Balanced
Scorecard Basics
The
balanced scorecard is a strategic planning and jmanagement 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.
Gartner Group suggests that over 50% of large US firms have adopted the BSC.
More than half of major companies in the US, Europe and Asia are using balanced
scorecard approaches, with use growing in those areas as well as in the Middle
East and Africa. A recent global study by Bain & Co listed balanced
scorecard fifth on its top ten most widely used management
tools around
the world, a list that includes closely-related strategic planning at number
one. Balanced scorecard has also been selected by the editors of Harvard
Business Review as
one of the most influential business ideas of the past 75 years.
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 Dr.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).
Reference: The Institute Way: Simplify
Strategic Planning & Management with the Balanced Scorecard.
Balanced
Scorecard Software
The
balanced scorecard is not a piece of software. Unfortunately, many people
believe that implementing software amounts to implementing a balanced
scorecard.Once a scorecard has been developed and implemented,
however,performance management software can be used to get the right
performance information to the right people at the right time. Automation adds
structure and discipline to implementing the Balanced Scorecard system, helps
transform disparate corporate data into information and knowledge, and helps
communicate performance information. The Balanced Scorecard Institute formally
recommends the System developed by Spider Strategies and co-marketed by
the Institute.
