Chris Gough is a Consultant at Grant Thornton. He may becontacted on 0171 728 2289 or at Chris.H.Gough@gtuk.com.
All industries, and service industries particularly, have to mobilise andexploit their intangible or invisible assets. The implementation of a knowledgemanagement initiative requires a comprehensive approach that addresses afirm’s culture, its business processes, its management, leadership and its IT– all at once. A conjurer with many spinning plates on tall canes comes tomind!
The rapid deployment of IT in all businesses has provoked revolutionarychange in the way that business processes are undertaken. In the law firm of 25years ago, manual production of documentation and paper-based research wasunquestionably the norm; 15 years ago, word processing and the manipulation ofthe typed word on computer fired the imagination of many as to what the futuremay bring. The last five to ten years have seen the escalation of client/servercomputing with the goal being the ultimate ability to share resources andinformation.
All businesses are in the midst of a change; and law firms are no exception.We are seeing the change from industrial age to information age competition.Sustainable competitive advantage no longer comes just from the rapidinstallation of new technology into physical assets and the prudent managementof financial assets and liabilities.
The Balanced Scorecard is a performance measuring system. It has evolved froma need to provide business managers with a complete set of tools with which toplot a course to competitive success.
Why We Need A New Performance Measuring System
A number of challenging operating assumptions now face modern law firms.
- Cross-departmental initiatives are common. Firms need to supply integrated legal and business services that cut across traditional departmental functions.
- Information technology often links law firms directly to their client systems. On-line access to matter information changes the traditional client relationship and places more pressure on a firm to ‘get it right’.
- Client segmentation forces information age law firms to offer customised services to its diverse customer segments – firms must know what their clients want.
- Domestic borders are no longer a barrier to competition from efficient and responsive foreign law firms. Information age firms must compete in a global environment while marketing sensitively to local clients.
- All employees are now ‘knowledge workers’ and must contribute value by what they know and the information that they can provide. Investing in, managing, and exploiting the knowledge of every employee will become critical to the success of information age law firms.
Operating in these complex environments, law firm managers need instrumentsto navigate a firm to competitive success. The Balanced Scorecard is aperformance measuring tool that has been devised to meet the needs of thesechallenging times.
‘Scorecarding – What Is It?’
We owe the development of the Balanced Scorecard to Professor Robert Kaplanof the Harvard Business School and David Norton, president of RenaissanceSolutions. It is a performance measuring system which measures rates of progressby reference to continuous improvement activities. Many organisations begin byapplying scorecarding techniques only to one project or initiative rather thanattempting to construct a scorecard which is designed to measure performanceacross a whole firm. In addition to traditional financial measures of success,score„carding includes performance measures relating, for example, to clientsatisfaction and employee skills. The measuring system lays down benchmarks forfuture successes while measuring the success of existing projects. The key tosuccess in using scorecarding techniques is the translation of a firm’smission statement and strategy into a comprehensive set of performance measuresthat provides the framework for a strategic measurement and management system.
Many have a negative approach to measurement and think of it as a tool tocontrol behaviour and to evaluate past performance. The measures on a BalancedScorecard should be used differently – to articulate and communicate thestrategy of a business and assist in aligning individual, organisational andcross-departmental initiatives to achieve a common goal.
The Four Perspectives of the Balanced Scorecard
The scorecard measures organisational performance across four balancedperspectives:
- financial
- customer/client
- internal business process
- learning and growth.
Historically, businesses have measured success in purely financial terms.However, it can be argued that too much reliance was placed on short-termfinancial results at the expense of long-term value creation. Theunder-investment in intangible and intellectual assets that generate futuregrowth have been too often overlooked. While the financial success of anyproject or initiative is still of prime importance, The Balanced Scorecardincludes other perspectives mentioned above.
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When using the Balanced Scorecard as a performance measurement tool for afirm as a whole, the ‘client perspective’ allows partners and managers toidentify the client and market segments in which the firm will compete. Thisperspective will typically include several core or generic measures of thesuccessful outcomes from a well-formulated and implemented strategy. If applyingthe Scorecard to a specific project, such as a knowledge management (KM)initiative, the client perspective is likely to focus on key outcomes such asenforcing client loyalty or improving the speed of client service.
The ‘internal business process’ perspective focuses on the criticalprocesses which must operate effectively for the firm as a whole, or anindividual project, to succeed. In a firm-wide initiative, the perspective wouldconcentrate on the processes which facilitate the delivery of accurate, highquality advice to clients. In the measurement of a KM project, the team involvedmay look closely at the mechanisms employed to gather the ‘know-how’ andspecimen documents from fee-earners which are ultimately available to others viasoftware systems.
The ‘learning and growth’ perspective identifies the infrastructure thatthe organisation must build to create long-term growth and improvement.Organisational learning and growth comes from three principal sources: people,systems and efficient procedures. The other Scorecard perspectives will oftenreveal large gaps between existing capabilities of people, systems andprocedures compared to those needed for a firm or initiative to achievebreakthrough performance. To close the gaps, firms will have to invest in re-skillingemployees, enhancing information systems and aligning organisational proceduresand routines. In relation to a KM project, the ‘learning and growth’perspective gives an opportunity to examine the personal skills and culturalchanges which are necessary to get the most from such systems.
Cause and Effect Relationships
In order to develop an effective Scorecard, an entire chain of cause andeffect relationships need to be developed throughout the four perspectives. Theareas where performance drivers will test success or failure can then behighlighted. Cause and effect relationships are ‘if – then’ statementsthat are linked to a firm’s strategy.
Performance Drivers and Outcome Measures
The Scorecard should have a mix of outcome measures and performance driverswithin each perspective. Performance drivers communicate how the outcomes are tobe achieved and suggest the measurement to demonstrate success. Taking theClient Perspective as an example, a firm employing Scorecard techniques tomeasure the success of their KM initiative may decide that the strategicobjectives for a knowledge management system may be to:
- increase client satisfaction
- increase client retention
- increase the rate of acquisition of new clients.
These are fairly ‘standard’ objectives for the firm in any event. But howwould you test that your KM project was delivering these outcomes? Some examplesare shown in the diagram opposite.
Measurement as a Tool for Tracking the Success of Knowledge Projects
The ultimate success of IT projects, and KM initiatives are no exception, hasoften been difficult to measure. That, in some part, is due to the fact that ITimplementations often concentrate on getting the installation of machines andhardware right rather than concentrating on efficient human interaction withthem. It has often been the case that, long after technical consultants haveleft a site which is ostensibly working satisfactorily, there are still humanand cultural issues which are unresolved or remain to be tackled. The benefit ofadopting the Balanced Scorecard as a tool for measuring success of projects isthat the measurement process highlights the areas which require extra work tokeep the project ‘on track’ and improve it.
By concentrating on the firm’s strategy, the Balanced Scorecard encouragesa shared understanding and keeps the firm’s vision at the forefront of theminds of those involved in the project. Keeping the four perspectives in mindcreates an holistic model for the firm’s strategy or a project-related sectionof it and focuses on the change efforts which are necessary to implement theproject successfully. A strategy is a set of hypotheses about cause and effect.The measurement system should make the relationships among objectives in thevarious perspectives explicit so that they can be managed and measured.
The Balanced Scorecard should have a mix of outcome measures and performancedrivers. Outcome measures (eg a workforce with improved skills in the growth andlearning perspective) and performance drivers (eg training undertaken by eachemployee) detail what is to be achieved and as importantly how it will beachieved. The project manager or sponsor will also get early indications aboutwhether a project is being implemented successfully – and ultimately whetherthe firm’s strategy is being followed.
A comprehensive system of measurement and management will specify how theimprovement in client service resulting from a KM initiative has in turnimproved financial performance. Whether those indicators are increased fees as aresult of improved client service or improvements in profit because ofreductions in time spent, the financial goals should be included in thescorecard.
The Role of Scorecards in Identifying Opportunities for Best Practice Sharing
Implementing a knowledge management initiative will invariably involve usingIT to enhance the collection and dissemination of information. One of the keysto ensuring success of the project will be understanding and making the culturalchanges which are necessary to encourage the sharing of ideas, documents andknow-how.
The performance drivers which should form part of the Learning and GrowthPerspective of the scorecard to ‘drive’ the cultural change will probablyinclude, as mentioned, itemising all of the training necessary for personnelusing the system, testing the effectiveness of the software itself as well asdealing with the motivational issues (ie why should personnel change the waythey work to ‘populate’ this new system with information)? Devising anincentive scheme to encourage contributions to the KM system is a way ofencouraging employee ‘buy in’.
Core outcomes of the Learning and Growth Perspective performance drivers are(or should be) employee productivity, satisfaction and retention; use of thesystem and regular contributions to it and an appreciation of the system’sbenefits through increased understanding of it.
The Internal Business Process Perspective should examine the processesnecessary to ensure that best practice sharing is identified and noted. Exampleswould include group/departmental meetings, processes necessary for documentprofiling, key word identification, etc.
Using Scorecards to Improve the Capture and Sharing of Client Information
In the client perspective of the Balanced Scorecard, firms identify theclient and market segments in which they have chosen to compete. These areas ofwork will deliver the revenue from the firm’s financial objectives.
In the past, firms could concentrate on their internal capabilities;emphasising experience as a key reason for existing and potential clients toinstruct the firm. Firms are now shifting their focus to client needs –mission statements frequently declare that ‘delivering value to clients’ isa firm’s primary goal. In order to do that, firms have to understand theirclients’ needs and their criticisms of the services they currently offer.
Clearly, firms must understand what their clients want from them. They mustcreate a service that is valued by clients if they are to achieve consistentfinancial performance. Within the customer/client perspective, it is vital thatthey understand their clients, the clients’ businesses and the clients’requirements.
Building a Balanced Scorecard
Whether devising a Scorecard to measure the performance of a whole firm or ajust a specific project, it will be necessary to appoint an ‘architect’ tocollect background information and explain the process to those involved. Thearchitect will ‘own’ the philosophy and methodology for designing anddeveloping the Balanced Scorecard. The architect oversees the process, schedulesmeetings and interview sessions, and keeps the project ‘on track’. He or shewill need to work with a firm’s executive team, particularly to obtainconsensus and clarity about strategy and the objectives of the project. This canoften be more difficult than it sounds; as expectations and objectives are oftenfound not to coincide.
Many, however, find the appeal of a Balanced Scorecard to be obvious and takereadily to developing a balanced approach. In identifying and agreeing theprincipal purposes of the project, the team should also work out the frameworkfor implementation and the management processes that will follow theconstruction of the scorecard.
The benefit from spending time in developing a Balanced Scorecard initiativebecomes particularly apparent when score„carding is transformed from ameasurement system into a management system. As the scorecarding concept isdeveloped, it can be used to:
- clarify and gain consensus about strategy
- communicate that strategy throughout a firm
- align departmental and personal goals
- link strategic objectives and long-term targets and annual budgets
- obtain feedback to learn about and improve strategy.
Scorecarding can rapidly become a law firm’s primary management tool inforging a path to competitive success.
