Balanced Scorecard
The balanced scorecard is a strategic
planning and management system used to align business activities to the
vision and strategy of the organization, improve internal and external
communications and monitor organization performance against strategic
goals.
The balanced scorecard suggests we view 4 critical perspectives of our
business:
- Learning & growth:
includes training, learning, corporate culture and
attitudes, self growth. Individuals are the main repository of
knowledge of an organisation and the critical resource.
Communication among workers is key, as is avoiding brain drain.
- Business process:
Metrics based on internal business processes allow management to
monitor how well the business is running and wether it�s
products/services are well accepted by clients.
- Customer:
Indicators on customer satisfaction and tools to improve and monitor
customer relations are critical
- Financial: Timely
and accurate financial data is still a key to manage the business.
Data should be centralised and of fast and easy access, but
financial data should not be the only indicator, thus the original
intention of the word �balanced�.
The Balanced Scorecard automates and
centralizes the issuance and tracking of objectives, targets, measures
and initiatives.
The Balanced Scorecard (BSC) began as a
concept for measuring whether the smaller-scale operational activities
of a company are aligned with its larger-scale objectives in terms of
vision and strategy. It was developed and first used at Analog Devices
in 1987. By focusing not only on financial outcomes but also on the
human issues, the Balanced Scorecard helps provide a more comprehensive
view of a business, which in turn helps organizations act in their best
long-term interests. The strategic management system helps managers
focus on performance metrics while balancing financial objectives with
customer, process and employee perspectives. Measures are often
indicators of future performance.
History of Balanced Scorecard
In 1992,
Robert S. Kaplan and
David P. Norton began publicizing the Balanced Scorecard through a
series of journal articles. In 1996, they published the book The
Balanced Scorecard. Since the original concept was introduced, Balanced
Scorecards have become a fertile field of theory and research, and many
practitioners have diverted from the original Kaplan & Norton articles.
Robert S. Kaplan and
David P. Norton themselves revisited Balanced Scorecards with the
benefit of a decade's experience since the original article.
The Balanced Scorecard is a performance planning and measurement
framework, with similar principles as Management by Objectives, which
was publicized by
Robert S. Kaplan and
David P. Norton in the early 1990s. Having realized the shortcomings
of traditional management control systems,
Robert S. Kaplan and
David P. Norton designed the Balanced Scorecard as a result of a
one-year research project involving 12 companies. Since its
introduction, the Balanced Scorecard has been awarded a prize by the
American Accounting Association as the �best theoretical contribution in
1997�, and its industry and academic attention has placed it alongside
approaches such as Activity Based Costing and Total Quality Management.
Balanced scorecard is a tool to execute and monitor the organisational
strategy by using a combination of financial and non financial measures.
It is designed to translate vision and strategy into objectives and
measures across four balanced perspectives: financial, customers,
internal business process and learning and growth. It gives a framework
ensuring that the strategy is translated into a coherent set of
performance measures.
Use of Balanced Scorecard
Implementing Balanced Scorecards typically
includes four processes:
1. Translating the vision into operational goals;
2. Communicating the vision and link it to individual performance;
3. Business planning;
4. Feedback and learning, and adjusting the strategy accordingly.
The Balanced Scorecard is a framework, or what can be best characterized
as a �strategic management system� that claims to incorporate all
quantitative and abstract measures of true importance to the enterprise.
According to Kaplan and Norton, �The Balanced Scorecard provides
managers with the instrumentation they need to navigate to future
competitive success�.
Many books and articles referring to Balanced Scorecards confuse the
design process elements and the Balanced Scorecard itself. In
particular, it is common for people to refer to a �strategic linkage
model� or �strategy map� as being a Balanced Scorecard.
Balanced Scorecard is a performance management tool. Although it helps
focus managers' attention on strategic issues and the management of the
implementation of strategy, it is important to remember that the
Balanced Scorecard itself has no role in the formation of strategy. In
fact, Balanced Scorecards can comfortably co-exist with strategic
planning systems and other tools.
Original methodology
The earliest Balanced Scorecards comprised simple tables broken into
four sections - typically these "perspectives" were labeled "Financial",
"Customer", "Internal Business Processes", and "Learning & Growth".
Designing the Balanced Scorecard required selecting five or six good
measures for each perspective.
Many authors have since suggested alternative headings for these
perspectives, and also suggested using either additional or fewer
perspectives. These suggestions were notably triggered by a recognition
that different but equivalent headings would yield alternative sets of
measures. The major design challenge faced with this type of Balanced
Scorecard is justifying the choice of measures made. "Of all the
measures you could have chosen, why did you choose these?" This common
question is hard to ask using this type of design process. If users are
not confident that the measures within the Balanced Scorecard are well
chosen, they will have less confidence in the information it provides.
Although less common, these early-style Balanced Scorecards are still
designed and used today.
In short, early-style Balanced Scorecards are hard to design in a way
that builds confidence that they are well designed. Because of this,
many are abandoned soon after completion.
Improved methodology
In the mid 1990s, an improved design method emerged. In the new method,
measures are selected based on a set of "strategic objectives" plotted
on a "strategic linkage model" or "strategy map". With this modified
approach, the strategic objectives are typically distributed across a
similar set of "perspectives", as is found in the earlier designs, but
the design question becomes slightly less abstract.
Managers have to identify five or six goals within each of the
perspectives, and then demonstrate some inter-linking between these
goals by plotting causal links on the diagram. Having reached some
consensus about the objectives and how they inter-relate, the Balanced
Scorecard is devised by choosing suitable measures for each objective.
This type of approach provides greater contextual justification for the
measures chosen, and is generally easier for managers to work through.
This style of Balanced Scorecard has been commonly used since 1996 or
so.
Several design issues still remain with this enhanced approach to
Balanced Scorecard design, but it has been much more successful than the
design approach it supersedes.
Popularity of Balanced Scorecard
Kaplan and Norton found that companies are using Balanced Scorecards to:
* Drive strategy execution;
* Clarify strategy and make strategy operational;
* Identify and align strategic initiatives;
* Link budget with strategy;
* Align the organization with strategy;
* Conduct periodic strategic performance reviews to learn about and
improve strategy.
In 1997, Kurtzman found that 64 percent of the companies questioned were
measuring performance from a number of perspectives in a similar way to
the Balanced Scorecard.
Balanced Scorecards have been implemented by government agencies,
military units, business units and corporations as a whole, non-profit
organizations, and schools.
Many examples of Balanced Scorecards can be found via Web searches.
However, adapting one organization's Balanced Scorecard to another is
generally not advised by theorists, who believe that much of the benefit
of the Balanced Scorecard comes from the implementation method.
Variants, Alternatives and
Criticisms
Since the late 1990s, various alternatives
to the Balanced Scorecard have emerged, such as The Performance Prism,
Results Based Management and Third Generation Balanced Scorecard. These
tools seek to solve some of the remaining design issues, in particular
issues relating to the design of sets of Balanced Scorecards to use
across an organization, and issues in setting targets for the measures
selected.
Applied Information Economics (AIE) has been researched as an
alternative to Balanced Scorecards. In 2000, the Federal CIO Council
commissioned a study to compare the two methods by funding studies in
side-by-side projects in two different agencies. The Dept. of Veterans
Affairs used AIE and the US Dept. of Agriculture applied Balanced
Scorecards. The resulting report found that while AIE was much more
sophisticated, AIE actually took slightly less time to utilize. AIE was
also more likely to generate findings that were newsworthy to the
organization, while the users of Balanced Scorecards felt it simply
documented their inputs and offered no other particular insight.
However, Balanced Scorecards are still much more widely used than AIE.
A criticism of Balanced Scorecards is that the scores are not based on
any proven economic or financial theory, and therefore have no basis in
the decision sciences. The process is entirely subjective and makes no
provision to assess quantities (e.g., risk and economic value) in a way
that is actuarially or economically well-founded.
Another criticism is that the Balanced Scorecard does not provide a
bottom line score or a unified view with clear recommendations: it is
simply a list of metrics.
Some people also claim that positive feedback from users of Balanced
Scorecards may be due to a placebo effect, as there are no empirical
studies linking the use of Balanced Scorecards to better decision making
or improved financial performance of companies.
The Four Perspectives of The
Balanced Scorecard
The grouping of performance measures in
general categories (perspectives) is seen to aid in the gathering and
selection of the appropriate performance measures for the enterprise.
Four general perspectives have been proposed by the Balanced Scorecard:
* Financial perspective;
* Customer perspective;
* Internal process perspective;
* Learning and growth perspective.
The financial perspective examines if the company�s implementation and
execution of its strategy are contributing to the bottom-line
improvement of the company. It represents the long-term strategic
objectives of the organization and thus it incorporates the tangible
outcomes of the strategy in traditional financial terms. The three
possible stages as described by Kaplan and Norton (1996) are rapid
growth, sustain and harvest. Financial objectives and measures for the
growth stage will stem from the development and growth of the
organization which will lead to increased sales volumes, acquisition of
new customers, growth in revenues etc. The sustain stage on the other
hand will be characterized by measures that evaluate the effectiveness
of the organization to manage its operations and costs, by calculating
the return on investment, the return on capital employed, etc. Finally,
the harvest stage will be based on cash flow analysis with measures such
as payback periods and revenue volume. Some of the most common financial
measures that are incorporated in the financial perspective are EVA,
revenue growth, costs, profit margins, cash flow, net operating income
etc.
The customer perspective defines the value proposition that the
organization will apply in order to satisfy customers and thus generate
more sales to the most desired (i.e. the most profitable) customer
groups. The measures that are selected for the customer perspective
should measure both the value that is delivered to the customer (value
position) which may involve time, quality, performance and service and
cost and the outcomes that come as a result of this value proposition
(e.g., customer satisfaction, market share). The value proposition can
be centered on one of the three: operational excellence, customer
intimacy or product leadership, while maintaining threshold levels at
the other two.
The internal process perspective is concerned with the processes that
create and deliver the customer value proposition. It focuses on all the
activities and key processes required in order for the company to excel
at providing the value expected by the customers both productively and
efficiently. These can include both short-term and long-term objectives
as well as incorporating innovative process development in order to
stimulate improvement. In order to identify the measures that correspond
to the internal process perspective, Kaplan and Norton propose using
certain clusters that group similar value creating processes in an
organization. The clusters for the internal process perspective are
operations management (by improving asset utilization, supply chain
management, etc), customer management (by expanding and deepening
relations), innovation (by new products and services) and regulatory &
social (by establishing good relations with the external stakeholders).
The learning and growth perspective is the foundation of any strategy
and focuses on the intangible assets of an organization, mainly on the
internal skills and capabilities that are required to support the
value-creating internal processes. The learning and growth perspective
is concerned with the jobs (human capital), the systems (information
capital), and the climate (organization capital) of the enterprise.
These three factors relate to what Kaplan and Norton claim is the
infrastructure that is needed in order to enable ambitious objectives in
the other three perspectives to be achieved. This of course will be in
the long term, since an improvement in the learning and growth
perspective will require certain expenditures that may decrease
short-term financial results, whilst contributing to long-term success.
Key Performance Indicators of
Balanced Scorecard
According to each perspective of the
Balanced Scorecard, a number of KPIs can be used such as:
Financial
* Cash flow
* ROI
* Financial Result
* Return on capital employed
* Return on equity
Customer
* Delivery Performance to Customer - by Date
* Delivery Performance to Customer - by Quality
* Customer satisfaction rate
* Customer Loyalty
* Customer retention
Internal Business Processes
* Number of Activities
* Opportunity Success Rate
* Accident Ratios
* Overall Equipment Effectiveness
Learning & Growth
* Investment Rate
* Illness rate
* Internal Promotions %
* Employee Turnover
* Gender/Racial Ratios
Further lists of general and industry-specific KPIs can be found in the
case studies and methodological articles and books presented in the
references section.
Referencese
http://en.wikipedia.org/wiki/Balanced_scorecard
http://www.learn.com/learncenter.asp?id=178441&sessionid=3-23C08CF8-12DF-4DA7-B5FF-3D0B33665DA5&page=16
http://clarification.wordpress.com/2008/01/
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