Linking Strategy to Operations

Balanced scorecard and activity-based costing co-creator shares insights on evolution of management accounting tools.

Harvard Business School professor Robert S. Kaplan is co-developer of both activity-based costing and the balanced scorecard. In 2006, Kaplan was elected to the Accounting Hall of Fame, and received the Lifetime Contribution Award from the Management Accounting Section of the American Accounting Association. In 2008, the Institute of Management Accountants honored him with a Lifetime Award for Distinguished Contribution to Advancing the Profession of Management Accounting. The following is an edited transcript of a recent interview with the JofA.

JofA: Could you give a summary of how you’ve come to work with activity-based costing and balanced scorecards?

Kaplan: This journey started in the 1980s when I became exposed to the changes and innovations that were going on in management primarily through the Japanese management approach, which included total quality management and just-in-time inventory. And I realized that, if what I was hearing from practice was true, it undermined what we had been teaching and doing research on and actually practicing for the last 75 years. In effect, new approaches would be needed for both costing and performance measurement.

From that stage on, I started working on solutions. We found a few companies that had developed more accurate ways of assigning overhead costs to products and customers. That’s how the activity-based costing (ABC) movement started. But even these improved financial metrics captured only what was happening with physical and financial assets, not the organization’s intangible assets. The Japanese were gaining advantage through training and motivating their employees, improving the quality of processes, and working better with suppliers and customers—a whole set of performance capabilities that would not be picked up by periodic financial statements.

In 1990, David Norton and I developed the balanced scorecard (BSC), which retained financial metrics but supplemented them with metrics on the company’s performance with customers, processes, and people and culture. This was an independent development from ABC, which addresses, “What are the costs associated with our existing processes, products and customers?” The balanced scorecard responds to, “Are we creating current and future value for our shareholders and customers?”

JofA: In the United States, how do you see the implementation of activity-based costing progressing?

Kaplan: I think there was a clear upsurge of interest starting in the mid-1980s when we introduced the concept. I detected a falloff in the late ’90s and early part of this decade, just because the approach that we introduced ended up being too complex to implement.

People worried about subjectivity from people’s estimates about their distribution of time, and it was difficult to keep the cost estimates up to date. Processes changed, and the cost of re-interviewing people was high. I think that ABC’s use has gone down because people tried it, and it just proved too difficult. But I think the new approach, time-driven ABC, which Steve Anderson and I introduced, addresses these problems and makes ABC much more accessible and realistic for all enterprises.

Time-driven ABC works at the transaction and order level, and estimates directly the resource capacity (usually time) needed to process a transaction, build and deliver a product, and service a customer. It eliminates the need for subjective time estimates, which makes it easier to implement. And by directly linking processes to transactions, it is more flexible and accurate since variations in resource consumption can be readily modeled. ERP systems, which did not exist in the 1980s, now are widespread so the data for costing directly from transactions is now feasible.

Many accountants and finance professionals may not yet realize the simplicity and power of this new approach. They may remember that they tried ABC 10 or 15 years ago, and it didn’t work out as advertised because of the difficulty of working from and maintaining employees’ time estimates. The process time estimates used in time-driven ABC are much easier to obtain, verify and update as needed.

JofA: Has implementation of the balanced scorecard been similar to that of ABC?

Kaplan: I believe the adoption of the balanced scorecard has been much more widespread than even ABC. It addresses a fundamental issue that all enterprises, manufacturing and service, private sector and public sector, and nonprofit as well, face: how to describe, communicate and implement your strategy. We have established the Balanced Scorecard Hall of Fame that now includes more than 100 enterprises from all sectors and from countries all over the world that have used our philosophy to implement BSC and achieved performance breakthroughs. I do an informal survey in an executive program I teach at Harvard. Twice a year we get 160 executives, two-thirds of whom come from outside the U.S., for an eight-week program. This is pretty much a random draw from the world’s managerial population. They’re not coming to this program because I’m teaching the balanced scorecard; they’re coming to spend eight weeks at Harvard.

I start the sessions by asking how many are using the balanced scorecard in some form in their organizations. Consistently, over the past eight years, 65% to 70% of the hands go up. Not all of them may be following the principles that Dave Norton and I have been advocating over the last 10 years, but that still indicates the widespread adoption of the concept in some form.

JofA: In your most recent book, The Execution Premium, you introduce a six-stage closed-loop management system (see Exhibit 1). Does this system tie other management accounting tools such as ABC and balanced scorecards together?

Kaplan: A Harvard Business Review editor has called the strategy execution management system my “theory of everything.” It encompasses not only management accounting and control, but also quality management, beyond budgeting, strategy formulation, activity-based costing, analytics, operational dashboards and management by objectives. So it integrates a whole suite of management tools in a comprehensive and closed-loop system that links strategy and operations.

JofA: In your closed-loop system, it appears that ABC is really an operations planning and monitoring tool?

Kaplan: We describe how to use ABC for operational planning by having it forecast the levels of resource capacity—employees, equipment, space, technology—you need to supply in order to deliver on the revenue targets in your strategic plan. This is a powerful analytic tool that eliminates almost all of the guesswork, subjectivity and negotiations normally associated with the resource planning or budgeting process.

As the strategy is being executed, ABC monitors whether you’re making money from your strategy—not in aggregate, financial statements do that—but product by product, by product line and also by customer-by-customer and by segment and channel. So the ABC system gives managers detailed feedback on where the strategy is working and where not, and greatly facilitates decisions managers can make to transform unprofitable operations into profitable ones.

JofA: And the balanced scorecard is used both to translate strategy into operations as well as to monitor strategy?

Kaplan: We are making strategy actionable and helping allocate resources consistent with the strategy. We make an important distinction between monitoring operations, which you can do with dashboards and key performance indicators, versus monitoring the strategy, which is the role for strategy maps and balanced scorecards.

JofA: What do you see as the primary role for the finance organization inside this closed-loop system?

Kaplan: We’re advocating for a transformation of the finance function— we’re not abandoning traditional financial reporting, internal controls and auditing because all that still needs to be done. But these should not be the only processes that the finance function does. In addition to the statutory compliance role, finance needs to play a role for value creation. We might talk about the finance function being transformed from bean counting and reporting to participating actively in value creation. Instead of just looking in the rearview window, the finance function can use tools such as activity-based costing, strategy maps and balanced scorecards to help the organization look through the front windshield and navigate to a profitable future.

The final chapter of The Execution Premium talks about a new office of strategy management. This office or function coordinates all the activities that go into the six-stage management system. We describe the roles and responsibilities for the strategy management office as well as where it should sit in the enterprise. The most natural place is likely within the finance function because finance is traditionally involved in planning, resource allocation, reporting, monitoring and evaluating. We have given the finance function a new and robust set of tools to help it guide the enterprise into the future. One can think of renaming the CFO to become the CVO, the chief value creating officer, or the CPO, the chief performance officer.

JofA: For CPAs who haven’t had a lot of experience up to this point with either activity-based costing or balanced scorecards, how would you recommend they go about learning this? Where should they start and what should their focus be in learning how to become an integral part of a closed-loop system like the one you describe?

Kaplan: On the particulars of ABC and BSC, there are many articles, books and cases available that they can order. As far as having accounting and finance people become more central to the strategy management system, they’ll have to get more comfortable being a business partner with the line managers and general managers, the CEOs. You can’t just be the scorekeeper, sitting on the sidelines. You actually have to be part of the team. And that’s probably a good place to start, is to become a more value-added partner of the team. You still need the finance function to be the corporate conscience or the corporate skeptic. Not all strategic ideas are profitable ideas or ideas worth doing, and the finance function has to retain that skepticism and control mentality. But they must complement the control function with a mind-set of helping the organization create sustainable value.

Accountants don’t need to reinvent this stuff; these ideas now have been out about 20 years and there’s been enough written about them that they should be able to do some reading or go to some courses to learn the fundamentals.

JofA: How do you see the use of balanced scorecards and strategy maps and strategy execution and dashboards and budgets—the things that are in the center of this closed-loop system—evolving over the next five years or so?

Kaplan: I think that our current knowledge about the effective use of strategy maps and scorecards now offers something uniquely valuable that no other approach can. The ability to describe your strategy, to measure your strategy, get feedback on your strategy—these are fundamental to business. All businesses need these capabilities, but until we formulated strategy maps and scorecards, they lacked the tools to accomplish them. I think that most people now recognize the limitations of attempting to manage competitive organizations with financial metrics alone. Financial metrics remain important, but they’re not sufficient for guiding the success of the organization, and we now know how to fill the gap.




JofA articles
ABCs of Batch Processing,” Aug. 07, page 40
Accountability by Numbers,” June 03, page 61

Smart Management Reporting: Maximizing Business Performance, a CPE self-study course (#733561)

Business, Industry & Government
For more information and resources for members in business, industry and government, please visit the Financial Management Center at

View the archive of the Sept. 18 AICPA Strategic Management Infocast with Robert Kaplan at

For more information or to place an order, visit or call the Institute at 888-777-7077.


Books authored or co-authored by Robert S. Kaplan:
The Execution Premium: Linking Strategy to Operations for Competitive Advantage
Time-Driven Activity-Based Costing
Strategy Maps
The Strategy-Focused Organization
The Balanced Scorecard: Translating Strategy into Action
Implementing Activity-Based Cost Management
Relevance Lost: The Rise and Fall of Management Accounting

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