Balanced scorecard

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 based on who the theorist is - Kaplan & Norton or others - and the time-frame, with Kaplan & Norton themselves modifying their original categories after the publication of their seminal works in 1992.

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.

For example, a company using a BSC to plan strategy may suffer a short-term financial loss while still achieving its long-term goals. But this loss can be seen in perspective and not cause undue disruption to the overall strategy.

In short, the BSC attempts to link quantifiable measures to business strategies. In order to implement such metrics, each company will have to undergo the following process:

• define the business vision
• translate the vision into operational goals
• communicate the goals and link them to individual performance
• reward performance that fulfills the vision and re-align performance that does not.

Misalignment between rewards given and the measures communicated are at the heart of most organizational malaise; in other words, promoting risk-taking while punishing failures discourages innovation in a company . Kaplan and Norton are careful to point out that the BSC is not merely a measurement tool, but rather a strategic decision-making instrument that forces management to align vision with rewards.

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.

See also

• Strategic management
• Strategy Execution
• Chief Performance Officer
• Strategy map
• Business Dashboard
• Enterprise Dashboard
• Executive Dashboard
• Half-life Method

References

• Chaudron, David (2006). "Balanced Scorecard, BSC and Performance Improvement". http://www.organizedchange.com/balancedscorecard.htm.

• 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

Links

[Metrus Group scorecard process] [Balanced Scorecard Institute] [Toolpack scorecard process]