WHAT IS THE BALANCED SCORECARD AND
HOW WOULD ITS ADOPTION SHAPE MANAGEMENT AND EMPLOYEE BEHAVIORS?
By Richard Muyingo ISM
Overview
This starts by giving a definition
of Balanced Scorecard (BSC). It looks at the evolution of BSC from the first
generation BSCs that served as merely as reporting tools to the third
generation BSC that act as a framework for implementing and managing
organizational strategy. The paper also looks how the present generation BSC is
impacting on modern day businesses and some of the software applications used
in the Balanced Scorecard. The paper
finally discusses ways in which the adoption of BSC in an organization will
shape management and employee behaviors.
Definition
Balanced Scorecard is a new
approach to strategic management that was developed in the early 1990s by Drs
Robert Kaplan and David Norton (Harvard Business School). It is a performance
measurement tool that provides a prescription on what organizations should
measure to balance the financial perspective. The balanced scorecard is not
only a measurement tool, but also a management 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
the external outcomes in order to continuously improve strategic performance
and results. When fully deployed, Balanced Scorecard transforms strategic
planning from an academic exercise into the nerve center of an enterprise.
Kaplan and Norton describe the innovation of 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 investment in long term capabilities and customer relationships
were not critical for the success. These financial measures are adequate,
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”.1
Balanced Scorecard (BSC) overcomes
the heavy dependence on traditional accounting based measures of an
organization’s performance to include other measures like customer value,
internal processes, learning and growth perspectives. It has now evolved to
become an integral part of organizations’ strategic and management system.
First Generation Scorecards
The first
generation Balanced Scorecards simply used a red, yellow and green reporting of
achievements on targets. These helped executives understand the health of an
enterprise and focus on key areas that needed attention. Along with the first
generation BSC came the first generation software such as Gentia, BSC, Panorama
Business Views and CorManage. These were designed as reporting or management
dashboard tools. Even if they have evolved considerably beyond this simple
beginning, they were the first applications to integrate financial and
non-financial reporting and thus formed the basis for Integrated Strategic Management
Systems of today.
The Second
Generation Scorecard
The second
generation BSC drew a linkage between strategic management and performance
measurement through a strategy map. Balanced scorecard suggests that we view
the organization from four perspectives and develop metrics, collect data and
analyze it relative to each of these perspectives; The Financial Perspective, The Customer Perspective, The Business
Internal Process Perspective and The learning and growth Perspective.
1. The
Financial Perspective.
At the top of the strategy map is
the financial perspective, This perspective looks at how the organization will
deliver value to its shareholders. The financial perspective entails both a
growth and a productivity strategy.
2. The
Customer Perspective
Below the
financial Perspective is the customer perspective. This layer reflects how the
organization will deliver value to their clients. It shows the choices that an
organization has to make and how it will differentiate itself in the eyes of
the customer. It looks at the choices that an organization is making for
example to be a product leader, customer intimate or operationally excellent
and the key customer segments that the organization should focus on.
3. Internal
Business Processes Perspective
This layer
is driven by the customer perspective. It defines the key internal processes at
which the organization must excel in order to deliver on its customer value
preposition.
4. The
learning and growth perspective.
This
perspective looks at the key elements of culture, technology and skills that
are critical if the organization is to execute its internal processes. It looks
at employee training and cultural attitudes related to both individual and
corporate self-improvement.
BSC Software
In 1998 the
Balanced Scorecard Collaborative, a company founded by Kaplan and Norton
developed functional standards for BSC software based on those standards
guidelines. The functions of these standards was to ensure that developers of
BSC software moved beyond the executive dashboards into tools that could be
used to implement and manage strategy. Since its inception BSC has certified 16
software applications as complaint with those functional standards. With the
introduction of the strategy map, BSC became a measure of an organization’s
health.
Third Generation
BSCs
As
BSC evolved, it became clear that it could be used not only to describe
strategy but also to act as a framework for implementing and managing strategy.
The Third Generation BSC placed strategy at the center of the organization.
These elements formed the foundation of Norton and Kaplan’s second book on BSC.
The book describes how BSC can serve as a tool for integrating strategy with
business performance. The third generation BSCs can be used to drive transformational
change and break through results in an organization. You cannot improve what
you cannot measure. So Balanced Scorecard serves as a very important tool for
performance improvement in that it provides metrics developed based on the
priorities of the strategic plan. These provide the key business drivers and
criteria metrics managers most desire to watch. Processes are then designed to
collect information relevant to those 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 feedback.
The value
of metrics is their ability to provide basis for defining
·
Strategic feedback to show the present status of the organization
from the many perspectives for decision makers
·
Diagnostic feedback into the various processes to guide
improvements on a continuous basis
·
Trends in performance over time as the metrics are tracked
·
Feedback around the measurement methods themselves and which
metrics should be tracked
Balanced
scorecard provides quantitative inputs to forecasting methods and models for
decision support systems. It builds on some key concepts of previous management
ideas such as Total Quality Management (TQM) including customer-defined
quality, continuous improvement, employee empowerment and measurement based
management and feedback. In traditional industrial activity quality control and
zero defects were the watchwords. In order to shield the customer from
receiving poor quality products, aggressive efforts were focused on inspection
and testing at the end of the production line. The problem with this approach
as pointed out by Deming is that the true causes and defects could never be
identified and there would always be inefficiencies due to the rejection of
defects. What Deming saw was that variation is created at every step in the
production process and the causes of variation need to be identified at all
stages and that a business should be part of a system with feedback loops The
feedback data should be examined by managers to determine the causes of
variation what are the processes with significant problems and then they can
focus attention on fixing that subset of processes.
The Strategy Map
Through the
Strategy map as seen in the figure 1, balanced scorecard incorporates feedback
around internal business processes outputs, and also feedback loop around the
outcomes of business strategy. This creates a double loop feedback in the
balanced scorecard.
Figure 1 The Strategy Map and The Double-Loop Feedback Process
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How Balanced Scorecard
is impacting on Businesses
Third
generation BSC go much deeper than simple reporting and drill down analysis.
They also integrate historically separate activities for example they may
support the integration of the planning and budgeting process with the BSC and
may integrate the performance development incentive process with the scorecard
Essentially
BSC becomes the common thread that ties the essential activities of the
organization together. This integration is what supports users in leveraging
the BSC to manage ever-decreasing cycle times and stay competitive. The BSC has
been implemented in thousands of organizations worldwide from small nonprofit
organizations to large multinational corporations. Developing from a simple
need for a more holistic measurement system, the BSC is now an integrated third
generation solution that allows organizations to rapidly and measurably
implement strategy and drive breakthrough results.
Starting as
simple idea in 1992 today the BSC is deployed in more than half the Fortune 500
companies and the BSC concept was named one of the most important management
ideas of the past 75 years by the Harvard business school. The recent
integration of third generation BSC technology solutions only means that this
idea the integration of strategy and management will continue to grow. A survey
of 200 companies in more than 20 countries by the UK analyst firm Business
Intelligence showed that 57 percent of them had adopted balanced scorecards.
Balanced
Scorecard introduces facts into Management by making measurements to
performance. The goal of making measurements is to permit managers to see their
company more clearly from many perspectives and hence to make wiser long term
decisions. The Baldrige criteria (1997) booklet reiterates 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 many types including customer, product and service performance,
operations, market, competitive comparisons, supplier, employee-related, 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 the best practices benchmarks”.
“A major
consideration in performance improvement involves the creation and use of
performance measures 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 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 form the tracking processes the measures or
indicators themselves may be evaluated and changed to better support such
goals”. 2
Third generation
BSC applications
Many of the
leading BSC applications are designed to support this integrated focused view
of enterprise ERP and business vendors alike have developed solutions that
position the BSC as the integrating framework that ties their disparate
solutions together. Although this approach doesn’t address the less tangible
issues of executive leadership and organizational alignment, which are critical
to the overall success of an organizational change project it does facilitate
communication, integration, and analysis that are central to success in a BSC
initiative The leading third generation BSC applications let executives start
with a high level view of their strategy using the strategy map then quickly
drill down into supporting BSCs for forensic analysis. Within the supporting
BSCs executives can analyze the actual vs target on the various supporting
metrics and perform what if scenario metrics on their analysis.
Balanced
Scorecard Collaborative Certified is a voluntary certification program
developed by BSCol to help manage the growth of the BSC application market. In
response to request by clients BSCol developed a series of functional standards
that outlined the minimum requirements for a BSC application that meet the
Kaplan- Norton standards. The BSC functional standards identify user
requirements and needs taking into account the experience gained through
BSCol’s work in more than 300 clients.
These observations have been codified in the functional standards to provide
guidance for organizations preparing to purchase a BSC application and provide
a baseline for technology vendors developing such an application. The standards
should be viewed as a minimum threshold upon which vendors can add to address
new requirements. To date 16 companies have been awarded BSCol certified status
-
ABC technologies (recently aquired bay SAS): Oros scorecard
-
CorVu Inc: CorManage
-
Crystal Decisions Inc: Crystal Decisions Balanced Scorecard
-
FlexiBI Technology: FlexiBI
-
Open Ratings (formerly Gentia): Open Ratings Balanced
Scorecard
-
Hyperion Solutions Corp: Hyperion Performance Scorecard
-
In Phase Software Ltd: Performance Plus
-
Oracle: Oracle Balanced Scorecard
-
Panorama Business Views Inc: PB Views
-
PeopleSoft Inc:
People Soft Balanced Scorecard
-
Procos: Strat&Go
-
ProDacapo: Balanced Scorecard Manager
-
QPR: QPR Scorecard
-
SAP AG: SAP SEM
-
SAS Institute Inc: SAS solutions for Balanced scorecard
-
Vision Grupo Consultores: Strategos
How Balanced Scorecard
Would Shape Management and Employee Behaviors
Balanced
scorecard is based on five principals, which serve as the basis of an
integrated strategic management. These principals if well implemented will
provide transformational change and breakthrough in an organization. However
results have shown that fewer than 15% of the strategies are implemented
successfully and this lack of execution is one of the reasons why organizations
fail. Each principle is designed to address that critical issue. These
principals are
1. Executive
to lead change
2. Translate
the strategy into operational terms
3. Align the
organization to the strategy
4. Make
strategy every one’s job
5. Make
strategy a continual process
With these
principals as the guidelines, the adoption of Balanced Scorecard will shape the
way in which both management and employees in an organization behave in a
number of different ways. First and foremost the entire management of an organization will be aligned to the
organization’s vision and strategy. The process of building a scorecard and
discussing it will provide clarity and accountability for the execution of
strategy. While most executive teams share common goals, people often disagree
on how to achieve these goals. Balanced scorecard will help solve this
management misalignment.
The
balanced scorecard offers a platform for feedback and information sharing
across an organization. This feedback process will provide employees from the
management level to the lower cadres with information relating to the
organization’s vision and strategy. All employees will be able to align their
activities to this strategy. This will all be linked through one common thread
the strategy.
Because
balanced scorecard provides management with the necessary measures to track key
initiatives for addressing problems areas and or pursuing business
opportunities faster, business managers will be able to respond faster in
addressing problem areas or taking advantage of new opportunities. The balanced
scorecard will also provide managers with more visibility across organizations and
when appropriate more effectively cross utilize resources.
Balanced
scorecard will enable employees right down to the individual level understand
the key performance indicators that they have control and responsibility of and
how they affect the overall success of the organization. Through incentive
systems that are measured against performance indicators managers will be able
to extract the most out of their employees. When something is measured people
usually pay attention when something affects their compensation, people will
even pay more attention. Employees will be able to understand when they need to
improve their performance
Because
balanced scorecard is a continual process and business managers will be
required to respond faster to new situations and be vigilant about their
strategy and their performance against it. Business managers will increasingly
rely on information technologies to provide a real time view of the
organization’s strategy, as this will become a competitive advantage. Whereas
most organizations have significant investments in IT, managers will be
concerned with how these applications should work in harmony with the balanced
scorecard extracting and sharing information as part of the scorecard.
Bibliography
1. http://web.lexis-nexis.com/universe/document
2. http://balancedscorecard.com
3. http://www.balancedscorecard.org/basics/learning.htm
4. http://www.bscol.com/invoke.cfm