Balanced Scorecard

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History of the Balanced Scorecard

In 1992, an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review caused a lot of attention for their method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996.

The financial performance of an organization is essential for its success. Even non-profit organizations must deal in a sensible way with funds they receive. However, a pure financial approach for managing organizations suffers from two drawbacks:

• It is historical. Whilst it tells us what has happened to the organization, it may not tell us what is currently happening. Nor it is a good indicator of future performance.
• It is too low. 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 is resulting from intangible assets. This kind of value is not measured by normal financial reporting.

The 4 perspectives of the Balanced Scorecard

The Balanced Scorecard method of Kaplan and Norton is a strategic approach, and performance management system, that enables organizations to translate a company's vision and strategy into implementation, working from 4 perspectives:

1. Financial perspective.
2. Customer perspective.
3. Business process perspective.
4. Learning and growth perspective.

This allows the monitoring of present performance, but the method also tries to capture information about how well the organization is positioned to perform in the future.
 

Benefits of the Balanced Scorecard

Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard:

• Focusing the whole organization on the few key things needed to create breakthrough performance.
• Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service initiatives.
• Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees can see what's required at their level to achieve excellent overall performance.

1. 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 make sure to provide it. In fact, there is often more than sufficient 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 financial issues leads to an 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.

2. The customer perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any company. These are called 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 seem (still) good. In developing metrics for satisfaction, customers should be analyzed. In terms of kinds of customers, and of the kinds of processes for which we are providing a product or service to those customer groups.

3. The Business Process perspective

This perspective refers to internal business processes. Measurements based on this perspective will show the managers how well their business is running, and whether its products and services conform to customer requirements. These metrics have to be carefully designed by those that know these processes most intimately. In addition to the strategic management processes, two kinds of business processes may be identified:

• Mission-oriented processes. Many unique problems are encountered in these processes.
• Support processes. The support processes are more repetitive in nature, and hence easier to measure and to benchmark. Generic measurement methods can be used.

4. Learning and 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 are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to learn continuously. Government agencies often find themselves unable to hire new technical workers and at the same time is showing a decline in training of existing employees. Kaplan and Norton emphasize that 'learning' is something 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 such as an Intranet.

The integration of these four perspectives into a one graphical appealing picture, has made the Balanced Scorecard method very successful as a management methodology.

Objectives, Measures, Targets, and Initiatives

For each perspective of the Balanced Scorecard four things are monitored (scored):

• Objectives: major objectives to be achieved, for example, profitable growth.
• Measures: the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin.
• Targets: the specific target values for the measures, for example, 7% annual decline in manufacturing disruptions.
• Initiatives: projects or programs to be initiated in order to meet the objective.

Double-Loop Feedback

In traditional industrial activity, "quality control" and "zero defects" were important words. To shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. A problem with these approaches - as pointed out by Deming - is that the true causes of defects could never be identified, and there would always be inefficiencies because products with a defect are rejected. Deming understood that variation is created at every step in a production process, and the causes of variation need to be identified and repaired. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a system, with feedback loops. The feedback data should be examined by managers to determine the causes of variation, and what are the processes with significant problems. Then they can focus their attention on repairing that subset of processes.

The balanced scorecard method includes feedbacks around internal business process outputs. As in TQM. Additionally, the Balanced Scorecard provides a feedback for the outcomes of business strategies. This creates a "double-loop feedback" process in the balanced scorecard.

Outcome Metrics

You can't improve what you can't measure. Therefore metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics managers most desire to watch. Processes are then designed to collect information relevant to these 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 and provide feedback.

So the value of metrics is in their ability to provide a factual basis for defining:

• Strategic feedback to show the present status of the organization from many perspectives for decision makers.
• Diagnostic feedback into various processes to guide improvements on a continuous basis.
• Trends in performance over time.
• Feedback around the measurement methods themselves. Which measurements should be tracked?
• Quantitative inputs for forecast methods and for decision support systems.

Management by Fact

The goal of measuring is to permit managers to see their company more clearly - from many perspectives - and hence to make wiser long-term decisions. A 1997 booklet on the Baldrige Criteria summarizes 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 of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and 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 'best practices' benchmarks."

"A major consideration in performance improvement involves the creation and use of performance measures or 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 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 from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals."
 

Cautionary note on using the Balanced Scorecard

You tend to get what you measure. People will work to achieve the explicit targets which are set. For example, emphasizing traditional financial measures may encourage short-term thinking. The Core Group Theory by Kleiner provides further clues on the mechanisms behind this. Kaplan and Norton recognize this, and urge for a more balanced set of measurements. But still, people will work to achieve their scorecard goals, and may ignore important things which have no place on their scorecard.
 

Evolution of the Balanced Scorecard

In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon the intended method of use within an organization. They describe how the Balanced Scorecard can be used to support three distinct management activities, the first two being management control and strategic control. They assert that due to differences in the performance data requirements of these applications, planned use should influence the type of BSC design adopted. Later that year the same authors reviewed the evolution of the Balanced Scorecard as shown through the use of Strategy Maps as a strategic management tool, recognizing three distinct generations of Balanced Scorecard design.

Book: Robert S. Kaplan, David P. Norton - The BSC: Translating Strategy into Action

Book: Paul R. Niven - BSC Step-by-Step: Maximizing Performance and Maintaining Results

Book: Paul R. Niven - BSC Step-by-Step for Government and Nonprofit Agencies

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For my study I have to choose a methode of analysing the control proces in a maintenance division. Just to be clear, the company is a n... 6   2 comments Implementation of Balanced Scorecard in Outsourcing Industry Hi, could someone share his/her experience of implementing the BSC in outsourcing industry? Especially the KPIs which were taken into consideration. Thank you..... 5   1 comments Balanced Scorecard for Software Development Has anyone experience of using the Balanced Scorecard to manage software development projects or managing a customer support department?... 3   1 comments Start a new topic about the Balanced Scorecard Sign up for free

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Best Practices The best, top-rated topics about the Balanced Scorecard. Here you will find the most valuable ideas and practical suggestions. 🥇 Balanced Scorecard Design Tips I designed the BSC for a few organisation and they were surprised by the statistics. One firm was appreciated and even awarded also, for that technique. It totally depends how well it is designed.... 71   5 comments 🥈 Balanced Scorecard for Engineering Services I am working on a project related to BSC on engineering services, can anyone share their idea/experience in this field.?... 52   3 comments 🥉 Weaknesses or Disadvantages of the Balanced Scorecard Rodov and Leliaert mention 3 weaknesses of the Balanced Scorecard: 1. The system (once designed) is quite rigid and static 2. The system is extremely company specific. 3. The system does not provid... 45   12 comments Balanced Scorecard Trends and Developments The BSC concept has proved to be fluid and developing with time. Hence the more reason one needs to constantly keep pace with recent developments. This framework has aligned itself very well with oth... 34   5 comments What the Balanced Scorecard DOES Address and What NOT According to my experience, the balanced scorecard effectively deals with the 'hard side' of the organization, for example the financial performance (such as the turn over), the level of training, the... 30   11 comments

Expert Tips Advanced insights about the Balanced Scorecard. Here you will find professional advices by experts. Consultancy Tips Teaching Tips Practical Implementation Tips 15 Best Practices on Balanced Scorecard Avoid Pitfalls in Implementing the Balanced Scorecard Here's a list of Best Practices for successful Balanced Scorecard implementation. Kaplan and Norton already mentioned th... Generic Balanced Scorecard Implementation Process Template to adapt to your own specific demands and circumstances Here is a generic step-by-step procedure towards implementing the Balanced Scorecard (adapt to your own specific demands... Balanced Scorecard Implementation - Pitfalls and Solutions Balanced Scorecard Implementation, Balanced Scorecard Pitfalls, Implementing Balanced Scorecard The Balanced Scorecard is a strategic performance management tool that has enormous potential when applied properly. Acc... Linking Strategy with Execution Linking Strategy to Implementation One of the world's most popular business tools for translating strategy into operational activities is the Balanced Scor... How to Measure the Success of a Balanced Scorecard Implementation? Measuring BSC success Hi, we're implementing the Balanced Scorecard in our organization. How do you measure it's success? An interesting artic... Best Practices to Better Target Setting Management by Objectives, SMART, Business Performance Management, Balanced Scorecard, KPIs, CSFs In most organizations it is very common to specify organizational targets with the aim of increasing performance. This s... Advantages Balanced Scorecard Strategic management The Balanced Scorecard approach has following advantages for an organization: - Due to the focus on long-term strategic ... How to Incorporate Sustainability into the Balanced Scorecard? Sustainability Balanced Scorecard, SBSC, Triple Bottom Line Due to the fact that corporate sustainability issues have become more and more important, organizations are now forced t... Why is it Important for a Balanced Scorecard to Communicate the Strategy? Balanced Scorecard & Strategy Why is it important for a Balanced Scorecard to communicate the strategy? 1. It describes the corporate vision to the ... 3 Steps in Solving Problems with Data Credibility Improving Data Reliablility, IT, Business Intelligence The problem of data credibility Data credibility problems have been existed for many years. Due to this credibility pro... Cascading Balanced Scorecard to Team & Personal Scorecards BSC Implementation Implementing the Balanced scorecard at the team and individual level can be problematic: individual roles may not have ...

Information Sources Various sources of information regarding the Balanced Scorecard. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Balanced Scorecard Metrics Default Metrics per Perspective Around 20 example metrics for each of the perspectives of the BSC.... Balanced Scorecard Overview HR 1. Corporate Performance Scorecard 2. Strategy Map Framework 3. Four Perspectives in Balanced Scorecard 4. Identifyin... KPIs and KPI Management Understanding KPIs, Introduction Introduction by expert Joe Panebianco gives a first understanding of what Key Performance Indicators (KPI's) are and the... Interview Kaplan: Historic Background of Balanced Scorecard Developing a Broader Perspective Towards the Beginning of the BSC In the 1980's Kaplan recognized that financial measurements by themselves were insufficient to guide companies to succes... Balanced Scorecards in Hospitals Balanced Scorecard, Performance Management, This presentation elaborates on the Balanced Scorecards in a hospital and the ways it can lead to improvements regarding... How to Build the Employee Scorecard (Executive Summary) Basic Understanding of the Employee Balanced Score Card Brett Knowles provides an Executive Summary that overviews the key building blocks in an Employee Scorecard. It is inten... Basics of BSC Introduction Presentation Introductory presentation on the Balanced Scorecard.... Balanced Scorecard Project Template BSC Project Management Comprehensive spreadsheet offers many default templates:Process Inputs Checklist, Development Timeline, Team Formation C... BSC to Control Strategy Performance Measurement Paper by Dennis Campbell ao demonstrates that performance measurement systems can be used to monitor, analyze, and revis... Balanced Scorecard Templates Balanced Scorecard Project Excel Workbook contains several templates to help you develop a Balanced Scorecard: Basic checklist, Timeline, Critical ...

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