Back in 1992, Harvard Business School professor ROBERT S. KAPLAN evolved a performance metric, the Balanced Scorecard, for businesses. It assesses a company's performance on intangible yet vital criteria such as customer loyalty, product innovation, employee capabilities and culture. Several global organisations, including Indian multinationals, have adopted it. Kaplan spoke to Business Today's MANU KAUSHIK on a recent visit to India. Edited excerpts:
On why the Balanced Scorecard matters:
There is this inability of the financial accounting model to capture the value created by intangible assets. Companies can build facilities and have equipment. They create value in terms of tangible assets on the balance sheet. But that's a small percentage of how value gets created. The value creation process depends on multiple types of intangible assets. First, the company should have a good strategy and be able to understand customers. It has to have robust internal processes that create products and services, strong focus on innovation and employees with skills. Ours is a framework by which those aspects of a company's performance get measured.
On the shortcomings of Indian academic institutions:
There is general concern that Indian academic institutions are not close enough to industry. Many business and engineering schools are unaware of what Indian companies are doing, whether it is Tata Group or HCL. There are innovative practices of these companies which are not being taught currently even in the leading schools. Engineering and business schools are professional institutions. To serve the profession, they have to understand the current problems.On why costing techniques of large corporations are archaic:
Most organisations are trained in a certain way. For them, cost accounting is not as exciting as product design, product development and marketing. So they don't give attention to it. I am doing work for a large organisation where we are trying to understand their whole supply chain costs - from raw material purchase to delivery to their customers. Today, they don't have a system that can tell us their end-to-end costs.On why companies need to apply cost management techniques:
Through my research, we already know how to do costing more accurately. We don't need any new innovation. The theory is there, the issue is the application. We need business leaders to recognise that perhaps their costing method is wrong. Businesses with narrow profit margins such as distribution companies, which handle tens of thousands of products, should be able to tell their profit and loss on every product. But they can't. Some of the systems they use are very inaccurate.