The Balanced Scorecard field has gone through two stages of development: a business indicators stage and a strategic modeling stage. The discipline has been remarkably successful in the sense that the Balanced Scorecard has been widely adopted and applied and that software tools for strongly supporting its first two stages are readily available and have benefited from vigorous competition. But there are at least five challenges facing the practice as follows:

1. Dissatisfaction and perceived failure involving Balanced Scorecards appear to be too high, and reports of lack of impact seem too plentiful.

2. The strategic component of Balanced Scorecards often lacks concreteness and undermines strategy mapping efforts.

3. The Balanced Scorecard framework is conceptually inadequate as a guide to specifying key performance indicators (KPIs).

4. Balanced Scorecards are characterized by measurement modeling weaknesses, which lead to either too many indicators or a set of indicators that don't encompass important variation in organizational behavior.

5. Balanced Scorecard implementations have substantial impact modeling and evaluation research weaknesses that prevent testing of the cause-and-effect relationships in strategy maps.

Due to these challenges and related problems, a third stage of Balanced Scorecard practice is emerging. But the form it will take is not entirely clear, because we are the ones who must make that decision. The third generation may involve major modifications of the original four-perspective conceptual framework (financial; customer; internal business process; learning and growth), since to qualify as a new stage or generation, a new wave of practice has to involve more than incremental changes in techniques and tools relative to present patterns of practice.

Space constraints prevent me from describing all of these challenges in the accompanying Executive Report . Instead, because of their great importance, and because of the relatively small amount of attention given to them, I've chosen to focus on offering solutions to two of the five challenges: the conceptual framework underlying Balanced Scorecards and the problem of strengthening its measurement models.

The initial four-perspective Balanced Scorecard framework is best seen as a beginning. We need to go beyond it to develop a better and expanded ontology framework for metrics development.

ADAPTIVE SCORECARD

Many companies using the Balanced Scorecard may want to revise their Balanced Scorecards gradually, so an Adaptive Maturity Model is offered for use in developing the third stage of Balanced Scorecard practice. The model views financial performance measures as Level 0 of an envisioned Adaptive Scorecard evolution. The Balanced Scorecard with its four-perspective framework of measures and indicators is Level 1 of the model, and the report develops three additional levels.

The first level of this Adaptive Scorecard, Level 2 of the model, distinguishes operational performance measures from intelligence performance measures but retains the four perspectives as the rows of the framework. The basis of the distinction between operational performance and intelligence performance measures is the difference between routine and creative learning. Creative learning at the organizational level is at the heart of organizational adaptive functioning, and this idea involves the following categories of intelligence performance measures: decision processing; knowledge processing; knowledge management processing; their information and knowledge outcomes; and their non-knowledge and non-information outcomes. These categories provide the top level of a conceptual framework for developing intelligence performance measures in each perspective of the Adaptive Scorecard.

These intelligence performance measures cannot be easily measured using the range of indicators and the very simple measurement models used in the first and second stages of the Balanced Scorecard. Instead, intelligence performance measures must be developed using a group decision process, panel-based human judgment, and text sources.

Creating the Adaptive Scorecard by introducing measures and indicators of intelligent performance is no trivial task. It involves adding to the conceptual framework underlying scorecards, adding measurement modeling, and adding other new tools to the kit bag of Balanced Scorecard practitioners. But change in the Balanced Scorecard does not end there. Once Level 2 of the Adaptive Scorecard Adaptive Maturity Model (AMM) is integrated into the practice of organizations, Level 3 then calls for the introduction of a new perspective adding measures of the external impact of an organization to its scorecard.

Previous levels of the Adaptive Scorecard framework, in not including an external impact category, give a free pass to organizations to avoid measuring the degree to which their organization is socially responsible. The Level 3 Adaptive Scorecard is the first scorecard that would explicitly provide a foundation for tracking organizational social responsibility over time, and it could be applied by all forms of organization, whether private, nonprofit, or public.

The step to Level 3 is another major development in scorecard progress, but the introduction of Level 3 will require much effort. One consolation is that the organization is much less likely to be blindsided by unexpected external side effects that threaten its very survival. The other is that the Adaptive Scorecard will be balanced between internal and external impacts for the first time.

The breakdown of all scorecard perspectives into process and outcome measures in Level 4 highlights the fact that outcomes are produced by processes and that organizational strategy models that directly link outcomes without going through processes are missing some vital links. The inclusion of the doing/managing distinction highlights the problem of evaluating the quality of managing in a Balanced Scorecard context. Level 4, the last step in the Adaptive Scorecard AMM, incorporates a management evaluation perspective, a real advance over previous views.

CONCLUSION

The information in the report suggests that the third-generation Balanced Scorecard will be an Adaptive Scorecard. It will have an expanded and more balanced conceptual framework, a destination statement, a more broad-ranging set of indicators, more sophisticated formal modeling of measures, and simulation of strategy and dynamics, with greater applicability to the reality of organizational complexity, and an emphasis on facilitation sessions for information to use in both measurement and dynamic modeling.

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