Most companies rely on far too many metrics

Less than 20% of all typical companies have mature balanced scorecard implementations in place that are generating business value, according to research from business advisory firm The Hackett Group, an Answerthink company.

At their most effective, balanced scorecards can be powerful tools, providing concise, predictive and actionable information about how a company is performing and may perform in the future, and world-class companies are 159 percent more likely than typical companies to have mature balanced scorecards in place, according to Hackett's research. But the full benefits of effective balanced scorecards are not being realized for more than 80% of typical companies examined by Hackett. Primary reasons include too many metrics and overweighting the scorecards with historical financial information.

According to Hackett, companies report an average of 132 measures to senior management each month -- nearly nine times the number of measures in most effective balanced scorecards. In addition, half the metrics companies rely on are driven by internal financial data, which places far too much weight on historical performance and not enough emphasis on forward-looking measures such as external financial and operating performance.

Hackett found that overall, nearly two-thirds of typical companies have some type of balanced scorecard program in place or in development. But Hackett found that only 17% of all typical companies have developed mature balanced scorecards that rely on a mix of financial and operational metrics.

World-class companies are 159% more likely to have reached this level in their balanced scorecard efforts -- but even at world-class companies, only 44% have achieved this goal. According to Hackett's research, this suggests that most companies are having significant difficulty taking balanced scorecards from concept to reality.

Hackett found that companies report an average of 132 metrics to senior management each month (83 financial and 49 operational). This is nearly nine times the number of measures suggested as appropriate when the concept of the balanced scorecard was introduced in 1992.

Balanced scorecards should focus on a mix of internal and external measures. But according to Hackett's research, 50% of the measures companies currently use are keyed to internal financial data. Other measures are incorporated, including internal operating statistics (33%), external financial data (13%) and external operating (4%). But clearly, internal finance data is too heavily weighted to make the scorecards truly balanced.

"Given the way the concept of the balanced scorecard has evolved in practice, it is no wonder that many financial executives look on the concept as an expensive, bloated and useless substitute for the traditional paper reports. Most companies get very little value out of balanced scorecards because they haven't followed the basic rules that make them effective," says John McMahan, Hackett senior business advisor.

Adds Cody Chenault, Hackett finance practice leader, "If you're tracking nine times the recommended number of metrics, you're confusing detail with accuracy and it's going to be almost impossible to see indicators that might emerge from the data. Companies make the mistake of relying heavily on historical internal finance data. It's what they understand best, and are the most comfortable with. But by putting little weight into forward-looking internal and external metrics, such as sales forecasts, market share, competitor pricing and broad economic indicators, companies sabotage their own balanced scorecard efforts. They create a system that's about as effective as driving with the windshield covered while looking in the rearview mirror."

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