Look beyond the budget, says finance guru

Management expert Robert Kaplan is telling New Zealand executives just balancing the books won't future-proof their companies. Photo / Natalie Slade

It might seem strange for an accounting scholar to believe so strongly in the need for businesses to focus on non-financial measures.

But Harvard University professor Robert Kaplan says financial gauges are too narrow to judge the success of business in the modern world.

"Success in today's world does not rely on just meeting financial measures. Customer loyalty and relationships, quality of employees, information systems - none of those rely on financial measurements [but] are so important."

The70-year-old co-founded the Balanced Scorecard management plan in 1992 with colleague David Norton and has spent nearly 20 years travelling the world talking to businesses.

The system likens executives to pilots with a range of controls and indicators in front of them which they use to make decisions and develop strategies, and has been endorsed by corporate heavyweights such as Mobil.

The Balanced Scorecard was widely picked up in the Western world in the 1990s and has now spread to the Middle East and Asia.

But Kaplan, speaking from Wellington this week on his third trip to New Zealand, said reminding people of its relevance to today's markets is one reason he keeps travelling.

"Many people view this as a mature if not stale method. I'm here to show them some of the exciting new enhancements," he said yesterday before an Auckland conference of 200 executives.

Kaplan's system focuses on improving non-financial aspects like customer service and delivery, upskilling staff, improving processes and incorporating technology.

"If you want to have sustainable financial performance you need to identify what customers want and deliver an attractive product or service to them.

"If you want to excel at innovation, that has certain demands on people. There's a need to assess what skills people have."

Kaplan says one of the biggest mistakes companies make is not committing enough people or resources to making any changes they want.

"Strategies don't execute by themselves. Many companies formulate a plan, send brochures to their employees, then nothing happens."

Businesses must work with staff to get the message through. "They need to make it real and tangible."

Kaplan admits trying to get many corporates to look at areas not linked to the budget can be tough, particularly in the current environment.

It can be particularly hard to get established executives, who've worked their way up through the business using traditional systems, to introduce change.

"It makes them nervous. It's like learning a new sport at the age of 50. Having a visionary leader will mean they understand that doing the same thing that got them here today will not be adequate for the future."

The role of risk is also something that has come to the forefront in the past three years.

"My current thinking is that rather than embedding it in the management structure, it's so important it needs to have its own key objectives and strategies."

Companies need to identify the risks and recognise early warning signs so that they can be mitigated. A prime example of a company that failed to plan for risks is BP.

He says it was to be expected that BP would drill for oil at riskier sites than in the past as oil has become more scarce, but it didn't have enough plans in place should something go wrong.

Paul Brock, chief executive of Kiwibank, which has been using the Balanced Scorecard system since 2007, says the biggest advantage is that it allows for tight focus.

"It's a visual tool to see whether you are getting there."

Brock says the system allowed it to get staff more involved in making changes."Instead of having a handful of people involved from the executive you get more than 50 people."

Robert Kaplan
* Harvard University professor and co-founder of the Balance Scorecard.
* Born in 1940 in New York City.
* Until the age of 10 he lived with his parents and two sisters in a one-room apartment in the Bronx.
* Attended Massachusetts Institute of Technology where he earned Bachelor of Science and Masters of Science degrees in electrical engineering.
* Attained his PhD at Cornell University and became interested in finance and accounting.
* Spent 15 years working at the Graduate School of Industrial Administration at Carnegie Mellon University before moving to Harvard in 1984.
* He has authored or co-authored more than a dozen books and more than 125 published papers in academic and professional journals.
* Married to wife Ellen with two daughters.