How does a “traditional” valuation methodology such as the Balanced Scorecard stand up to today’s intense focus on financials? Technology Editor Christopher Lindquist recently caught up with its cocreator, Robert S. Kaplan, Marvin Bower professor of leadership development at Harvard Business School, to hear his thoughts on the state of the Scorecard.
CIO: With the continued economic slump, there’s a strong emphasis on financial criteria. Since those are only one-quarter of the Balanced Scorecard, is it less in line with today’s needs or is it still a valid valuation methodology?
Robert S. Kaplan: The Scorecard is more important now because the risk is that too many companies will go back to their old familiar ways, focusing only on financials and losing sight of their long-term strategy. Organizations that are still managing by the Scorecard are trying to downsize in ways that minimize the disruption to long-term capability development. They try to make their spending reductions more balanced, as it were, and not falling entirely on the long-term investments like people and systems. Organizations living with the Scorecard tell us there are still difficult choices, but the discussion about what to cut is more balanced than it would have been without the Balanced Scorecard.
CIOs have known for years that they need to find ways to improve the value of IT and business investments, and demonstrate those improvements. Do you see 2003 as being a watershed year for this?
2003 and beyond is going to be an era of business analytics packages that sit on top of those ERP packages and data warehouses that companies have constructed at considerable expense?but are still not delivering punchy, decision-oriented information. Companies can implement analytical tools like activity-based costing and the Balanced Scorecard more easily because of existing infrastructure investments. It can help organizations capture the benefits from those investments. Being able to close your books quickly and reliably isn’t creating shareholder value, but activity-based management can deliver great value.
We’ve heard a lot of CIOs talking about the value of information itself. Do you suggest any particular approach to valuing information?
Many people, particularly accountants like myself, want to apply values to intangible assets like information. The Balanced Scorecard quantifies those assets but does not value them. I don’t think you can value intangible assets in a way that puts them on the balance sheet. Their value is contingent on their connection to the strategy and their connection to the other tangible and intangible assets in the organization. When an organization is successful, it’s because everything has been lined up. You have the right information, you have the right people with the right training, the right process, targeted customers, the right value propositions?everything works. If any one of those was not in place, the strategy might fail, and you won’t get results. In that situation, economists technically call that a joint product. I believe you can quantify the intangibles and measure their state of readiness and their capabilities. But I don’t believe you can put a meaningful financial value on them.