R&D becoming E&S?

The next incarnation of the famous Balanced Scorecard, is this actually what I am working on? If it is, the outcome better be a whole lot different than what you would find today when embarking on a strategic revamp of your corporation with the help of those advanced (and expensive) management consultants telling you to draw strategy maps and bespoke Balanced Scorecards…

David Norton and Robert Kaplan introduced the balanced scorecard in a very influential Harvard Business Review article in 1992 based on a multi-company research project to study performance measurement in companies whose intangible assets played a central role in value creation (Nolan Norton Institute, 1991). The intangible assets were meant to be captured in four key dimensions: Financial, Customer, Internal Business Processes and lastly Learning and Growth.

Interestingly, and also quite enlightening on how the normal management consulting firm works when implementing new ideas from academia in to large companies, the very first implementation I ever saw of the Balanced Scorecard was already bastardised and corrupted far beyond recognition from it’s original intention. Additional dimensions had been added and tangible financial metrics were mixed with strategic non-tangible ones. The management consultant firm who created this “improved” Balanced scorecard probably both listened to the costumer and got paid handsomely. The minute detail that remained in terms of implementability and possibility to follow up on the promise of Norton and Kaplan’s 1992 HBR article were left for others to take care of…

Now, more than 20 years later there are, to no ones surprise, still very few studies that support Balanced Scorecards as a model of management accounting that creates more value (for shareholders and customers) than other models of operational management. When trying to understand and quantify the value of a Balanced Scorecard there seems to be a wide agreement that it is impossible to distinguish between cause and effect of plotting and distributing your strategy in this very specific way. Perhaps the practical implementation of Balanced Scorecard and strategy map mechanisms have become an unintended worst-of-breed manifestation from the merger of compliance and governance, mixing financial metrics with intangible assets (which I experienced first hand).

Rhetorical question to the reader: What metric will dominate your bi-weekly follow up meeting of the balanced scorecard in your organisation, sales and margin figures (tangible) or the subjective customer satisfaction score?

This also highlights what happens when you, the corporate executive, have your (bastardised-) Balanced Scorecard in one hand and new investment proposals in the other. The knee-jerk reaction will be to treat everything that can risk your status quo with an unhealthy amount of skepticism. -After all, investing in something unproven will potentially drain my annual profitability. Let someone else do that.

When managers at the helm of a company use the Balanced Scorecard as a method of de-risking the enterprise in a way that also stifles innovation down the ranks of corporate hierarchies it also detaches the company and it’s employees from having a meaningful customer dialogue other than -look what we made, now buy it from us.

In late 2014, as part of my Eisenhower Fellowship, I had an extremely meaningful and efficient one-hour discussion over coffee with MIT Research Fellow and author of the recent book “The Innovators Hypothesis”, Michael Schrage. Michael and I discussed the processes of innovation in larger companies and the way we tend to increase friction the larger we get. Friction, in this perspective, gravitates around the notion of self inflicted problems and inhibitors to change, that we, the large companies of the world tend to create when we grow.

Michael presented a way of looking at the next generation of successful large technology companies as one where we replace R&D with E&S. In short, his idea is that, in order to be successful in a world where you can no longer expect that people will buy the products you think the world should buy from you. You have to embark on a journey of Experimentation and Scaling as opposed to classical Research and Development methods (E&S vs. R&D).

Now, before all my R&D friends out there say that: -we get it Rickard, and, we are doing this since 10 years already… I would like to invite you all to a discussion on the premise that the E&S approach should include very little actual development work, if any. Rather, Michael Schrage describes this as a Business innovation approach supported by the understanding of technology. The difference between technical development and business development is that in a world where we (supported by rapid prototyping, lean startup etc.) embark on a journey of finding statistically evidence (truth) of technical success we forget that what we were really supposed to explore and quantify the actual Value that we are providing to our customers…

Or, as Michael puts it in his book “what does your customer want to become”.