Published here December 2003. 

PART II | Reason 3 | Shareholder Value | Stakeholder Value
Finding the Right Metrics | Metrics as "Observables" and the Clairvoyant Test
Don't Forget Financial Metrics | Be Careful Using Balanced Scorecards
Each Organization Needs Its Own Metrics | PART IV

Be Careful Using Balanced Scorecards

The majority of currently available, project prioritization and portfolio management software tools provide the capability for defining both financial and non-financial metrics. The tools are often based on the balanced scorecard approach. Balanced scorecards can be effective, but there are problems with the way they are often implemented. First, the scorecards are typically defined so as to trade off achievement of objectives in some arbitrary or subjective way intended to imply balance. That is "The measures represent a balance between external measures for shareholders and customers and internal measures of critical business processes, innovation, and learning for growth".[4]

But, maximizing value requires efficient business processes, innovation and learning, and customer satisfaction. Why would an organization want to accept less value (e.g. lower shareholder value), in order to obtain a higher score (i.e. better "balance") on some internal business process? Maximization, and not balance, is the goal.

The second problem is that, contrary to typical scorecard mathematics, it is generally not correct to weight objectives that represent means for achieving more fundamental objectives. For example, suppose we include scorecards for both costs and business processes. But, improving business processes is a means for achieving the more fundamental objective of reducing costs. Thus, a project might get a favorable score on process improvement, but zero weight should be assigned to this score if the value of that process improvement is completely reflected in a favorable score assigned to cost reduction. If the weight is not zero, there will be double counting.

Failure to account for the hierarchical nature of objectives and the consequent overlap is a serious error being made by many who are designing tools for project portfolio management. For example, several websites suggest that There are four goals for portfolio management: value maximization, balance, strategic direction and the right number of projects. In fact there is only one goal: value maximization. The proper balance, strategic direction and number of projects are whatever is required to maximize value to the organization.

A third problem is that it is generally not correct to add different types of value. This statement, which is well established by value measurement theories such as multi-attribute utility analysis, often comes as a surprise to people accustomed to adding and subtracting money values. In fact, being able to weight and add sources of values is an exception. It requires the condition in which the value of achieving any level of performance on any one objective does not depend on the degree to which any other objective is achieved. Scoring methods are being advocated that involve weighting and adding scores for criteria such as project risk, internal rate of return, time-to-complete, urgency, and many other criteria that fail to pass this test.

It makes no sense, for example, to weight and add a project's score for time-to-complete to weighted scores for other criteria that indicate the value added once the project is completed. Being quick is much more valuable if the project adds a lot of value than if the project adds little or no value. Weight-and-add could only make sense, in this case, if the weights are not constants; that is, if the weight assigned to time-to-complete is a function of the ultimate value of the project.

A sound value model addresses these issues by specifying a logically correct way of quantifying value. Prioritizing projects using a balanced scorecard approach will distort project decisions unless the weights and mathematical form of the aggregation equation are derived consistent with the model of value.

Don't Forget Financial Metrics  Don't Forget Financial Metrics

4. R. Kaplan and D. Norton, The Balanced Scorecard, Harvard Business School Press, 1996.
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