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:
- Financial perspective.
- Customer perspective.
- Business process perspective.
- 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
 This
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 -
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