Balanced scorecard

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The Balanced Scorecard (BSC) is a performance management tool which 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.

By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests.

Organizations were encouraged to measure, in addition to financial outputs, those factors which influenced the financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.

The underlying rationale is that organizations cannot directly influence financial outcomes, as these are "lag" measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise. Organizations should instead also measure those areas where direct management intervention is possible. In so doing, the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. In practice, early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Customer," "Internal Business Processes" and "Learning and Growth."


[edit] History

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, research and consulting practice. The Balanced Scorecard has evolved considerably from its roots as a measure selection framework. While the underlying principles were sound, many aspects of Kaplan & Norton's original approach were unworkable in practice. Both in firms associated with Kaplan & Norton (Renaissance Solutions Inc. and BSCOL), and elsewhere (Cepro in Sweden, and 2GC Active Management in the UK), the Balanced Scorecard has changed so that there is now much greater emphasis on the design process than previously. There has also been a rapid growth in consulting offerings linked to Balanced Scorecards at the level of branding only. Kaplan & Norton themselves revisited Balanced Scorecards with the benefit of a decade's experience since the original article.

[edit] Use

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;index Setting
  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.

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.

[edit] 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.

[edit] 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 superseded.

In the late 1990s, the design approach had evolved yet again. One problem with the "2nd generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it ignored the fact that opportunities to intervene, to influence strategic goals are, and need to be anchored in the "now;" in current and real management activity. Secondly, the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument; the Vision or Destination Statement. This device was a statement of what "strategic success," or the "strategic end-state" looked like. It was quickly realised, that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic Activity and Outcome objectives to respond to it. Measures and targets could then be selected to track the achievement of these objectives.

In 2007, the 4th Generation was evolved in the work by Hannabarger, Buchman and Economy. They created linkages between the Strategic, Operational and Tactical levels within organizations through Scorecards and Dashboards that provide drill down / up capability to identify sources and root causes for under-performing scorecard metrics. Soon after this work, Kaplan and Norton revised their approach and acknowledged it had lacked the ability to give focus on measures to the here and now, day-to-day operational and tactical levels within organizations that the Hannabarger, Buchman and Economy work provides.

[edit] Popularity

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. Indeed, it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards were often designed remotely by consultants. Managers did not trust, and so failed to engage with and use these measure suites created by people lacking knowledge of the organisation and management responsibility.

[edit] 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.[citation needed]

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. [1]

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.

[edit] The four perspectives

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;
  • Innovation and learning 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 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 proposition) 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 innovation and learning 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 Innovation & Learning 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.

[edit] Key performance indicators

According to each perspective of the Balanced Scorecard, a number of KPIs can be used such as:

[edit] Financial

It defines the value proposition that the organisation will apply to satisfy customers and thus generate more sales to the most desired customers

[edit] Internal business processes

[edit] Learning and growth

  • Investment Rate
  • Illness rate
  • Internal Promotions %
  • Employee Turnover
  • Gender 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.

[edit] Software tools

Many firms choose to use standard office software (such as spreadsheets, word processors, presentation software) to provide the same functions as are provided by commercial software packages - trading the time taken to develop the appropriate templates in the packages and then use them against the typically high cost of commercial Balanced Scorecard software packages/services. Alternatively, several Open Source Packages are available as an alternative to commercial software.

[edit] See also

[edit] References

  1. ^ Jensen, Michael C.,Value Maximization, Stakeholder Theory, and the Corporate Objective Function (October 2001). Unfolding Stakeholder Thinking, eds. J. Andriof, et al, (Greenleaf Publishing, 2002). Also published in JACF, V. 14, N. 3, 2001, European Financial Management Review, N. 7, 2001 and in Breaking the Code of Change, M. Beer and N. Norhia, eds, HBS Press, 2000.. Available at SSRN: or DOI: 10.2139/ssrn.220671

[edit] Sources

  • Charles Hannabarger, Frederick Buchman, and Peter Economy (2007) "Balanced Scorecard Strategy for Dummies" Wiley Publishing, Inc. ISBN: 978-0-470-13397-2
  • Douglas W. Hubbard "How to Measure Anything: Finding the Value of Intangibles in Business" John Wiley & Sons, 2007. ISBN 978-0470110126
  • Cobbold, I. and Lawrie, G. (2002a). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002
  • Cobbold, I and Lawrie, G (2002b). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002.
  • International Controller Association: Statement Balanced Scorecard; Gauting, Germany, 2003
  • Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review Jan – Feb pp. 71-80.
  • Kaplan R S and Norton D P (1993) "Putting the Balanced Scorecard to Work", Harvard Business Review Sep – Oct pp2-16.
  • Kaplan R S and Klein N (1995) “Chemical Bank: Implementing the Balanced Scorecard” Harvard Business School Press
  • Kaplan R S and Norton D P (1996) "Using the balanced scorecard as a strategic management system", Harvard Business Review Jan – Feb pp. 75-85.
  • Kaplan R S and Norton D P (1996) “Balanced Scorecard: Translating Strategy into Action” Harvard Business School Press
  • Kaplan, R. S., & Norton, D. P. (2004). Measuring the strategic readiness of intangible assets. Harvard Business Review, 82(2): 52-63.
  • Kaplan, R. S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes. Boston: Harvard Business School Press.
  • Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30
  • Niven, Paul R. (2006) "Balanced Scorecard. Step-by-step. Maximizing Performance and Maintaining Results".
  • Per Nikolaj Bukh & Teemu Malmi "Re-Examining the Cause-and-Effect Principle of the Balanced Scorecard"
  • Norreklit H. (2000), The balance on the balanced scorecard - a critical analysis of some of its assumptions, Management Accounting Research, 11, pp. 65-88.
  • Papalexandris, A., Ioannou, G. and Prastacos, G.P. (2004) Implementing the Balanced Scorecard in Greece: a software firm’s experience. Long Range Planning, 37(4), 347-362.
  • Papalexandris, A., Ioannou, G., Prastacos, G.P. and Soderquist, K.E. (2005) An integrated methodology for putting the Balanced Scorecard into action. European Management Journal, 23(2), 214-227.
  • Voelper S., Leibold M., Eckhoff R., Davenport T. (2006), The tyranny of the Balanced Scorecard in the innovation economy, Journal of Intellectual Capital, Vol. 7, n° 1, pp. 43-60.
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