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Chapter 3: Government Performance
Use the “Balanced Scorecard” Concept to Optimize Texas State Government Performance
Summary
The balanced scorecard is a framework for the strategic management of an organization that translates strategy into action through performance measures. The balanced scorecard is used by more than half of the Fortune 500 corporations in the US. A growing number of state agencies in Texas and other states, US cabinet departments, cities, and counties are beginning to employ it as well. The state should encourage more widespread use of the balanced scorecard by state agencies by selecting nine state agencies to implement the balanced scorecard strategic management system.
Background
Robert Kaplan of Harvard Business School and David Norton, a business consultant, developed the balanced scorecard as a result of a careful study of the use of performance measures and shared this new management method in a Harvard Business Review article published in 1992.[1] It has become one of the most widely used management approaches of the decade. A recent Bain & Co. survey of management practices found that more than half of the Fortune 500 use the balanced scorecard, and anecdotal evidence suggests that more than half of the entire Fortune 1000 use it as well.[2]
The balanced scorecard is a framework for strategic management. It allows executives to escape the narrow, short-term focus that springs from exclusive concentration on financial measures of success. Instead, it keeps the broader picture in mind—anticipating and addressing the needs and wants of customers, constantly improving the operations that produce the goods and services they demand, and creating an organization characterized by innovating, teaching, knowledge-sharing, and personal and organizational growth. The broader perspective helps organizational leaders see the big picture—the larger shape of the diverse tasks before them -- and puts the longer term challenges of building for the future on an equal footing with the short term financial results reported daily on the stock exchanges. Widely adopted in larger businesses, governments across the United States are now adapting the balanced scorecard to instill strategic management in government.
The obvious and important roles of performance measures and information sometimes cause balanced scorecard novices to miss the most significant implications of the system. It’s often said, “What you can’t measure, you can’t manage.” While the truth of that proverb may vary from situation to situation, Kaplan and Norton add a corollary that is much harder to dispute: “What you measure is what you get. Senior executives understand that their organization’s measurement system strongly affects the behavior of management and employees.”[3] What performance measures should an organization decide to use? How should its leaders select them? Those decisions can point an organization in the right direction and move it toward a successful, prosperous, rewarding future. But, precisely because the choice of performance measures affects behavior, making the wrong choices can distort the implementation of the most carefully designed strategy. Indeed, they can destroy the connections between strategy and performance, not enhance them. That’s why having the right framework for translating the strategy is so important.
The failure of many organizations to communicate and implement strategy is dramatic. It has been reported that:
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only 5 percent of workers understand their organization’s strategy;
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only 25 percent of managers have incentives linked to strategy;
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60 percent of organizations do not link budgets to strategy; and
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85 percent of executives spend less than one hour per month on strategy.
It’s not surprising, then, that 90 percent of all companies fail to execute strategy.[4] The balanced scorecard provides the necessary linkage between strategy and performance measures to translate an organization’s strategy into action.
Traditionally, financial measures have driven corporate strategy and provided the chief performance measures. Executives are finding that financial measures are inadequate for guiding and evaluating their companies over the long run. Information age companies must create value for the future through investment in customers, suppliers, employees, processes, technology, and innovation.[5] Traditional performance measures for internal business processes tend to focus on improving the cost, quality, and cycle times of the existing processes. The balanced scorecard improves performance by identifying the crucial processes for achieving the highest levels of performance for customers and shareholders.[6]
As a framework for strategic management, the balanced scorecard embraces four perspectives for selecting and utilizing performance measures: the financial perspective, the customer perspective, the internal business process perspective, and the learning and growth perspective.[7] The scorecard provides a framework and a language to communicate mission and strategy; it uses measurement to inform employees about the drivers of current and future success. For business corporations, these perspectives can be summarized in four questions:
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How do we look to shareholders?
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How do customers see us?
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What internal business processes must we excel at?
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How can we continue to improve and create value?[8]
Use of the balanced scorecard allows senior managers to achieve a balance between financial and non-financial measures, short and long-term objectives, lagging and leading indicators, and internal and external perspectives.[9] The balanced scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures. This system provides the framework for a strategic management and measurement system.[10] As Exhibit 1 shows, the balanced scorecard provides a framework to translate an organization’s strategy into operational terms.
The balanced scorecard has given some of the largest US corporations a framework for adopting a strategy that provides a balance between financial and non-financial objectives and measures, short-and long-term goals, and internal and external performance.[11] Adopting the balanced scorecard helps an organization avoid unnecessary, insignificant performance measures and concentrate on those that define the success of the organization as it pursues its mission.
The balanced scorecard provides a method by which an organization can translate its mission and vision into goals, objectives, and performance measures. For each of the four perspectives, management adopts goals, objectives, and performance measures to gauge the organization’s success in implementing its goals and objectives. Starting from the customer perspective, the managers of a private sector company might identify time measures related to the time needed to fill customer orders, quality measures related to number of product defects, and other measures related to performance and service. But management must determine what the customers really want and need, that is, what really makes a difference to the customers in their decisions to buy the company’s goods and services and do business with the company. Management can collect this kind of information through surveys and other means that solicit information from customers.
When the customer-based measures have been selected, then management must ask the following questions: What internal operations are critical to enabling the firm to satisfy those customer needs? What internal business processes are crucial to supporting its customer services? What are the company’s core competencies that are needed to produce what the customers want? The answers to these questions help management determine goals, objectives, and performance measures for the internal business process perspective. As the executives consider the performance of these internal business processes, they will naturally be led to the next perspective as they look for ways to improve them through innovation, learning, and growth.
In today’s rapidly changing competitive environment, the company and its employees must constantly innovate, improve, and learn to produce existing products with better quality and service and new products that provide more value for customers. Management must ask: How can we develop and introduce new products rapidly that will form the bulk of company sales? What programs can we introduce to reduce process defects, missed deliveries, and other problems over the next few years? What training processes will be effective in improving employee productivity? Questions of this kind can point to critical factors that will improve both customer service and internal business processes over time. The answers will result in goals, objectives, and performance measures for the learning and growth perspective.
The survival of a company will depend on its financial health, and management must link the performance measures from the customer-based, internal business process, and learning and growth perspectives to the financial perspective. Only when improvements in the three non-financial perspectives are translated into improvements in financial performance will they help sustain the company’s long term survival. And the financial perspective leads back to the customer, who in the free competitive market ultimately rules the entire process.
The rapid growth of business use of the balanced scorecard has led to the development of supporting software by several manufacturers. Although software is not necessary for an organization to implement a balanced scorecard, putting the organization’s performance measures into a software system enhances the value and effectiveness so greatly that most organizations will want to use technology. Some organizations may find it possible to use their existing information technology resources as a means of maintaining the flow of information necessary to the operation of the balanced scorecard system. Others may wish to purchase commercially available software. It is important for the organization to plan its scorecard to the point that it has completed the analysis of its selected measures and ensured the validity and reliability of the systems and methods of measurement before it selects and introduces an information technology system to support its scorecard.[12]
While the balanced scorecard was developed for business, governmental agencies have begun to examine the balanced scorecard as a way to improve their systems and take them to a new level as their strategic planning processes become more mature. An extensive study by the National Partnership for Reinventing Government entitled “Balancing Measures: Best Practices in Performance Management,” examines the public sector’s efforts to implement the balanced scorecard concept. The study found that public entities originally thought that because they do not generate profits, the principles that apply to the private sector don’t apply to them. The study concludes, however, that public entities have found this not to be true. The “bottom line” for most government organizations relates to their missions. But they do not achieve their mission outside the context of their customers, stakeholders, and employees. The roles of the customer, stakeholder, and employee in a public organization’s day-to-day operations are vital to the success of their missions.[13]
Benefits of the Balanced Scorecard
The benefits of the balanced scorecard are many:
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The balanced scorecard provides a means for translating an organization’s strategic planning into meaningful and important performance measures that will turn that strategy into action.[14]
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The adopting organization will be able to translate its strategy into action because managers can communicate the organization’s objectives and targets.[15]
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The balanced scorecard emphasizes those processes that are most crucial for obtaining the highest levels of performance.[16] Typically, an organization can select the 20 to 25 performance measures most critical to its performance. It need not abandon the other measures, but the scorecard will put them into a more appropriate perspective. Most organizations find that they need to adopt new measures to complete their scorecard, since gaps in measuring its performance have been exposed, itself a benefit to implementing the scorecard.
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The balanced scorecard can be used to drive organizational change, a situation in which it has its greatest impact.[17]
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The balanced scorecard allows executives and managers to avoid the unnecessary choice between financial success and other short-term goals, on the one hand, and the innovation and improvement of internal business processes, on the other, which will sustain the future of the organization.[18]
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The balanced scorecard provides a means for linking the improvement of internal business processes to the needs and expectations of specific external constituencies.[19]
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The balanced scorecard helps to align the objectives and performance of all people in the organization from top to bottom.[20]
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The balanced scorecard helps top executive management allocate the organization’s resources in accordance with the organization’s strategic goals.[21]
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A well designed process of developing a balanced scorecard “gives an organization, usually for the first time, a clear picture of the future and a path for getting there.”[22]
Installing the Balanced Scorecard
The proper implementation of the balanced scorecard begins with the total commitment of the organization’s senior executives. They must understand that the balanced scorecard is a strategic management system, not a measurement system. The process begins with the executive team’s clarification of the organization’s vision. The organization’s vision is its long-term plan in the context of the environment in which it expects to operate. That vision must be translated into a strategy that can be understood and communicated. The process continues as the top layers of management discuss and learn about the organization’s strategy within the strategic framework provided by the balanced scorecard. Strategic business units (SBUs) within the organization develop their own scorecards, and the executive team reviews the individual scorecards of the SBUs. During this process, the executive team can identify programs or operations that are not contributing to the mission of the organization, pinpoint cross-business issues not originally included in the corporate strategy, and determine programs for corporate change. At the end of this process, executives and managers should have developed a satisfactory balanced scorecard for the entire organization and should ensure that it has been effectively communicated to the entire organization.
At this point, the scorecard is in place, but the executive team must still do the following:
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Link the scorecard to individual executive performance objectives and incentive compensation;
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Revise the long term plan and budget to reflect those measures;
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Hold monthly and quarterly reviews that concentrate more on strategic issues;
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Conduct annual reviews of corporate strategy; and
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Link all objectives and incentive compensation to the scorecard.[23]
As the system is being put in place, executives, managers, and staff will be educated in the balanced scorecard, its operations and its uses, by the process of installation. To this, the organization’s leaders may want to add a formal training process, including some training in using the software used in connection with the organization’s balanced scorecard.
The Balanced Scorecard in Government
Many state and local governments across the US are now adopting a balanced scorecard approach to translate the organizational mission and strategies into a comprehensive set of performance measures. A report issued by the National Performance Review cites several examples of entities that have implemented balanced systems of performance measures. They include: City of Charlotte, North Carolina; the US Department of Interior’s Bureau of Land Management; the US Postal Service; and the Department of Transportation’s US Coast Guard.
The executives of public entities can adapt the balanced scorecard developed for businesses. A section of a National Performance Review report entitled “Lessons We Learned” lists “adapt, don’t adopt” and “flexibility is the key.” A best practice may not be adopted exactly the way it was done in another organization. Among its findings, the report states, “There is no such thing as a permanently fixed balanced set of measures; instead, the process of balancing the needs of customers and employees against mission is a constant and living one, flexible and open to change.”[24]
City of Charlotte
Of all governments implementing the balanced scorecard, perhaps the City of Charlotte has the most experience.[25] Pam Syfert, the city manager, initiated the move toward the balanced scorecard in 1994. The city put in an extensive effort to make the scorecard fit the needs of the city. They were careful to make adaptations that would make their scorecard appropriate to the needs of city government. First, they put the focus on the customer of city government, the citizen, at the top, in place of the financial perspective. The customer perspective emphasized strategic focus areas, the key services the city was delivering. The financial objectives “became the enablers” for helping the city achieve the objectives for delivering its services and “measured whether the city was delivering its services to its customers at a good price.”[26] The internal business process and innovation, learning, and growth perspectives supported the customer and financial perspectives. The internal business process perspective encouraged the city to improve its service delivery. The innovation, learning, and growth perspective showed whether the city was effectively utilizing its technology and whether its employee training and skills were adequate to support the other processes.
The results in Charlotte have been dramatic. Discussions about plans and decisions were approached with a much broader, more strategic perspective. Mayor Pat McCrory of Charlotte observed:
The balanced scorecard has helped me to communicate a strategic vision for the city to my constituents, the citizens. It also helps me when I have discussions with potential employers to locate here. It helps my city manager focus on things that will have the biggest impact on the city, and I see it helping people in departments think across organizational boundaries, to realize that they should not be a group of segregated departments.[27]
One change in performance measures was particularly surprising. Historically, a major measure for the Police Department was time in responding to 911 calls. The department’s analysis showed that response time was relevant for less than 1 percent of the calls. Even when the call was reporting a crime, the victims were satisfied if the police arrived within an hour, rather than the previous standard of two minutes. They also concluded that there was no relation between the response time and the crime rate. The police department revised its measures to focus on perceptions of safety and more reliable measures of the crime rate.[28] The police department used the balanced scorecard to support its shift of resources to preventing crime, rather than to dealing with its consequences.[29] But this is only one example of how the city has used the balanced scorecard to institute strategic management.
City Manager Syfert, named by Governing magazine as a “Public Official of the Year” in its November 1999 issue, credits many of her city’s successes to the use of the balanced scorecard:
Over the years, city staff measured everything from workload, to response time and cost per unit to efficiency and effectiveness. One unintended result was information overload. There were lengthy reports with data generated that few people read... Building a scorecard helps managers link today’s actions with the achievement of today’s priorities. It encourages accountability. And, today, we define accountability by results.[30]
Syfert’s use of the balanced scorecard was the framework within which she and her administration achieved some impressive results. The City of Charlotte showed national leadership in revitalizing neighborhoods, promoting public private partnerships, keeping service costs down, and cutting the size of government bureaucracy. The number of public employees, other than those working on public safety, declined from 2,150 to 1,313 since 1991. The city’s use of managed competition, in which private firms and units of city government compete to win the right to provide services, has saved taxpayers about $9 million a year.[31]
Texas State Agencies
Texas state agencies are now beginning to use the balanced scorecard approach, including the State Auditor’s Office (SAO), Texas Department of Transportation (TxDOT), and the Texas Education Agency (TEA). The State Auditor’s Office has fully implemented its balanced scorecard and uses it in monitoring the agency’s progress and performance on a daily basis. TxDOT has included a very limited application of the balanced scorecard in its most recent strategic plan. However, TxDOT is only using it as a means of attempting to test whether its strategy is being translated into action, not as its central framework for strategic management.[32] TxDOT has not begun to reap the potentially much greater benefits possible from a full implementation of the balanced scorecard. TEA began implementing a balanced scorecard in Fall 1999 and completed its installation of the system at the end of fiscal 2000.
When the balanced scorecard is adapted to government, the roles of the four perspectives change. The groups that agencies have traditionally treated as clientele and constituencies are really also their customers. Agencies may introduce new perspectives, and they may start with the mission of the agency. For example, the State Auditor’s Office (SAO) has adopted and implemented the balanced scorecard as the framework for its strategic management of the agency. The SAO starts with the mission of the agency and works its way through the customer focus, internal processes, the learning and knowledge perspective, and the financial perspective. The mission is found by asking why the office exists and how its services support its goals. Concerns about allocating limited resources to competing audit and investigation processes drive the financial perspective. Management asks several critical questions:
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“How will we acquire and allocate our resources to achieve our mission?” Management works to build and update skill levels and maintain high morale in the learning and growth perspective.
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“What must we do to develop staff skills and promote a motivated workforce?” This supports the work of managers who are continually seeking to maintain efficient and high quality internal processes.
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“At what internal processes must we excel to promote quality and working relationships with our customers?” Improvement in internal business processes should lead to more satisfied stakeholders and customers for the audit and investigation processes.
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“How do we establish and maintain effective working relationships with our clients?”
The answers to these questions determine the SAO’s strategy and how it will achieve success. They also help the organization measure what matters. Top management at SAO can monitor the progress of every audit and investigation with a few clicks using the software system that shows the data related to its balanced scorecard.
The implementation of the balanced scorecard resulted in major changes in the performance measures SAO uses. SAO now measures dollar savings recommended, percentage of projects providing useful information, percentage of customers who believe the information is useful, and percentage of employees who believe SAO maintains a positive work environment, among other strategically chosen performance measures.[33] Both the State Auditor’s Office and the Texas Education Agency use commercially purchased software as part of their implementation of the balanced scorecard, but neither received special or increased appropriations to implement this management improvement. At TEA, the cost of the software was included in the purchase of a larger package of software systems. At the State Auditor’s Office, the cost was $72,000 for a license that permitted 240 users, plus a $12,000 implementation fee that included training.[34]
Existing Foundations in Texas Government
Foundations for using the balanced scorecard already exist in state government. Every agency’s budget will be the basis of the fiscal or financial perspective. State law already requires state agencies to develop strategic plans for their operations.[35] The Legislative Budget Board and the Governor’s Office of Budget and Planning determine the elements to be included in each agency’s plan. The plans include indicators used to measure the outcomes and outputs of the agency’s work, and are found in the state’s General Appropriation Act.[36] Thus, state agencies have now been working with performance measures for most of the last decade. In addition, the last session of the Legislature enacted SB 1563 to require Texas state agencies to identify their customers and required the Legislative Budget Board to develop customer service-related performance measures.[37] This action put in place the formal foundations for the customer service perspective. Finally, many agencies in Texas government have participated in the Survey of Organizational Excellence (SOE) that assesses state employee opinion. Originally a measure of employee attitudes, SOE has evolved into a means of estimating certain aspects of organizational performance.[38] Although the information developed in this survey will be broadly useful to all perspectives in an agency’s scorecard, the survey itself will be critical to all operations related to the innovation, learning and growth perspective. These foundations mean that agency managers already have a head start toward implementing the balanced scorecard.
The performance measures now found in the biennial appropriation bill need not be altered, but they may need to be refined to adapt to the balanced scorecard perspective.
Putting the existing strategic planning and performance measurements into the framework of the balanced scorecard at the agency level is a big step. However, it promises to improve the present system’s utility dramatically. Full implementation will require several years. For implementation to be successful, agency leadership must be committed to this change. Still, the benefits are likely to repay the time and effort many times over.
Recommendation
State law should designate five agencies of various sizes and functions to implement the balanced scorecard approach.
The Governor’s Office of Budget and Planning and the Legislative Budget Board are well informed in their budget-related roles to select five agencies to use the Balanced Scorecard approach, based on agency interest, and the potential for improvement that may be realized through use of this tool. One criterion for selection should be the ability and willingness of the agency to absorb the associated costs, if needed, to support the balanced scorecard, including software, training, and annual maintenance, within its existing or otherwise prevailing appropriations levels. The agencies should report on their progress to the Legislature.
Fiscal Impact
To the extent that the selected agencies volunteered to absorb implementation costs within their existing appropriations, there will be no direct fiscal impact from this proposal. The only identifiable cost to agencies would be the purchase of software and training. Agencies considering the purchase of software will need to analyze, assess, and plan the installation of the balanced scorecard before they decide whether to use existing information technology resources or purchase special software.
One criterion for the selection of agencies should be their ability and willingness to pay for any needed software under their otherwise prevailing appropriations levels, as was done by the State Auditor’s Office and the Texas Education Agency. In this manner, the decisions of agencies to purchase software will not increase spending levels. The indirect results of adopting the balanced scorecard should be gains in efficiency and performance. Use of the balanced scorecard over a period of several years could result in improvements in strategic focus, performance, and efficiency and result in net savings to the agencies, as the example from the City of Charlotte suggests.
[1 ] Robert S. Kaplan and David P. Norton, “The Balanced Scorecard—Measures that Drive Performance,” Harvard Business Review (Jan.-Feb. 1992), pp. 71-79.
[2 ] E-mail from Dylan Miyake, Director, BSC Online, a division of the Balanced Scorecard Collaborative, October 16, 2000.
[3] Robert S. Kaplan and David P. Norton, “The Balanced Scorecard—Measures that Drive Performance,” p. 71.
[4] Deborah L. Kerr, “The Public Sector Balanced Scorecard: ‘Maybe-Proofing’ Your Organization,” presented at the e-Texas Commission hearing, Austin, Texas, June 24, 2000.
[5] Robert S. Kaplan and David P. Norton, The Balanced Scorecard (Boston: Harvard Business School Press, 1996), p. 7.
[6] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 11.
[7] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 25.
[8] Robert S. Kaplan and David P. Norton, “The Balanced Scorecard—Measures that Drive Performance,” Harvard Business Review, p. 72. This and some related articles are reprinted in Harvard Business Review on Measuring Corporate Performance (Cambridge, Mass: Harvard Business School Press, 1998).
[9] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. viii.
[10] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 2.
[11] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. viii-ix; and e-mail communication from Dylan Miyake, director, BSC Online, October 16, 2000.
[12] Nils-Goran Olve, Jan Roy, and Magnus Wetter, “Systems and IT Solutions for Scorecards,” Performance Drivers: A Practical Guide to Using the Balanced Scorecard, (Chichester, England: John Wiley & Sons, 1999), pp. 229-252.
[13] National Partnership for Reinventing Government, Balancing Measures: Best Practices in Performance Management (Washington, DC, August 1999), pp. 8, 9.
[14] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, pp. 272-286.
[15] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 147.
[16] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 11.
[17] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 13.
[18] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 28.
[19] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 115.
[20] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, pp. 199-223.
[21] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 238.
[22] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, p. 292.
[23] Robert S. Kaplan and David P. Norton, The Balanced Scorecard, pp. 272-286.
[24] National Partnership for Reinventing Government, Balancing Measures: Best Practices in Performance Management, pp. 2, 5.
[25] Robert S. Kaplan, “City of Charlotte (A),” No. 9-199-036 (Cambridge, Mass: Harvard Business School, Feb. 5, 1999); and Robert S. Kaplan, “City of Charlotte (B),” No. 9-199-043 (Cambridge, Mass: Harvard Business School, March 29, 1999).
[26] Robert S. Kaplan, “City of Charlotte (A),” p. 4.
[27] Robert S. Kaplan, “City of Charlotte (A),” p. 9.
[28] Robert S. Kaplan, “City of Charlotte (A),” p. 6.
[29] Robert S. Kaplan, “City of Charlotte (B),” No. 9-199-043 (Cambridge, Mass: Harvard Business School, March 28, 1999), pp. 4-5.
[30] “Beyond Performance,” Governing (November 1999), p. 26.
[31] “Beyond Performance,” Governing (November 1999), p. 26.
[32] Texas Department of Transportation, Strategic Plan, 1999-2003: Moving Toward a Successful 21st Century (Austin: Texas Department of Transportation, 1998).
[33] Deborah L. Kerr, “The Public Sector Balanced Scorecard: ‘Maybe-Proofing’ Your Organization.”
[34] Interview with Cindy Holmes, State Auditor’s Office, Austin, Texas, August 15, 2000.
[35] V.T.C.A., Government Code §2056.002(a).
[36] V.T.C.A., Government Code §2056.002(b).
[37] V.T.C.A., Government Code §2113.001-2113.007.
[38] Michael Lauderdale, Reinventing Texas Government (Austin: University of Texas Press, 1999),pp. xv-xvi.
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