch as return-on-investment or return-on-equityis used. We en-
courage managers who operate under a shareholder value discipline to use that metric
as their overarching measure in the financial perspective. Within the financial perspec-
tive of the BSC, the shareholder value metric is decomposed into the subobjectives of
cost reduction, improved asset productivity, and revenue growth (see strategy map tem-
plate, Kaplan and Norton 2001b, Figure 2). Customer objectives define the strategy for
revenue growth.
Managers operating only with shareholder value metrics, and without the more
comprehensive BSC measurement framework, often take a low-risk and short-term
pathreduce costs and dispose of underutilized assetsto achieve their financial im-
provements. Growing revenues typically takes longer, involves more risk, and requires
more near-term spending to develop new products, services, and markets, enhance cus-
tomer relationships, improve service, and increase employee capabilities. Nothing in
shareholder value management is incompatible with revenue growth. But the financial
metrics in a shareholder value approach cannot serve as a vehicle for articulating a
revenue growth strategy and the complementary processes for achieving it. The BSC
complements shareholder value management by defining the drivers of revenue growth
explicit objectives and measures for targeted customers, the differentiating customer
value proposition, the internal business processes for innovation and enhanced cus-
tomer relationships, and the needed infrastructure investments in people, systems, and
organizational alignment. It also helps executives manage the trade-offs between short-
term productivity improvements and long-term sustainable revenue growth.

Activity-Based Costing
Activity-based costing (ABC) was developed to correct another defect in financial
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 157

systemsthe inability of traditional costing systems to identify the drivers of indirect

and support costs (Kaplan and Cooper 1998). ABC operates by relating organizational
spending to activities and processes that support the design, production, marketing,
and delivery of products and services to customers.

Operational Linkage
The first linkage between ABC and the BSC occurs in the operational measures of
the BSCs internal process perspective. Three parameterscost, quality, and time
usually define the operating performance of any process. Quality and time are rela-
tively easy to measure since they are based on physical measurements. Cost, however,
is an analytic concept that cannot be measured by a stopwatch or a laser-gauging in-
strument. Only with an ABC model can organizational expenses be accurately traced to
processes of product development, marketing and sales, manufacturing, distribution,
and service delivery.

Customer Profitability Linkage

A second linkage occurs when an ABC model is used to measure the profitability of
individual customers (Kaplan and Cooper 1998, Chapter 10). The BSC customer per-
spective typically includes customer outcome measures such as acquisition, satisfac-
tion, retention, account share, and market share. But companies also need to measure
whether their loyal, satisfied customers are profitable. Balancing measures such as
customer profitability or percentage of unprofitable customers help managers ensure
they are not improving their customer measures at the expense of high-level financial
profitability measures.

Budgeting Linkage
A third linkage arises when the ABC model is used for activity-based budgeting:
combining information on the forecasted volume and mix of products and services with
anticipated activity and process efficiencies to construct a bottom-up budget for forth-
coming periods (Kaplan and Cooper 1998, Chapter 15). With the BSC providing the
management process for defining the strategic budget, and activity-based budgeting
used to develop the operational budget (see discussion of these two budgets in Principle
#4 above, Making Strategy a Continual Process), managers have powerful analytic
tools for their budgeting processes.
ABC can also be combined with shareholder value management by applying ABC
principles to assign assets to activities and then to cost objects. This enables capital
costs and residual income to be calculated at the individual product and customer level.

Getting Started
Thus, shareholder value metrics, ABC, and the BSC play complementary roles.
People often ask, My organization has limited capacity for these major change initia-
tives. I cant do all three at the same time. Which should I do first?

1. If the biggest problems facing an organization are large, growing indirect and
support expenses, and inefficient processes, then implement ABC first. It gives
managers a deep understanding of their cost structure, helps them to identify
the most costly and nonvalue-added processes, and reveals how much of the growth
158 Accounting Horizons/June 2001

in support resources can be reversed by taking appropriate actions with ineffi-

cient processes, complex products, or demanding customers.
2. If the organization has a low return on investment, a weak financial structure, a
low sales-to-asset ratio, and high levels of working capital, then start with share-
holder value management. The shareholder value approach highlights the ineffi-
cient use of capital and provides explicit incentives for managers to divest under-
performing assets and increase the utilization of the remaining assets.
3. If the organization wishes to implement a major change in its strategy, or has
just been restructured from a centralized, functional organization to a decentral-
ized, customer-focused one, then start with the BSC. No other tool facilitates
major changes in strategy better or faster.

Organizations ultimately benefit from all three measurement approaches: the fi-
nancial and investment discipline that comes from adopting a shareholder value ap-
proach; the deep understanding of cost structure and cost drivers that activity-based
costing provides; and the integrated framework for managing strategy, including value
and revenue drivers, that the Balanced Scorecard delivers.

Total Quality Management

Many companies also engage in quality initiatives. The causal linkages in a BSC
strategy map enhance quality programs by articulating the two ways that process im-
provements can link to strategic outcomes. First, quality improvements in the internal
perspective should improve one or more outcome measures in the customer perspective;
second, quality improvements can lead to cost reduction, an outcome in the financial
perspective. The BSC enables managers to describe how they expect to translate quality
improvements into higher revenues, fewer assets, less people, and lower spending.
The BSC process also guides organizations to redeploy their scarce resources of
people and funds away from nonstrategic process improvements and toward those pro-
cesses and initiatives most critical for implementing the strategy to achieve breakthrough
customer and financial performance. In addition, building a Balanced Scorecard often
reveals entirely new processes at which the organization must excel. Rather than just
improving existing processes, the scorecard process focuses quality initiatives on im-
proving the performance of these newly identified processes.

RESEARCH AGENDA ON ORGANIZATIONAL

PERFORMANCE MANAGEMENT
During the past ten years, the Balanced Scorecard evolved from a performance mea-
surement system to an organizing framework for successful strategy implementation.
Changing what is measured profoundly affects the behavior of managers and employees,
and helps organizations deliver dramatically improved performance. This is good news
for accounting researchers. Accountants are in the measurement business and the expe-
rience of adopting companies reaffirms that measurement matters. Moreover, the experi-
ence affirms that management control systems matter. Its not just what is measured but
how the measurements are used that determines organizational success. The impact of
the scorecard is reinforced when it is used in a multiplicity of management processes:
compensation (the most studied process by accounting researchers); alignment of diverse
organizational units to a common strategy; communication and education; setting indi-
vidual objectives; linking strategy, planning, resource allocation, and budgeting; setting
Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 159

targets; exploiting information technology for new reporting presentations; conducting

management meetings interactively to promote testing, learning, and adaptation; and
senior leaderships use of measurement to drive organizational change. All these pro-
cesses can be studied to assess their individual and collective effectiveness.
Some good empirical work tests the causal linkages that underlie the construction
of strategy maps (Ittner and Larcker 1998; Banker et al. 2000). Interesting experimen-
tal work assesses how individuals respond to reports containing financial and nonfi-
nancial data (Lipe and Salterio 2000; Swain et al. 1999). But these are only the begin-
ning of promising research initiatives on performance measurement and management.
Analytic research can expand beyond contracting issues to address how synergies
nonlinear returnsare created when diverse individuals do their tasks in ways that
are in phase with and reinforce each other. The successful BSC implementers did not
hire new, more skilled employees. They did not work their employees harder or longer.
They achieved the benefits by having their existing employees focus and align their
efforts around a common strategy. Understanding how measurement yields nonlinear
performance returns by coordinating and focusing employees effort could be fertile
ground for analytic modeling.
Empirical and experimental research can explore several important issues. How can
targets with comparable degrees of difficulty be established across diverse business and
shared service units? Mobil adopted a process they called leveling to put all units on a
level playing field for rewards. It called for active involvement of senior staff specialists
and managerial peers to review, challenge, and eventually ratify the targets proposed by
decentralized units. The form of the reward is also of interest. Mobils previous policy re-
warded managers who achieved their targets, but gave zero rewards when performance
fell short of targets. The new policy was a continuous reward function that increased with
the degree of difficulty of the targets. As the CEO stated, I prefer to give a better rating for
a manager who stretches for a target and falls a little short, than to someone who beats an
easy target. Just how to implement such a process in practice, of course, is a nontrivial
task for which additional research could certainly be beneficial. Analytic schemes already
exist for rewarding the achievement of stretch targets (Kaplan and Atkinson 1998, 773
780), but our experience with implementing these schemes in practice is quite limited.
The visibility of a managers ability and effort is heightened when the BSC is used
as an interactive control system. A Mobil senior executive claimed, The process en-
ables me to see how managers think, plan, and execute. I can see the gaps. Such in-
creased observability of managers performance allows companies to use subjective re-
wards based on ability and effort, not the second-best approach of rewarding only on
results. Again, empirical and experimental research can investigate the effectiveness of
subjective rewards based on such increased observability. How well are people making
subjective evaluations and judgments? What kind of subjective judgments can we con-
fidently allow individuals to make and in what circumstances?
Many organizations obtain substantial commitment and contributions from their
employees without introducing incentive compensation based on BSC measures. Indi-
viduals want to be part of and contribute to a successful organization. Without the
guidance of a BSC, however, employees are often just given a job to do, not an opportu-
nity to find new and better ways to help the organization achieve its strategic objec-
tives. Thus, research on the mix between intrinsic and extrinsic motivation can be ef-
fectively conducted with the communication and personal goal-setting processes of the
BSC management system.
160 Accounting Horizons/June 2001

The multiplicity of management processes required to create strategic focus in an

organization can be studied. Are all critical? Is success a multiplicative model in which
the performance breakthroughs come from all processes being implemented effectively?
Or can some processes be effective and deliver significant results without being rein-
forced by others? This research will likely require intense field research, probably by
studying an implementation in a multi-unit organization, where different units adopted
different aspects of the BSC management system. For example, some units might have
implemented all five principles of a strategy-focused organization, while others did only
one or two. How did this affect the resulting performance of all these units?
During the past ten years, many organizations of all types and in all geographic
areas adopted performance management systems that use a mixture of financial and
nonfinancial metrics. In these two papers, we present a framework that describes the
measurement and management systems of successful organizations we observe in prac-
tice. With the widespread availability of organizational implementations and a frame-
work to describe how the implementations were performed, accounting researchers can
now begin a systematic research program, using multiple research methods, to explore
the key factors in implementing more effective measurement and management sys-
tems. Such a systematic exploration provides a valuable complement to the individual
case studies to be produced in the years ahead.

REFERENCES
Banker, R., G. Potter, and D. Srinivasan. 2000. An empirical investigation of an incentive plan that
includes nonfinancial performance measures. The Accounting Review (January): 6592.
Drucker, P. 1954. The Practice of Management. New York, NY: HarperBusiness.
Hamel, G. 2000. Leading the Revolution. Boston, MA: HBS Press.
Ittner, C., and D. Larcker. 1998. Are nonfinancial measures leading indicators of financial per-
formance? An analysis of customer satisfaction. Journal of Accounting Research: 135.
Kaplan, R. S., and A. A. Atkinson. 1998. Advanced Management Accounting. Third edition. Up-
per Saddle River, NJ: Prentice Hall.
, and R. Cooper. 1998. Cost & Effect: Using Integrated Cost Systems to Drive Profitability
and Performance. Boston, MA: HBS Press.
, and D. P. Norton. 2001a. The Strategy-Focused Organization. Boston, MA: Harvard Busi-
ness School Press.
, and . 2001b. Transforming the balanced scorecard from performance measure-
ment to strategic management: Part I. Accounting Horizons (March): 87104.
Kotter, J. 1996. Leading Change. Boston, MA: HBS Press.
Lipe, M., and S. Salterio. 2000. The balanced scorecard: Judgmental effects of common and unique
performance measures. The Accounting Review (July): 283298.
Mercer, William M. & Co. 1999. Rewarding employees: Balanced scorecard fax-back survey
results. May 20. London, U.K.
Mintzberg, H. 1987. Crafting strategy. Harvard Business Review (July-August).
Myers, R. 1996. Metric wars. CFO Magazine (October).
. 1997. Measure for measure. CFO Magazine (November).
Simons, R. 1995. Levers of Control. Boston, MA: HBS Press.
. 2000. Performance Measurement & Control Systems for Implementing Strategy. Upper
Saddle River, NJ: Prentice Hall.
Swain M., K. Krumwiede, and T. Eaton. 1999. Effects of balanced scorecard performance mea-
sures on decision process and decision quality. Working paper, Brigham Young University.