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Published: January 9, 2002

 
 

What Are the Measures That Matter?

A 10-year debate between two feuding gurus sheds some light on a vexing business question.

Like all leading characters in a good feud story, Bob Kaplan and Tom Johnson have become living symbols of something much larger than themselves. Once they were research partners and coauthors and shared their success. But they have not spoken in years, and each has publicly staked his professional reputation on the other one being wrong.

Their quarrel, which has lasted more than 10 years, is at heart a fundamental disagreement about the source of business success. Does it accrue to those who drive their businesses with numerical targets and performance measures, as Professor Kaplan asserts? Or to those who believe, as Professor Johnson argues, that management through measurement is fundamentally dangerous?

The debate, of course, is not just about business measurement. It’s about control. In most companies, top management relies on measurements — not just bottom-line targets, but other numerical goals from “fast-cycle” targets to desired “customer satisfaction” survey results — to signal its priorities. Is that, or is that not, a healthy way to run a company?

To Professor Kaplan, it’s not just healthy, but essential to profitability. Robert S. Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, is the most visible figure behind Activity-Based Costing (also known as ABC) and the Balanced Scorecard (which also is part of the title of the 1996 bestseller The Balanced Scorecard: Translating Strategy into Action, published by Harvard Business School Press, that Professor Kaplan coauthored with consultant David P. Norton). Although ABC and the Balanced Scorecard are derived from accounting methods, Professor Kaplan sees both as full-scale cultural changes for management in general. They break down the implicit cultural barriers between finance and accounting, on the one hand, and operations-oriented management, on the other, all for the sake of developing strategies that encompass both.

Activity-Based Costing, for instance, incorporates into corporate financial calculations the kinds of hidden costs that have traditionally been evident only on the shop floor: errors in a production process as it snowballs out of control, wasted effort in cumbersome part-ordering processes, or time spent traveling from one building to another. Taking advantage of computers to gather this information from assembly-line measurements and employee surveys, ABC divides these costs among particular projects, processes, and products. This means, for instance, if the least profitable 10 percent of products are cut using the ABC method, the cut will be more accurate — increasing profitability more — than it would have been under traditional cost accounting.

Opposing Views
If ABC helps financial controllers see what operations people see, then the other Kaplan method, the Balanced Scorecard, moves in the other direction. It helps managers incorporate into their strategies the insights of accountants — the best accountants, the ones who know how to draw forth from a mass of numerical data those few statistics and results that genuinely matter.

The Scorecard, one version of which was originally developed at Analog Devices Inc. (a semiconductor company based in the Boston area), is a sort of update of the Management by Objectives (MBO) system that Peter Drucker helped pioneer in the 1960s. Under MBO, managers were asked to set financial targets and hold themselves accountable for them. The Balanced Scorecard expanded this to include not just financial targets, but also business process improvement goals, customer satisfaction goals, and “learning and growth” objectives (e.g., “What have you done, this quarter, to improve the capabilities of people in your department?”). The “balance” in the Scorecard is the way it trains managers to consider all four criteria, and evaluates them on all four — thus making it less likely (for instance) that they will release products that meet bottom-line cost targets but that no one wants to buy.

 
 
 
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