What IS Balanced Scorecard?

WHAT IS A BALANCED SCORECARD?
(This is a copyrighted article; an extract from "Balanced Scorecard Handbook for Practitioners" by Nadeem Kureshi. Please contact the author for permissions at nadeemkureshi@gmail.com)

Balanced Scorecard can be described as a Strategic Management system, which uses a set of quantifiable measures to continuously monitor how well an organization is achieving its stated objectives, which in turn come from organization’s strategy. The set of measures communicates to the employees and outside stakeholders the performance drivers through which the organization will achieve its strategy.

A small definition, however, is not sufficient to understand the scope of a Strategic Management System. The concept of balanced scorecard can be most easily understood by breaking down the term “balanced scorecard” itself into “balanced” and “scorecard”. Perhaps the more obvious role of the Balanced Scorecard is reflected by the later part, “scorecard”, which implies putting in place, recording and illustrating a small number of KPIs (Key Performance Indicators, a.k.a Measures or Measurements),which allow busy top management to quickly evaluate what is going on in the critical areas of the organization. However, the merit of balanced scorecard as an innovative approach to performance measurement lies in the other half, “balanced”. It is much more than a scoring mechanism.

The roots of the term “Balanced” in Balanced Scorecard perhaps lie in the fact that public sector organizations put too much emphasis on meeting the senior management requirements. It is obvious that such over-emphasis can either relegate or sometimes completely neglect many other important perspectives of organizational management, such as development of capacity (to meet stakeholders’ expectations), investing in Human Resource (HR), developing strong organizational values, improvement of processes to ensure effective output and ensuring judicious utilization of taxpayers’ money.

In response to such concerns, the idea of balanced scorecard came forth in early 1990s. It has, since then, evolved into an organizational model which looks at the activities of the organization from more than one perspective (such as Stakeholder Satisfaction for the public sector or Profits for private sector). These perspectives are considered fundamental to an organization’s strategy. This core concept of Balanced Scorecard, illustrated in Figure 1, suggests every organization should give equal consideration to both long term and short term performance in meeting Stakeholder’s Expectations, being Financially Effective when meeting those expectations, using smartly designed Internal Processes to meet those expectations thus consuming least amount of human resources, time and other material resources and; building an Organizational Capacity to run those smart processes.

Figure 1: Balanced Scorecard Perspectives

It is obvious that bringing a balance in perspectives will form a very good-looking strategy. It is one thing to craft a great, seemingly winning strategy but making it actionable by all tiers of workforce is entirely different; and the real challenge. It is estimated that more than 90% of organizations around the world fail to implement their strategy[1]. In the Balanced Scorecard methodology, measurement of progress on strategy is fundamental, along-with optimization of the processes used to achieve the strategy.

WHY MEASUREMENT IS IMPORTANT

In October 1707, Great Britain lost nearly an entire fleet of ships. There was no war; the admiral, Clowdisley Shovell, simply miscalculated his position in the Atlantic, smashing his flagship into the rocks of the Scilly Isles, off the southwest coast of England. Rest of the fleet following behind, went aground as well;4 warships and 2,000 lives were lost.

It was obviously embarrassing for a nation proud of its’ naval history. But to be fair to the admiral, though the concept of latitude and longitude had been around since the first century B.C., still no one had then devised an accurate way to measure longitude. Seafarers like Clowdisley Shovell had to estimate their progress either by guessing their average speed or by dropping a log over the side of the boat. Relying on such crude measurements, the admiral can be forgiven his massive misjudgment.

What caused the disaster was not the admiral’s ignorance, but his inability to measure something that he already knew to be critically important—in this case longitude.[2]

We’ve come a long way since then. Today’s instrumentation ensures that any failure of navigation may be pinned squarely on your shoulders. But obviously, not every aspect of our daily life can be measured through off-the-shelf instruments. With an increasing demand from top management to increase work efficiency, a strong demand of accountability is being generated on part of managers to show results from the resources with which they have been entrusted. To do that, managers have to demonstrate tangible results, and those results are best captured in performance measures.

Therefore, Performance Measures or KPIs form the heart of any modern strategic management system. Only through assigning and measuring intelligently designed KPIs for all strategic objectives, we can ensure that those objectives are met.

MEASUREMENT AND STRATEGIC MANAGEMENT

What differentiates Balanced Scorecard from other strategic management systems is that it translates an organization’s strategy into action through linking a set of performance indicators with every strategic objective. Further, it is ground breaking in the balance provided by the recording of results achieved (lag indicators) and the illustration of drivers of those results (lead indicators).

The process of designing a Balanced Scorecard involves debates about goals, perspectives and KPIs. This is an extremely useful process of testing the strategy and aligning the organization behind the strategic goals. A properly executed Balanced Scorecard process requires every level of the organization to have a clear and agreed understanding of[3]:

-        Why the organization exists – its fundamental goal;

-        What the organization values;

-        The organization’s vision for the future;

-        The critical measures that will make a real difference to the organization’s performance;

-        Who the stakeholders are and how their views can be collected and reflected in the respective quadrants of a Balanced Scorecard; and

-        How the quadrants and measurements link together (causal links) to ensure the organization moves towards its strategic goals and objectives.

DOES BALANCED SCORECARD ENTAIL ADDITIONAL WORK?

Balanced Scorecard does not bring any additional work. However, it is certainly a new way of looking at our daily work. In fact, a well-designed and executed strategic management system can bring a considerable reduction in the amount of work an average manager is expected to do, through:

-        Improved, shorter and less resource consuming processes

-        Reduced or eliminated returns as a consequence of online reporting on well-designed measures (KPIs)

-        Shorter, strategy focused meetings

-        Improved information databases for managers thus enabling quick decision-making.

WILL IT WORK?

Any internet search will show a plethora of qualitative success stories of Balanced Scorecard implementation in organizations around the world. Similarly, there are several studies which seem to indicate a phenomenal increase in the number of organizations that use this strategic management system over the last decade. While many prominent navies around the world use this system, one often cited example is of Royal Navy where insightful details of the positive cultural changes brought through this system are available[4].

Several scholarly work are available that explore the theoretical aspects of this and other Strategic Management System;  for example Kureshi (2011), Jensen (2002), Wisniewski M, (2001), Rigby DK (2001), Goodman (2002), Brooke (2002), (Frigi 2002), Bichard (1996), Palmer and Parker (2001), Lucas (1995) etc. (See bibliography for detailed referencing).

For readers who are interested in a more quantitative evidence of the popularity or otherwise of the Balanced Scorecard and other management tools, Bain & Company carry out an annual survey to investigate the experience of companies adopting leading management tools. The results of this survey and other useful information are posted on their website[5].

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[1]Ref for 90% failure in implementation.

[2]Marcus Buckingham and Curt Coffman, First Break All the Rules (New York: Simon & Schuster, 1999).

[3]A Practitioner’s guide to the Balanced Scorecard: The Chartered Institute of Management Accountants Research Foundation.

[4]Woodley PhD thesis on BSC in Royal Navy.

[5]http:// www.bain.com.

Balanced Scorecard Basics

By Dr Nadeem Kureshi

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. 

While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950’s and the work of French process engineers (who created the Tableau de Bord – literally, a "dashboard" of performance measures) in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January-February 1996): 76.

Perspectives

The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

The Learning & 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 -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is 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; what the Baldrige criteria call "high performance work systems."

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are 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 look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

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 do whatever necessary to provide it. In fact, often there is more than enough 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 financials leads to the "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.

Strategy Mapping

Strategy maps are communication tools used to tell a story of how value is created for the organization.  They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain.  Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows).

Measures

The Balanced Scorecard is ultimately about choosing measures and targets. The various design methods proposed are intended to help in the identification of these measures and targets, usually by a process of abstraction that narrows the search space for a measure (e.g. find a measure to inform about a particular 'objective' within the Customer perspective, rather than simply finding a measure for 'Customer'). Although lists of general and industry-specific measure definitions can be found in the case studies and methodological articles and books presented in the references section. In general measure catalogues and suggestions from books are only helpful 'after the event' – in the same way that a Dictionary can help you confirm the spelling (and usage) of a word, but only once you have decided to use it proficiently.

Software

It is important to recognise that the balanced scorecard by definition is not a complex thing – typically no more than about 20 measures spread across a mix of financial and non-financial topics, and easily reported manually (on paper, or using simple office software).

The processes of collecting, reporting, and distributing Balanced Scorecard information can be labour intensive and prone to procedural problems (for example, getting all relevant people to return the information required by the required date). The simplest mechanism to use is to delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc methods based around email, phone calls and office software.

In more complex organisations, where there are multiple Balanced Scorecards to report and/or a need for co-ordination of results between Balanced Scorecards (for example, if one level of Balanced Scorecard reports relies on information collected and reported at a lower level) the use of individual Balanced Scorecard reporters is problematic. Where these conditions apply, organisations use Balanced Scorecard reporting software to automate the production and distribution of these reports