Balanced Scorecard

Balanced scorecard From Wikipedia, the free encyclopedia.

In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC), a method for measuring a company's activities in terms of its vision and strategies. It gives managers a comprehensive view of the performance of a business as a combination of Financial and non-financial indicator. It is a management tool that continuously reveals whether a company and its employees achieve the results set forth by the strategy. But it is also a tool that helps the company express the necessary objectives and initiatives to support the strategies.

Summary of Features of the Balanced Scorecard

• Customer perspective
• Facilitates Learning
• Focuses on nternal processes
• As well as Financial measures seen in other performance models

• It is Objective
• It Measures
• Can be translated into initiatives
• Sets Targets

Why use it?

• Enhances the Feedback mechanism - Double Loop thinking
• It's an Integrated set of performance measures not an ad-hoc set of measures
• The major Strategic objectives are translated into measures
• It shows a Cause and effect relationship linking strategy formulations to financial outcomes
• It distinguishes between two types of measures LAGGING financial indicators and LEADING measures of future performance such as Customer Service

Benefits and Limitations

• Brings the measures under a single understandable report
• A comprehensive co-herent approach
• Considers all the important measures
• BUT
• Lacks empircal underpinning
• No support for underlying linkages
• Omits Social environmental factors - pollutions

Remember it's a framework not a template - Allows Companies to develop their OWN BUSINESS MODEL (Yip)

Implementation issues

• CEO/CFO need to be involved - Strategy
• Targets should stretch the org
• Difficulty in selecting and measuring the targets or weighting their importance - You get whay you measure.
• Creativity and Openess - Is it going to be understood and accepted by the organization

A more detailed view of the Balanced Scorecard

The scorecard seeks to measure a business from the following perspectives:

• Financial perspective - measures reflecting financial performance, for example number of debtors, cash flow or return on investment. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from two major drawbacks:

They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance. 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 can be thought of as intangible assets. These figures are not measured by normal financial reporting.

• Customer perspective - measures having a direct impact on customers, for example time taken to process a phone call, results of customer surveys, number of complaints or competitive rankings.

• Business process perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.

• Learning and growth perspective - measures describing the companies learning curve, for example number of employee suggestions or total hours spent on staff training.

The specific measures within each of the perspectives will be chosen to reflect the drivers of the particular business. The method can facilitate the separation of strategic policymaking from the implementation, so that organizational goals can be broken into task oriented objectives which can be managed by front-line staff. It can also help detect correlation between activities. For example, we might find that the internal business objective of implementing a new telephone system can help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business.

In many senses, the objectives chosen are leading indicators of future performance. Effort we make today is reflected in the future profits of the company. In this way, current expenditure can be viewed as investment in the future of the company.

Purpose of the balanced scorecard

Kaplan and Norton found that companies are using the scorecard to:

• Clarify and update strategy
• Communicate strategy throughout the company
• Align unit and individual goals with strategy
• Link strategic objectives to long term targets and annual budgets
• Identify and align strategic initiatives
• Conduct periodic performance reviews to learn about and improve strategy

Adoption results survey

In 1997 Kurtzman found that 64% of companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.

It is difficult to interpret the impressive survey based adoption statistics for the Balanced Scorecard, however, without being clear on how the term was both defined and understood by those participating in the survey. In practice, it appears, there are wide variations in understanding between organisations. In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon intended method of use within an organisation. They describe how Balanced Scorecard can be used to support two distinct management activities, management control and strategic control, and asserts that due to differences in the performance data requirements of these applications, planned use should influence the type of Balanced Scorecard design adopted. They also describe characteristics of Balanced Scorecards appropriate for each purpose, and suggests a framework to help select between them.

Later that year the same authors reviewed the evolution of the Balanced Scorecard as a strategic management tool, recognising three distinct generations of Balanced Scorecard design. In their paper, they relate the empirically driven developments in Balanced Scorecard thinking with literature concerning strategic management within organisations. Cobbold and Lawrie argue that over the dozen years that have passed since its introduction significant changes have been made to the physical design, application and the design processes used to implement the tool within organisations. This Balanced Scorecard evolution can largely be attributed to empirical evidence of changes driven primarily by weaknesses in earlier design processes, rather than in the architecture of the original idea they write. They conclude that it is these changes, in what they refer to as 3rd Generation Balanced Scorecard that have enhanced the utility of Balanced Scorecard as a strategic management tool.