Balanced Scorecard

From GTwM

In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC) as an attempt to;

• translate strategy into an easily communicable form
• help align strategy and strategic initiatives
• measure a company's performance against its strategies
• counterbalance the more traditional financial perspective with customer, internal process, and learning / growth perspectives.

In 2001 according to research which Robert S. Kaplan and David P. Norton provide in The Strategy-Focused Organization, still only 5% of the workforce understand their company's strategy, only 25% of managers have incentives linked to strategy, 60% of organizations don't link budgets to strategy, and 85% of executive teams spend less than one hour per month discussing strategy.

Contents 1 The Four Perspectives 2 Purpose of the Balanced Scorecard 3 Implementing a Balanced Scorecard 4 Criticism

The Four Perspectives

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 company's 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

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

Implementing a Balanced Scorecard

• Scorecards can be built at the business unit level (whether they be a SBU or a SSU) or at a Corporate level (although this should not be cascaded in a simplistic way down to the lower level if these units differ - which they usually will)
• Measures need to be formulated after strategy has been formulate (the scorecard communicates this strategy) that link each unit level strategic initiative with the overarching strategy
• Targets for each measure should cover a range of performance levels
  • Threshold Target
  • Projected Target
  • Stretch Target
• 2 Budgets need creating
  • use Activity-Based Costing for standard operations and
  • Project Accounting for strategic initiatives
• Planning therefore needs to be both top-down and bottom-up
• Pay needs to be linked to strategy via it's proxy the scorecard
• Monthly management meetings need to
  • move from reviewing solely financial performance to reviewing each of the four perspectives seperately
  • focus on learning rapidly whether the various strategic initiatives are working and if not whether the strategy or it's implementation is flawed
• The scorecard should be seen as only one of the management control levers available to management

The most important success factor is Leadership Style. The most effective leadership style according to Kaplan & Norton is to ensure "every private can become a general" as typical command and control styles fail to deliver in "the heat of battle" where plans normally fail as soon as the enemy engages. (see the research conclusion section of Lean HR)

Criticism

1. see Culture and Change pdf in our Learning module
2. see Criticism section in KPI's
3. W Edwards Deming argued that much of what was important could not be known (let alone measured) or as Albert Einstein put it: "Sometimes what counts can't be counted, and what can be counted doesn't count."
4. Art Kleiner in his book "What Really Matters; The core group theory of power, privilege and success" in discussing the BS theory argues "What is measured does matter - but only in light of the Core Group's perceived intentions and priorities. In practice, no matter how the measurements and incentives are intended to work, only what seems to matter to the Core Group will be measured" and "numbers are sacrosanct on the page, but everyone knows how fictional they are in reality" and "do we even need measurements and metrics that go up the hierarchy, or should we reorient them so that the people conducting the work are the same ones who receive all the reports"
5. see Fannie Mae, Accounting Scandals and Gemba