Balancing act: Scorecards help businesses stay healthy

February 12, 2001 —

COMPANIES OFTEN RELY on a single telltale measurement to determine success: profits. That may appeal to investors and Wall Street mavens, but it does not always indicate that a company is using its resources to reach its full potential.

In fact, even extremely successful companies could most likely turn more profit -- and do so with the same resources they already have in place. To reach that goal, several Fortune 500 and other companies are using balanced scorecard technology.

A balanced scorecard is a software application for measuring the success of enterprise departments, such as human resources and IT, to make sure they are performing optimally and working toward the company's ultimate goal of profitability rather than just looking at the bottom line. Scorecards enable organizations to measure the performance of processes such as business planning and simulation, performance management, and stakeholder communication.

The use of scorecards, since their inception in 1992, has been spreading, albeit slowly. Statistics confirmed by Stamford, Conn.-based Meta Group suggest that in 2001 the percentage of companies using balanced scorecards will rise to 38 percent, up from 27 percent in 2000. Closely in line with Meta Group's numbers, a study from Gartner, in Stamford, Conn., estimated that about 40 percent of the Fortune 1000 would implement a balanced scorecard by the end of 2000.

"The idea is a wake-up call to enterprises to look at the things they can directly control that will lead to profitability," says Doug Laney, vice president of application delivery strategies at Meta Group. "You can't directly control profits, but there are things you can control that add to profitability."

More than money

Duke Children's Hospital in Durham, N.C., had more on the line than mere profits; in 1996, the hospital was $11 million in the red. Critical programs were being shut down, the number of patient beds was being reduced, and the quality of patient care was declining.

Dr. Jon Meliones, chief medical director at Duke Children's Hospital, was faced with the problem of either cutting programs and laying off 30 nurses or figuring out a way to save 3 percent of the budget.

Rather than make the unpopular decision to cut programs and staff, he implemented a balanced scorecard with the help of Cary, N.C.-based SAS Institute. As a result, the hospital was able to streamline its practice, increasing efficiency and cutting the average cost per case from $15,000 in 1996 to $10,500 in 2000.

"We were able to turn things around enough to show that we could run the business without making the cuts," Meliones explains.

Indeed, by 2000 the hospital was earning $4 million in profits.

"It's not magic in a bottle, but if you follow the formula, you can save significant costs," Meliones adds. "By doing a good job with the scorecard, we had more money to invest back into the system and actually improve the health care we provide."

The health care industry is only one of a broad range of businesses that benefit from scorecard technology. One example brought to the forefront by the rise of e-business is the issue of customer service. Understanding how to gain and retain customers has always been tricky, but when going to annother source for goods or services is as easy as navigating to another Web page, the whole issue becomes much more complex.

To address this, ING Bank in Amsterdam, Netherlands, implemented a scorecarding application amid an internal reorganization because the bank was convinced that scorecards are the best way to measure results regarding client retention, the commercial process, and personnel organization.

The bank currently uses balanced scorecards for strategic quantitative and qualitative measurement, and a different scorecard application for remote users that still uses the same data as in-house managers so that both groups are working from the same information.

"We have more focus on the commercial effectiveness of managers, and it's an integral part of the information management that higher-level employees see," says Popko de Vlugt, ING Bank's head of management accounting and an internal scorecard expert.

"We want to have scorecards as an integral part of the commercial process and the banking process," de Vlugt adds. "It shouldn't be just a list."

ING Bank currently has 3,000 employees using the scorecard applications and plans to roll them out to all 10,000 employees over the next few years.

Keeps getting better

One of the biggest problems facing scorecard adoption is that companies typically install the applications in different parts of the organization at first. As scorecards become more prevalent, they soon realize the need to tie the various applications together, explains Henry Morris, vice president of data warehousing and knowledge management at market research firm IDC, in Framingham, Mass.

Meta Group's Laney says that scorecarding can help companies learn which aspects of their business need the most concentration.

"We found that the most important key performance measures were not related to profits, they were related to a company's service levels and product offerings," Laney explains.

To encourage use of scorecards, the Balanced Scorecard Collaborative, an organization dedicated to furthering the use of scorecards for business, published functional standards for scorecards in September 1998. In October 2000, SAS Institute, ABC Technologies in Beaverton, Ore., and Computer Sciences in El Segundo, Calif., began working jointly to create an XML standard to more easily integrate disparate scorecard applications. The XML standard is expected to be completed in the second half of 2001.

"The standard will help companies understand what drives value in the organization," says Jonathan Hornby, strategic manager for organizational performance at SAS. "Companies can look at business processes and determine how changing that process will affect everything else."

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