Management - 12manage

Balanced Scorecard

Clarifying and communicating vision and strategy into action. Explanation of Balanced Scorecard of Kaplan and Norton. ('92)

History of the Balanced Scorecard

In 1992, an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review caused a lot of attention for their method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996.

 

The financial performance of an organization is essential for its success. Even non-profit organizations must deal in a sensible way with funds they receive. However, a pure financial approach for managing organizations suffers from two drawbacks:

  • It is historical. Whilst it tells us what has happened to the organization, it may not tell us what is currently happening. Nor it is a good indicator of future performance.
  • It is too low. It is common for the current market value of an organization to exceed the market value of its assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess value is resulting from intangible assets. This kind of value is not measured by normal financial reporting.

The 4 perspectives of the Balanced Scorecard

The Balanced Scorecard method of Kaplan and Norton is a strategic approach, and performance management system, that enables organizations to translate a company's vision and strategy into implementation, working from 4 perspectives:

  1. Financial perspective.
  2. Customer perspective.
  3. Business process perspective.
  4. Learning and growth perspective.

This allows the monitoring of present performance, but the method also tries to capture information about how well the organization is positioned to perform in the future.
 

Benefits of the Balanced Scorecard

Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard:

  • Focusing the whole organization on the few key things needed to create breakthrough performance.
  • Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service initiatives.
  • Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees can see what's required at their level to achieve excellent overall performance.

1. The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will make sure to provide it. In fact, there is often more than sufficient handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financial issues leads to an unbalanced situation with regard to other perspectives. There is perhaps a need to include additional financial related data, such as risk assessment and cost-benefit data, in this category.

 

2. The customer perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any company. These are called leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline. Even though the current financial picture may seem (still) good. In developing metrics for satisfaction, customers should be analyzed. In terms of kinds of customers, and of the kinds of processes for which we are providing a product or service to those customer groups.

 

3. The Business Process perspective

Balanced Scorecard methodThis perspective refers to internal business processes. Measurements based on this perspective will show the managers how well their business is running, and whether its products and services conform to customer requirements. These metrics have to be carefully designed by those that know these processes most intimately. In addition to the strategic management processes, two kinds of business processes may be identified:

  • Mission-oriented processes. Many unique problems are encountered in these processes.
  • Support processes. The support processes are more repetitive in nature, and hence easier to measure and to benchmark. Generic measurement methods can be used.

4. Learning and Growth perspective

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge worker organization, people are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to learn continuously. Government agencies often find themselves unable to hire new technical workers and at the same time is showing a decline in training of existing employees. Kaplan and Norton emphasize that 'learning' is something more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools such as an Intranet.

 

The integration of these four perspectives into a one graphical appealing picture, has made the Balanced Scorecard method very successful as a management methodology.

 

Objectives, Measures, Targets, and Initiatives

For each perspective of the Balanced Scorecard four things are monitored (scored):

  • Objectives: major objectives to be achieved, for example, profitable growth.
  • Measures: the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin.
  • Targets: the specific target values for the measures, for example, 7% annual decline in manufacturing disruptions.
  • Initiatives: projects or programs to be initiated in order to meet the objective.

Double-Loop Feedback

In traditional industrial activity, "quality control" and "zero defects" were important words. To shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. A problem with these approaches - as pointed out by Deming - is that the true causes of defects could never be identified, and there would always be inefficiencies because products with a defect are rejected. Deming understood that variation is created at every step in a production process, and the causes of variation need to be identified and repaired. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a system, with feedback loops. The feedback data should be examined by managers to determine the causes of variation, and what are the processes with significant problems. Then they can focus their attention on repairing that subset of processes.

The balanced scorecard method includes feedbacks around internal business process outputs. As in TQM. Additionally, the Balanced Scorecard provides a feedback for the outcomes of business strategies. This creates a "double-loop feedback" process in the balanced scorecard.

 

Outcome Metrics

You can't improve what you can't measure. Therefore metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis. Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.

So the value of metrics is in their ability to provide a factual basis for defining:

  • Strategic feedback to show the present status of the organization from many perspectives for decision makers.
  • Diagnostic feedback into various processes to guide improvements on a continuous basis.
  • Trends in performance over time.
  • Feedback around the measurement methods themselves. Which measurements should be tracked?
  • Quantitative inputs for forecast methods and for decision support systems.

Management by Fact

The goal of measuring is to permit managers to see their company more clearly - from many perspectives - and hence to make wiser long-term decisions. A 1997 booklet on the Baldrige Criteria summarizes this concept of fact-based management:

"Modern businesses depend upon measurement and analysis of performance. Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect - that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors' or with 'best practices' benchmarks."

"A major consideration in performance improvement involves the creation and use of performance measures or indicators. Performance measures or indicators are measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company's goals. Through the analysis of data from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals."
 

Cautionary note on using the Balanced Scorecard

You tend to get what you measure. People will work to achieve the explicit targets which are set. For example, emphasizing traditional financial measures may encourage short-term thinking. The Core Group Theory by Kleiner provides further clues on the mechanisms behind this. Kaplan and Norton recognize this, and urge for a more balanced set of measurements. But still, people will work to achieve their scorecard goals, and may ignore important things which have no place on their scorecard.
 

Evolution of the Balanced Scorecard

In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon the intended method of use within an organization. They describe how the Balanced Scorecard can be used to support three distinct management activities, the first two being management control and strategic control. They assert that due to differences in the performance data requirements of these applications, planned use should influence the type of BSC design adopted. Later that year the same authors reviewed the evolution of the Balanced Scorecard as shown through the use of Strategy Maps as a strategic management tool, recognizing three distinct generations of Balanced Scorecard design.

 

Book: Robert S. Kaplan, David P. Norton - The BSC: Translating Strategy into Action -

Book: Paul R. Niven - BSC Step-by-Step: Maximizing Performance and Maintaining Results -

Book: Paul R. Niven - BSC Step-by-Step for Government and Nonprofit Agencies -

 

Balanced Scorecard Forum

Recent User Comments
S Ramanathan - India Finance "BSC contains many interesting features and serves as an extended tool of standard costing variance analysis in broader perspective, encompassing financial and marketing aspects to shape the company's strategy towards growth and prosperity."    0
Paul Thompson - USA Best Practices on BSC? "I am collecting Best Practices for successful Balanced Scorecard implementation. Kaplan and Norton already mention the following 5 principles:
1. Mobilize change through executive leadership (ownership and active involvement in the change project)
2. Translate the strategy into operational terms (using the 4 perspectives and a strategy map)
3. Align the organization to the strategy (coordination amongst business units, staff units and shared-service centers)
4. Make strategy everyone's everyday job (communication, education, align personal objectives, link compensation)
5. Make strategy a continual process (regular strategy meetings and update BSC and strategy map)
Who can contribute more?"
   27
Francis Masereka - Uganda Generating Cost Data "How does the balanced scorecard make the generation of cost data complex?"    11
Eric - USA Date Field "I find these comments informative. Even so, you should add a date field to the comments. For example, I have some advice that might help Dawei Zhang; but won't bother since I do not know if the opportunity to help is long past."    -1
Eseroma Kalou - Fiji Scorecard "We find it very useful to measure our activities in FEA Fiji."    6
Best User Comments
A. Pushpdhanva - INDIA Balanced Score Card "I designed the BSC for a few organisation and they were surprised by the statistics. One firm was appreciated and even awarded also, for that technique. It totally depends how well it is designed."    36
Pooja - India Balance "I am new to this tecnique kindly guide to this activity that how should i proceed to introduce this technique in my organisation . Kindly guide me with your valuable suggestions."    22
Alan - UK BSC Implementation Process "I didn't notice the steps towards actually implementing the Balanced Scorecard in the article, so here is my attempt: 1. Management defines Mission and Vision (Why are we here and How does the future looks like?). 2. Management defines Critical Success Factors (When will be successful?). 3. Create initial Balanced Scorecard (Expert) 4. Define Key Performance Indicators and refine BSC. (Each CSF is worked out in one or a few KPIs). Any builds?"    20
Dawei ZHANG - Chine A new BSC with 6 perspectives "What is important for an enterprise willing to deploy a BSC tool, is to adapt this concept to its strategic management purpose. I am now helping a freight forwarding company to implement a BSC. Due to the specificities in this sector, I find it necessary to add two other perspectives (vendor, socio-regulatory) in the BSC applicable in this company. With these six perspectives, it seems that we can measure the company's performance globally. I'm interested in listening to your fresh ideas about the BSC, thanks."    10
Busby - Canada Combine Balanced Scorecard "The BSC is a rather complex, and difficult to implement approach to strategic management. However, despite being over-initellectualized and thrown around much in consulting and management circles, it is very useful and a cornerstone to strategic thinking. I find BSC is most useful when synthesized with other strategic management models (e.g., strategic market management). Establishing a SCA without a good BSC or SM approach is difficult to impossible to achieve."    2

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Compare with the Balanced Scorecard: Strategy Maps  |  Office of Strategy Management  |  Performance Prism  |  CSFs and KPIs  |  Hoshin Kanri - Policy Deployment  |  Intangible Assets Monitor  |  People CMM  |  MSP  |  Beyond Budgeting  |  Strategy Dynamics  |  IC Rating  |  TQM  |  Value Profit Chain  |  Scientific Management

 

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  § Alan (UK) BSC best practice "6. Don't over-measure (Use no more than 3 to 4 Critical Success Factors per strategic objective or goal; use only a manageable number of measures per Critical Success Factor)"
  § Paula (Italy) Ownership & Accountability "7. Every objective should be assigned to a specific member of the management team, who “owns” this objective, indicator or measure."
  § David (Iceland) KISS "8. Keep It Simple and Stupid. Simplicity is crucial, especially in the first period. Don't assume all employees will learn in one meeting what cost you six months to prepare with your consultant :-) Allow everybody to see the big picture first. So start very simple and let it grow slowly."
  § Mark Pym (UK) My Balanced Scorecard advice "8. Ensure that any measures built into a BSC are aligned and that their impact/effect on other measures is closely considered and thought through.
9. Get underneath the surface of the measures and ask youself what behaviour will these measures really drive. Discuss this with Focus Groups.
10. Ensure your underlying policies and procedures support and promote the measures, especially your reward, benefits and HR policies."
  § Randy Retherford (USA) Provide Support, Money, and People "11. Leaders must provide the necessary support, money, and people to successfully implement a Balanced Scorecard process/system. Otherwise, this will become just another under-powered implementation, that will eventually be cancelled due to lack of seeing any real benefits."
  § Elia (Namibia) BSC "Perfect"

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  § Francois Aye (Switzerland) Data generation "By experience, financial / cost-related data are the easiest to generate ... although they are seldom readily available. Qualitative type of data - e.g. measuring customer satisfaction, process effectiveness, employee competencies or engagement - are even more complex and costly to generate for they frequently require to develop specific measurement tools. Such performance indicators however are critical to collect because they are lead indicators (financial ones generally are lag indicators. ie watching the past) and they provide input from the perspective of a wide variety of stakeholders. Considering one to two years to develop such indicators and their tools, plus two years to start to have an historical background and allow some fine-tuning of indicators/tools, it takes some three to five years to obtain something meaningful ! Top teams not ready to invest four years ahead should not start such a process - but their business will not be strategically driven."

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  § Editor (NL) Add date field in comments? "Thanks for this suggestion Eric. Note though that many / most of the comments and reactions on 12manage have a long term perspective and are seen by thousands of people. The precise date is not very relevant and will distract from the topic. Any reactions to comments will be useful not only for the person who created the comment, but also for anybody else in the world with an interest in the topic at hand. Thanks anyway for this suggestion!"

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  § lancy cyril dsouza (UAE) Balanced Score Card "Hi Can you share some of your experiences"
  § Amey Deshpande (India) Implementation aspects of BSC "I am doing my research on the Performance measurement systems with a focus on balanced scorecard. part of it necessitates doing it for some case study companies. could u share some of your thoughts on the implementation aspects."

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  § Danish Noor (USA) Change Implementation "Suggest to use the technique of "change implementation", the strategy based on Unfreeze, Intervene and Refreeze. You have to unfreeze the existing classical business process, plan for intervention, and Refreeze after implementation and validation. You must understand thoroughly the Ends that are required to achieve, the existing organizational and business structure and Means at your disposal. A good understanding and knowledge of what you are trying to ACHIEVE, what your are trying to AVOID, what you are trying to ELIMINATE & what you are trying to PRESERVE will aid in the intervention process."
  § Bernard Chakeredza (Zimbabwe) Auditing Internal "I am new to this measure how does it fit in Internal Auditing"

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  § Jesper (Danmark) BSC Implementation Steps "Suggested Balanced Scorecard Implementation steps:
1. Preparation (Create Strategy, Key Goals, For each goal 3 CSFs)
2. Decide what to measure in each of the 4 perspectives (max 20 in total !)
3. Create Implementation Plan
4. Implement the BSC system
5. Publicise the results
6. Use the results to improve performance
7. Review, revise or fine tune the system."

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  § Richard (UK) A 6-perspective BSC? "I think what you have developed is a Performance Prism, which a BSC with stakeholder measures - good luck - it should work well"

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