The term "balanced scorecard" comes from the book of the same name by Robert S. Kaplan and David P. Norton (Harvard Business School Press. 1996). Norton, CEO of the Nolan Norton Institute, the research arm of KPMG, and Kaplan, a Harvard Business School professor, wrote the book after using this successful consulting method for a decade.
The breakthrough idea was the idea of measuring more than one attribute of an organization to see how it translates corporate strategy into action. "The name reflects the balance between short and long term objectives, between financial and non-financial measures, between lagging and leading indicators and between internal and external performance perspectives," the two wrote in the Introduction to the tome.
In their landmark book, they recommended measuring four distinct areas using these questions:
- Financial. "To succeed financially, how should we appear to our shareholders?"
- Customer. "To achieve our vision, how should we appear to our customers?"
- Learning and growth. "To achieve our vision, how will we sustain our ability to change and improve?"
- Internal business processes: "To satisfy our shareholders and customers, what business processes must we exceed at?"
"Translating strategy into action" was their phrase that tied all four areas together. And that's the key to the query. A company must link its strategies to its actions and then measure them to see if they bring the company closer to its stated corporate goals. It's the linkage that's important.
In the outsourcing agreements I've seen over the years, nine times out of 10 there is no linking of objectives in the outsourcing agreement to the buyer's strategy. Most of the measurements in the document describe operational control and are not related to corporate objectives.
Here's how to apply the balanced scorecard principles to an outsourcing agreement. Service level agreements are measurements which quantify attributes of a process. In our three dimensional world, we typically measure three attributes of a process. If we use the help desk function as an example, the three attributes we could measure are:
- The speed of the process. Answer time is one metric. We want a live agent to answer 93 percent of the calls in 30 seconds.
- Quality of the product or process. Abandonment rate is one measurement. We want to abandon no more than 5 percent of the calls. Accuracy is another quality metric. Only one-half of 1 percent of all help desk tickets have to be reopened because they were not handled correctly the first time.
- Cost. To operate within the parameters of these metrics, the vendor will charge a set cost. Usually this is either per seat or per ticket.
A buyer assesses these metrics and determines that yes, the calls are answered within 30 seconds but 50 percent of them have to be reopened, indicating terrible quality. This translates into a host of unhappy customers because they feel they can't work with the technology. These frustrated buyers tell their colleagues and technology gets a bad rap. Then the company's sales begin to suffer.
Now the balanced scorecard is called into action. Executives relate the performance of the help desk to the marketing department and trace how it's depressing sales. In our consulting practice, we call these "increased impact statements."
Using a balanced scorecard has come to mean measuring multiple attributes to get a complete view of a corporation. But that is missing the key point of a balanced scorecard: the linking of corporate strategies to actions.
The answer to the question, "Can you use a balanced scorecard in an outsourcing deal?" is: Yes, if you have a strategy and link it to appropriate measurements, then take appropriate action." That's a goal something we all can work toward in outsourcing agreements.