Saturday, 21 July 2007

Balancing your scorecard (part 3)

THEY say that those who do not remember the past are condemned to repeat it. However, while this may be true, those who know only the past are damned many times over.

Certainly, in business we know this to be the case. That’s why commercial success stories are often called visionaries – they seem to literally be able to see what their consumers of the future desire — and hence they are able to modify themselves well beforehand to ensure that they have, and they are, what it is that their consumers desire.

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This must therefore be a dilemma for business organizations. For most of them, all that they can see is their past. Nothing at all about their present. And more importantly, not a thing about what their actions in the past and the present are doing to their future.

All because of the way they measure their own performance.

Accounting numbers, which is what most organizations rely on for gauging the effectiveness of their actions, are nothing but historical facts. Period-end financial statements like balance sheets are snapshots at certain points in time, and flow statements like profit and loss accounts are simply aggregations of past activity.

While financial statements may look impressive and important, in reality — by themselves — they are of limited use for management information.

It’s like driving a car by looking only at your side and rear view mirrors, with the windshield blacked out. While you know that up to a point you have managed to avoid a crash, there is no way of telling if a disaster is just about to happen.

So if driving this way is no good for traffic safety, then why should managing with only financial information be good enough for business?

The answer is — it is not. Enter balanced scorecards.

While not a totally new invention, as versions of the idea have existed in various forms at different stages in the past, Norton and Kaplan were the first to have their innovation gain widespread acceptance within the business community.

In a sense, a number of factors have conspired to make this happen, such as, for example, the increasing sophistication with which we can now obtain information about our organizations. Powerful IT (information technology) systems and large data warehouses present us with opportunities that business leaders in the past did not have at their disposal.

And yet, most organizations employing the tool have not really done themselves justice. But rather than the tool being at fault, it is the users who are to blame.

For so many years, effective management has been premised on the belief that specialization is the only way to run a business. While at a certain stage in our industrial development this has made possible the rapid progress and advancement of commercial organizations, the approach has also placed a severe limitation on the capacity of companies to work as unified units, and hindering their capability to move in a common direction.

Funnily enough, it is the function commonly entrusted with measuring and controlling performance that perhaps shares most of the blame.

Accounting and finance organizations have increasingly appropriated for themselves the task of telling businesses how well they are doing, and making everyone else believe that this is the “correct” way of judging performance.

Nothing short of a fundamental rethink of our current models of effective business management, therefore, is imperative if we are to finally accept that the way to our future is not found by blindly focusing solely on the events of our past.

ANNOUNCEMENT: Best wishes to the members of the UP College Cebu High School Class of 1982, who will be having their Silver Jubilee Anniversary Reunion starting at 6 p.m. today at the Shangri-la’s Mactan Island Resort and Spa, Cebu. Alumni who have yet to make up their minds are warmly encouraged to come and see their old friends. All past and present faculty members associated with Class ‘82 are likewise cordially invited to participate in the festivities. For further details please contact Virgil Urgel (09204039138), Joy Go (09178515601), Carlyn Relampagos (09-209005970) or Randy Cabahug (09173229923).

Published in the Suns Star Daily, Saturday, July 21, 2007 (

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