(FORTUNE Magazine) – It's new, and to those fascinated by the slash and thrust of financial management, it's really sort of sexy. It's called a corporate scorecard, and it's making quite a stir. Articles are appearing in academic publications like the Harvard Business Review and Sloan Management Review, consultants are flogging it on road shows, and companies as various as Shell and Analog Devices are singing its praises.

In essence, a corporate scorecard is a sophisticated business model that helps a company understand what's really driving its success. It acts a bit like the control panel on a spaceship--the business equivalent of a flight speedometer, odometer, and temperature gauge all rolled into one. It keeps track of many things, including financial progress and softer measurements--everything from customer satisfaction to return on investment--that need to be managed to reach the final destination: profitable growth. For example, a scorecard might graph customer service (is it improving or deteriorating?) and at the same time tally product defects (are they rising or falling and where?).

Even more important, scorecard software, which is usually distributed throughout a company's computer network, lets managers across the entire organization be certain they are talking about the same thing when they get together. If, say, customer satisfaction is dropping, the folks from sales, manufacturing, and R&D will all be reading the same score, and thus will be able to tackle the problem from common ground. It's little wonder, then, that according to a recent study by the Institute of Management Accountants, 64% of U.S. companies are experimenting with some sort of new performance measurement system.

But not all is so simple these days in the land of scorecards. A controversy is raging between two schools of thought. One, led by companies like Motorola and Analog, a highflying semiconductor maker, believes that a scorecard should be balanced. Analog, for instance, not only keeps close watch on financial performance numbers like gross profit margins on new products but also measures the softer stuff--processes like the time it takes to get a new product to market and employee satisfaction.

But there's another school of thought, led by companies like Fortis, a financial services giant, and Shell Oil, that says that the balanced scorecard confuses the issue, that a company should have a sophisticated way to measure itself but that those measurements should be purely financial. Here, managers use hard measurements like revenue growth and return on investment to guide the business.

"This is the big philosophical discussion right now," says John K. Shank, a professor of accounting at Dartmouth's Tuck School. Shank favors the more holistic balanced-scorecard approach: "At great companies like Motorola, they don't talk profits, they talk key drivers," he says with uncommon intensity. "How are you managing your manufacturing yield rates? Your cycle times?" If you manage those, the balanced-scorecard fans argue, the bottom-line results will come. "But managing by the financials," says Shank, "won't necessarily get you better financial results, because the financials only tell you where you were--they're history. They don't tell you where you're going. And they certainly don't tell you anything about your potential."

Advocates of the hard-number approach strongly disagree. "It can be very difficult to make decisions with a balanced scorecard," says Larry Selden, a professor of finance at Columbia University's graduate school of business administration. "How do you know the cost of gaining or losing a customer, for example? How do you know the lifetime value of a customer?" Those in Selden's camp--call them the number crunchers--believe you first have to measure how much value each activity contributes to (or destroys for) the company as a whole. "If I don't measure it, I don't understand it," says Selden. "Maybe you can use the balanced scorecard after you've done the financial analysis, but you have to begin with the financial measurements to decide what's on the scorecard."

No company is more devoted to the number-crunching school than Shell. In the early 1990s oil prices were falling and Shell's earnings were dismal to nonexistent. The creation of the Shell Business Model, as it is called, "was part of the company's larger, overall transformation," says Philip J. Carroll, Shell's president and CEO.

It was no small effort. Under Carroll's leadership, Shell dynamited its old corporate structure. As the smoke cleared and the wreckage of the old structure was carted away, including its old governance structure, Shell's corporate center, says Carroll, shrank from dozens down to an office made up, more or less, of himself and his secretary.

The old, imposing, monolithic Shell suddenly ceased to exist. In its place were four operating companies--Exploration & Production, Oil Products, Chemicals, and Services. Each of these businesses received its own internal board of directors and its own bottom and top lines. The results of the operating companies were consolidated into a single overall balance sheet. The reorganization looked good on paper, but something was missing.

Carroll needed a way to get his people more focused on the business. With 21,000 employees and $29.2 billion in revenue in 1996, this would be no easy task. Shell's employees viewed themselves as working primarily for a technology concern. And while they excelled at drilling deepwater wells from vessels and floating platforms anchored in the choppy Gulf of Mexico, they did not excel at watching the corporate wallet. As a result, Carroll decided to give "people working in the company a better way to understand economics," as he puts it. In other words, he wanted a way to change behavior.

The Shell Business Model was the answer. "Historically at Shell, managers would talk about how to build something like a chemical plant or a platform better, faster, or cheaper," says Thomas M. Botts, Shell's treasurer and general manager. That conversation still takes place, but now it is in the context of running the business profitably. "We're no longer focused just on how to build something," says Botts, "but on how it can create value. The intent is to have all 21,000 people know what drives value for the stockholder."

Shell's model uses a simple four-square matrix. The top left quadrant of the matrix contains a measurement for revenue growth. The top right-hand box of the four-square matrix is where Shell's model keeps track of what it calls its "intrinsic business value," which indicates the overall market value of the company--what it would be worth if it were put up for sale. In the bottom right quadrant is a number similar to economic value added, or EVA, that tells Shell's managers whether they're earning more than their cost of capital. Finally, in the bottom left quadrant, there are measures for return on investment.

Like a trip computer and road map, the model simply points the way. "It is not a program that lets me sit at a computer and figure out what the East Chicago revenue is going to be," says Carroll. "Rather, it influences the way I can discuss and evaluate the changing business strategies of the business units. We think of it as a financial beacon that supports decision-making in a very rigorous way," he says.

So how does it work in practice? When Shell evaluated its shallow-water drilling business in the Gulf of Mexico, using the model, it discovered a whole host of economic drivers affecting that business's success. "One of the major things we determined was that the time between the discovery of oil and gas and when it came on production was an average of four years," Carroll says. Until the model, Shell did not recognize the effect those long lead times had on profitability, since the company historically focused on maximizing return on investment and not so much on revenue growth. As a result, it undervalued the contribution of revenue growth to the company's bottom line.

After putting the model in place, Shell's managers learned that there was a causal link between revenue growth and shareholder value. As a result they have made shorter cycle times one of their objectives. Since the model has gone online, the time it takes to get a platform up and running has been shortened, in some cases, to as little as a year. To do that, Carroll has shifted more investment resources into building Shell's oil platforms faster.

Shell has been inching its way back to health since it created its new business structure and began employing the Shell Business Model. Net income jumped to $2 billion in 1996, from $1.5 billion the year before. Cash flow has improved, and so has revenue, $29.2 billion in 1996 from $24.7 billion in 1995. These figures indicate a company on the mend.

While Shell has done well with its purely financial approach, companies like Analog Devices believe that the numbers alone don't tell the whole story. Analog's headquarters is in a low, sprawling red-brick building about 20 minutes outside Boston. The company's mainstay products are computer chips for use primarily in communications, military, aviation, and cellular phone applications.

"In the mid-1980s we were not doing well. We simply needed to become more competitive," says Arthur M. Schneiderman, the MIT-trained engineer who developed the world's first balanced-scorecard model for Analog when he worked for it back then. "So we surveyed our customers and did benchmarking studies and found that they cared about things like delivery time and improved quality. Analog then built a model that would help its managers track and thus better manage such things. "Overall, there were about 15 nonfinancial measures that we identified as critical to the company's performance," Schneiderman says. These were things like the rate of on-time deliveries, product development cycle times, number of new products, and so on. Analog managers can now get a history of how Analog is doing and where it is going overall. They can check on defect rates plant by plant and see how each plant's quality is improving.

But Analog's model isn't just about the soft stuff. It links measurements like on-time deliveries to certain financial indicators. For example, the model now measures the percentage of sales due to new-product introductions, and gross margins on new products. Shell, by contrast, puts greater emphasis on more traditional, corporatewide indicators like revenues and return on investment.

Once a quarter Analog's 12 senior managers get together for a full day to discuss, among other things, results from their scorecards. "The managers," says Goodloe Suttler, the company's corporate vice president for marketing, quality, and planning, "are then asked to explain in front of the group any variances in their results and what they are going to do about them." One manager, for instance, once had a problem with what it calls its "new-product ratios." This is a scorecard item that helps managers judge how effectively the company is spending its R&D dollars. The balanced scorecard showed that one division was lagging in new-product development. Under the old system this wouldn't have been noticed because all the conventional short-term financials looked just dandy--i.e., it was too early for the R&D slump to show up in the numbers.

The division manager put more money into R&D and also began to look at new market segments while focusing a lot of attention on new-product sales and marketing strategies. "We wouldn't have done this if we were just looking at the financials," Suttler says.

So what does focusing on the soft stuff do for the bottom line? Analog's revenues doubled to $1.2 billion last year, from $538 million in 1991. Operating profits have increased steadily, from a dismal 3% of sales in 1991 to a more respectable 19% last year. In April 1993, Analog's stock was selling for some $7 a share. Currently it is trading at about four times that price, hovering in the $28 range. Not bad for a company that manages itself with a model that is almost entirely devoid of traditional financial measurements.

So which approach is right--Shell's or Analog's? Says Mike Uretsky, a professor at New York University: "The value of these devices is in the assumptions you build into them." Different companies at different times have different needs and aims. For example, if you're a media company that's just merged, you wouldn't build a strictly financial model that focuses, say, on productivity. Output per employee isn't a driver for that business. (Just because you're merging doesn't mean you will need fewer people to shoot a TV program.)

"So it all depends," says Uretsky, "upon what the company is wrestling with." Indeed, the real value of any model is that it forces you to reexamine your assumptions about what in your business really drives performance. It forces you to focus and become much more explicit about what matters to the customer and ultimately what matters to the most important person of all--the shareholder.

JOEL KURTZMAN, an independent consultant, is editor of Strategy & Business.