Balanced scorecard

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The balanced scorecard (BSC) is a strategic management tool that helps organizations focus on more than financial outcomes ("bottom-line" financial reporting). As the name suggests, the BSC attempts to define and measure factors that predict outcomes, and to ensure that a variety of key areas of operation are kept in focus.

The balanced scorecard is a strategic management system. It balances a financial perspective with the perspectives that lead to financial outcomes. The exact areas of measurement tend to differ, with different practitioners favoring different areas, and Kaplan & Norton themselves modifying their original categories after their seminal 1992 works.

Balanced scorecards have been implemented by businesses, government units, nonprofit institutions, schools, and business and nonprofit units or divisions. A number of sample scorecards can be found on the Internet.

Strategic management with the BSC

According to Kaplan and Norton, the BSC is

  1. a top-down reflection of the company's mission and strategy;
  2. a planning tool for future success;
  3. an integration of processes with strategy;
  4. a prioritization of measures critical to success.

The use of measures from different areas is designed to help leaders look forward rather than backward, and towards long-term success rather than be unduly concerned with the short term; the choice of measures varies by organization because they flow from the strategy, not from a normative "one size fits all" theory. According to practitioners and published research (not all of which is formally stated as relating to balanced scorecards), numerous organizational measures predict financial outcomes; these include employee and customer metrics, which are not, according to numerous research articles, normally considered by leaders at the same level as purely financial outcomes. By focusing equal attention to these predictors, the balanced scorecard has the potential to greatly increase long-term results.

The balanced scorecard attempts to link quantifiable measures to business strategies by having leaders define their vision or strategy as clearly as they can; then either the leaders or a group of sub-teams work on developing or assigning metrics to the vision or strategy. These goals are then communicated and, preferably, integrated into the organization's performance management systems, so that performance on these measures (or each person's equivalent to them) is rewarded. The strategy is thus communicated both in words, which are easily misconstrued or dismissed - and which, when not measured, are often ambiguous - and in actual metrics, which tend to be harder to misconstrue. Thus, the balanced scorecard is often lauded as a communication tool which clarifies the organizational strategy, both to employees, who see it either as words or as metrics, and to leaders, who must prioritize between many essential measures to focus on the most key issues.

Misalignment between rewards given and the measures communicated (e.g. promoting risk-taking while punishing failures) is an issue in many companies [1]. The balanced scorecard was designed to be a strategic decision-making instrument that forces management to align vision with rewards, solving this problem.

A comprehensive view of business

Some of the perspectives or areas measured by scorecards include:

  • Financial - measures reflecting financial performance, for example number of debtors, cash flow, or return on investment. However, financial figures alone tell us what has happened to the organization, but not what is currently happening.
  • Customer - 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 - measures reflecting the performance of key business processes, for example the time spent prospecting, percentage of units that required rework, or process cost.
  • Learning and growth - measures describing the company's learning curve -- for example, number of implemented employee suggestions or total hours spent on staff training.
  • Supplier - measures reflecting partnerships with or effective use of suppliers, such as the amount saved in supplier partnership programs (e.g. SCORE).

Specific measures within each of the perspectives are chosen to reflect the drivers of the particular organization, with considerable care taken to avoid choosing measures which will lead to unwanted behavior (e.g. gaming the system). The method can facilitate the separation of strategic policymaking from the implementation, so that 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, the internal 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.

Some recommend using a process where senior leaders choose what will be measured in terms of general perspectives, while committees below choose specific measures, and then cascade the scorecard down through organizational ranks until all levels are both involved in and measured by a scorecard. Generally, people focus on what is measured in the scorecard. This can lead to longer-term thinking, as there is less of a sole focus on financial outcomes, but experts also recommend caution in scorecard development, and regular re-inspection of the scorecard measures. Some use linkage analysis to verify the model used by executives in creating the scorecard.

Uses 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.

References

  • Cobbold, I and Lawrie G (2002a). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002 [1]
  • Cobbold, I and Lawrie, G (2002b). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002 [2].
  • Covey, Steven (2005): "The 8th Habit", Free Press
  • Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review Jan – Feb pp71-80.
  • Kaplan R S and Norton D P (1993) "Putting the Balanced Scorecard to Work", Harvard Business Review Sep – Oct pp2-16.
  • Kaplan R S and Norton D P (1996) "Using the balanced scorecard as a strategic management system", Harvard Business Review Jan – Feb pp75-85.
  • Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30
  • Schiemann W A and Lingle J (1999) "Bullseye! : Hitting Your Strategic Targets Through High-Impact Measurement" Free Press

External links

  • Covey, Chapter 1