In 1992, Robert S. Kaplan and David P. Norton introduced the balanced scorecard, a concept for measuring whether the activities of a
company are meeting its objectives in terms of vision and strategy. By focusing not only on financial outcomes but also on the
human issues, the balanced scorecard helps to provide a more comprehensive view of a business which in turn helps organizations
to act in their best long-term interests. The strategic management system helps
managers focus on performance metrics while balancing financial objectives with customer, process and employee perspectives.
Measures are often indicators of future performance.
Since the original concept was introduced, balanced scorecards have become a fertile field of theory and research, and many
practitioners have diverted from the original Kaplan & Norton articles. Kaplan & Norton themselves revisited the
scorecard with the benefit of a decade's experience since the original article.
Implementing the scorecard typically includes four processes:
- Translating the vision into operational goals;
- Communicate the vision and link it to individual performance;
- Business planning;
- Feedback and learning and adjusting the strategy accordingly.
A comprehensive view of business performance
Balanced Scorecard is simply a concise report featuring a set of measures that relate to the performance of an organization.
By associating each measure with one or more expected values (targets), managers of the organization can be alerted when
organizational performance is failing to meet their expectations. The challenge with Balanced Scorecard is, and has been since it
was popularized by an article in 1992 published in the Harvard Business Review, deciding on which measures to choose.[an
actual example of such a report would greatly clarify this further]
From the outset, the Balanced Scorecard has been promoted as a tool to help organizations monitor the implementation of
organizational strategy.
The earliest Balanced Scorecards comprised simple tables broken into four sections - typically these 'perspectives' were
labeled "Financial", "Customer", "Internal Business Processes", and "Learning & Growth".
Designing the Balanced Scorecard simply required picking five or six good measures for each perspective. Many writers have since
suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives: these
suggestions being triggered by a recognition that different but equivalent headings will yield alternative sets of measures. The
major design challenge faced with this type of Balanced Scorecard is justfiying the choice of measures made - "of all the
measures you could have chosen why did you choose these...?" is a common question asked (and using this type of design
process, hard to answer). If users are not confident that the measures within the Balanced Scorecard are well chosen, they will
have less confidence in the information it provides. Although less common, these early style Balanced Scorecards are still
designed and used today.
The early style Balanced Scorecards are hard to design in a way that builds confidence that they are well designed. Because of
this, many are abandoned soon after completion.
In the mid 1990s an improved design method emerged. In the new method, selection of measures was based on a set of 'strategic
objectives' plotted on a 'strategic linkage model' or 'strategy map'. With this modified approach, the strategic objectives are
typically distributed across a similar set of 'perspectives' as is found in the earlier designs, but the design question becomes
slightly more abstract. Managers have to identify the five or six goals they have within each of the perspectives, and then
demonstrate some inter-linking between them by plotting causal links on the diagram. Having reached some consensus about the
objectives and how they inter-relate, the Balanced Scorecard's measures are chosen by picking suitable measures for each
objective. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for
managers to work through. This style of Balanced Scorecard has been the most common type for the last ten years or so.
Several design issues still remain with this modified approach to Balanced Scorecard design, but it has been much more
successful than the design approach it supersedes.
Since the late 1990s, various improved versions of Balanced Scorecard design methods have emerged - examples being
The Performance Prism, Results Based Management and Third Generation Balanced Scorecard for example. These more advanced design methods seek to solve some of the
remaining design issues - in particular issues relating to the design of sets of Balanced Scorecards to use across an
organization, and in setting targets for the measures selected.
Many books and articles on Balanced Scorecard topics confuse the design process elements and the Balanced Scorecard itself: in
particular, it is common for people to refer to a 'strategic linkage model' or 'strategy map' as being a Balanced Scorecard.
Balanced Scorecard is a performance management tool: although it helps focus
managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that
Balanced Scorecard itself has no role in the formation of strategy. Balanced Scorecard can comfortably co-exist with strategic
planning systems and other tools.
Actual usage of the balanced scorecard
Kaplan and Norton found that companies are using the scorecard to:
- Clarify and update budgets
- Identify and align strategic initiatives
- Conduct periodic performance reviews to learn about and improve strategy.
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance
from a number of perspectives in a similar way to the balanced scorecard.
Balanced scorecards have been implemented by government agencies, military units, corporate units and corporations as a whole,
nonprofits, and schools; many sample scorecards can be found via Web searches, though adapting one organization's scorecard to
another is generally not advised by theorists, who believe that much of the benefit of the scorecard comes from the
implementation method.
Comparison to Applied Information Economics
A criticism of balanced scorecard is that the scores are not based on any proven economic or financial theory and have no
basis in the decision sciences. The process is entirely subjective and makes no provision to assess quantities like risk and
economic value in a way that is actuarially or economically well-founded. The Balanced scorecard does not provide a bottom line
score or a unified view with clear recommendations, it is simply a list of metrics [1]. Positive
responses from users of balanced scorecard may merely be a type of placebo effect. Furthermore, studies showed that many
companies utilising the process were not convinced of its benefits after a period of ten years[citation needed]. The use of the process has been
linked to the Enron disaster[citation needed]. There are no empirical studies linking the use of balanced scorecard to
better decision making or improved financial performance of companies.
Applied Information Economics (AIE) has been researched as an
alternative to Balanced Scorecards. In 2000, the Federal CIO
Council commissioned a study [2] to compare the two methods by funding studies in side-by-side projects in two
different agencies. The Dept. of Veterans Affairs used AIE and the US Dept. of Agriculture applied balanced scorecard. The
resulting report found that while AIE was much more sophisticated, AIE actually took slightly less time to utilize. AIE was also
more likely to generate findings that were newsworthy to the organization while the users of balanced scorecard felt it simply
documented their inputs and offered no other particular insight. However, balanced scorecard is still much more widely used than
AIE.[citation needed]
Key performance indicators
According to each perspective of the balanced scorecard there are a number of KPIs.
- Customer
- Delivery Performance to Customer - by Date
- Delivery Performance to Customer - by Quantity
- Customer satisfaction rate
- Customer retention
- Internal Business Processes
See also
References
- Douglas W. Hubbard "How to Measure Anything: Finding the Value of Intangibles in Business" John Wily & Sons, 2007. ISBN
978-0470110126
- 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.
- Kaplan R S and Norton D P (1996) “Balanced Scorecard: Translating Strategy into Action” Harvard
Business School Press
- Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17
pp128- 30
- Niven, Paul R. (2006) "Balanced Scorecard. Step-by-step. Maximizing Performance and Maintaining
Results".
- Norreklit H. (2000), The balance on the balanced scorecard - a critical analysis of some of its assumptions, Management
Accounting Research, 11, pp. 65-88.
- Voelper S., Leibold M., Eckhoff R., Davenport T. (2006), The tyranny of the Balanced Scorecard in the innovation economy,
Journal of Intellectual Capital, Vol. 7, n° 1, pp. 43-60.
Software tools
Over 100 software packages are available that provide some ability to automate the reporting of Balanced Scorecard
information. The most comprehensive list of such packages is freely accessible from the 2GC web site. Compiere [3] and BSPG [ http://bspg.sourceforge.net/intro/index.html ] are two open source software packages that do seem to provide BSC
implementation facilities.
Meanwhile, many firms choose to use standard office software (such as spreadsheets,
word processors, presentation software) to
provide the same functions as are provided by commercial software packages - trading the time taken to develop the appropriate
templates in the packages and then use them against the typically high cost of commercial Balanced Scorecard software packages /
services.
External links
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