The income statement isn’t

by Jay Cross on January 31, 2008

At the Learning Technologies conference in London yesterday, a member of the audience inquired about metrics. The reply was “ROI.” It never ceases to amaze me how many people assess the cost and benefit of projects with accounting approaches developed in Venice in five hundred years ago.

Accounting deals with numbers that can be audited. The rub is that the value of American corporations has migrated from tangibles you can see and touch to intangibles such as reputation, intellectual capital, and customer relationships. Twenty-five years ago, intangibles accounted for less than a third of the value of the S&P 500; ten years ago, intangibles had grown to more than 80% of that value.

Organizations that make decisions based solely on things that are sufficiently tangible to be counted might as well consult a Ouija board to set their goals.

Consider Google. Google’s net worth (its measurable assets less its liabilities) is $5 billion dollars. Investors value Google at $150 billion. If you were a decision-maker at Google, would you be trying to optimize the $5 billion figure or the $150 billion? Duh.

Why do corporations plan? It’s to guide the deployment of resources and to tell people what they need to do. The annual goal at a firm I did some assignments for was to increase profitability by 8%. I had only the vaguest notion of what to suggest they do. Verbal descriptions speak to me; percentages do not.

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This is why Robert Kaplan and David Norton developed the Balanced Scorecard. The Balanced Scorecard divides an organization’s goals into meaningful objectives in several areas. Each Scorecard is customized to fit the organization. The top-level Scorecard cascades down through the sub-levels of the company, providing clear objectives that summarize upward to the overall mission.

Kaplan and Norton have written three very lucid books on their methods. They and others host conferences to explain implementing this approach. But frankly, you don’t want to devote days to the books or conferences until you’ve made a rough-cut assessment about where the Scorecard might work for you. I just found a site to give you that start.

Consulting firm ActiveStrategy’s site explains how the Balanced Scorecard works and provides concrete examples. I’m confident ActiveStrategy would be happy to help you marry strategy and the Scorecard with their advice and software: that’s their business. I can’t vouch for their services but like their explanation and experience stories about the approach.

If your organization has been navigating with a faulty compass take a look at the Balanced Scorecard.

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