Using the Balanced Scorecard in a Downturn
Financial Perspective
When describing the Balanced Scorecard, most people characterize the objectives and measures within the Financial perspective as representing the ‘end in mind’ of your strategic story. In other words, should you achieve success with the objectives and metrics in the remaining three perspectives, the hypothesis is that those wins will lead to improved financial results. During a downturn the financial perspective takes on additional prominence, since managing the ‘fundamentals’ of the business is of critical importance.
All organizations attempting to navigate the tempestuous seas of a downturn must include the following in their Financial perspective:
Cash position: The venerable maxim ‘cash is king’ never rings truer than during troubled times, and it’s vital for all firms to monitor and manage this essential asset. A liquidity problem can not only signal imminent threats to your ability to continue as a going concern but can also impinge on your capacity to make shrewd investments that may present themselves (more on this in the Internal Process perspective) even during difficult periods.
Costs: Efficient operations can’t be overstated in periods of turmoil, and thus all companies must steward their resources towards ever-greater efficiency in order to achieve lower costs. However, caution is in order here. Don’t cut so deep that you’re unable to take advantage of future opportunities that may arise out of the downturn.
Revenue: The top line must be aggressively managed in a downturn. Look to protect existing revenue and, wherever possible, identify new sources of top line growth.
Profitability: It never goes out of style and is very much in vogue when times are unstable. As noted above, I would suspect that most, if not all, of these items currently reside within your Financial perspective. Your responsibility in this environment is to track these business basics with increased vigor and in shorter intervals. Where in the past you may have assessed financial health once a month, now is the time to begin weekly if not daily evaluations of your financial position.
Customer Perspective
During ‘normal’ business cycles, the Customer perspective identifies those objectives and measures that represent your chosen value proposition, be it customer intimacy, product leadership, or operational excellence. In many ways, this value proposition, which clarifies ‘how you sell,’ is the essence of strategy, and thus its translation is critical to your Balanced Scorecard. Your objectives and measures should portray with clarity the value proposition you’ve chosen. Obviously, strategy is not to be overlooked during a downturn, but within the Customer Perspective, as with the Financial, we must direct our attention to the most vital of indicators necessary to ensure we remain afloat and able to react nimbly in all situations.
During a recession consumer will often trade down to lower priced alternatives, choosing private label options or shopping at discount stores, for example. However, it is possible that others will continue to trade up, although most likely in smaller numbers. Either way, it’s vital for companies to maintain their current customers during an economic downturn, and vigilantly track customer retention rates. The ability to meet gross margin, revenue, and profitability targets hinges on your capacity to keep your current roster of customers. Defections in a downturn can be deadly, especially when you consider the many statistics which suggest it can cost up to ten times as much to attract a new customer as to keep an existing one. Focus your efforts on maintaining customer relationships, and where possible, growing them to expand revenue generation opportunities.
Internal Process Perspective
In this perspective we’re pulling back the curtain on our internal operations and using the penetrating light to identify improvement opportunities that will allow us to streamline the business, maintain our current customers, and possibly even uncover prospects for future growth and expansion. Let’s examine what must form part of your Internal Process perspective during a downturn.
Improved efficiency: This subject was introduced in the Financial perspective in the form of lower costs, and those decreased costs will often result from improved internal operations. One area ripe for examination in times of turbulence is the supply chain. Can you consolidate your suppliers? What about revisiting current purchasing arrangements? Now could be the time to negotiate more favorable terms.
Segmentation: In the Customer perspective discussion I stressed the importance of retention; maintaining, and if possible, growing relationships with current customers. In order to do that you must possess a deep understanding of your customer roster and their buying habits during a downturn, which may change dramatically. You need to know who is buying what, in what quantities, and what price points prompt them to look elsewhere. Segmenting your customers provides you with data that allows you to ensure the appropriate product, service, and price mix.
Research and Development/New product or service development: Ironically, despite the historic downturn in which we find ourselves mired, many experts say this is exactly the time to invest in the future – assuming your Balance Sheet allows you to do so. Think about it: your competitors may be teetering on the verge of bankruptcy, making them vulnerable, and the costs of many investments will be substantially lower due to the recession. Investing in a downturn is exactly what Apple did during the 2001 to 2003 downturn. Despite their own somewhat tenuous financial position – revenue fell 33 percent in 2001 over the previous year – they upped their research and development spending by 13 percent in 2001 and maintained that level for the following two years. That commitment to the future worked out very well for the company. In 2003 they introduced the iTunes music store and software and the iPod Mini. Rapid growth and more groundbreaking innovations followed.
Risk Management: Risk should be part of any well-conceived planning process, but its status must be elevated during a downturn. Scorecard architects Kaplan and Norton recommend three steps to glean insights into your risk exposure: First, attempt to identify the macro-economic variables that may put your strategy at risk. Second, estimate the impact of these variables on your profitability. Finally, aggregate risk exposure into your Scorecard, and discuss as part of your scheduled review meetings.
Employee Learning and Growth Perspective
This final perspective provides the intangible ‘enablers’ that will help to produce success in the other Scorecard perspectives. Of course, the most valuable of all intangibles possessed by organizations are the knowledge, skills, and capabilities of their employees. Now is the time to invest in this so-called ‘human capital.’ The prolonged recession has forced organizations to release legions of extremely talented individuals, making today’s free agent pool stronger than perhaps at any time in our history. And of course, given the nature of a downturn, you can avail yourself of that considerable talent at correspondingly lower costs.
Communication is another intangible that must be marshaled effectively during troubled periods. Providing clear and consistent messages informing your team of the ‘brutal facts’ facing you is vital should you hope to withstand the most damaging effects of the downturn, because it is precisely when things are at their apparent darkest that your people will most crave simple and honest communication of the circumstances you encounter. Open and honest communication now will lead to more informed decisions by every member of your team, and help you withstand the most severe effects of the crisis.
Final Thoughts
As a matter of practicality, you must determine whether the items discussed above will form part of your current Scorecard, or if you will create a separate “Downturn Balanced Scorecard” to be used temporarily as you navigate the current landscape. A case could be made for both alternatives. Segregating the matters above may lend added resonance and ensure laser-like focus in a time of crisis. However, including the topics in your current Scorecard sends a strong message of your belief in the Scorecard as a tool to guide you in good times and bad. Ultimately, of course, it is not the presentation, but the discussion and action taken on these topics that matters most.
Invoking an image of classic storytelling, these are indeed dark and stormy nights we find ourselves struggling through. What is vital in a storm is equally indispensable in a business downturn, and that is not drifting dangerously off course, but instead maintaining your path forward, despite the formidable obstacles. The Scorecard, with its time-tested and proven ability to help us measure what matters, is well equipped to serve as our intrepid guide during this voyage. By adding the items discussed above to your Scorecard or enlisting their aid on a Downturn Balanced Scorecard you’ll find yourself charting a course for current safety and future success.