Balanced scorecard

The balanced scorecard (BSC) is a strategic performance management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy.

By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests. This tool is also being used to address business response to climate change and greenhouse gas emissions.

Organizations were encouraged to measure, in addition to financial outputs, those factors which influenced the financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.

The underlying rationale is that organizations cannot directly influence financial outcomes, as these are "lag" measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise. Organizations should instead also measure those areas where direct management intervention is possible. In so doing, the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. In practice, early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Customer," "Internal Business Processes" and "Learning and Growth."

History

The first balanced scorecard was created by Art Schneiderman (an independent consultant on the management of processes) in 1987 at Analog Devices, a mid-sized semiconductor company^[1]. Other early applications of the concept in various companies were conducted by Harvard professor Dr. Robert S. Kaplan and others in a Nolan-Norton Institute study group. In 1992, Kaplan and David P. Norton began reporting the findings of their initial balanced scorecard experience through a series of journal articles.^[2][3] In 1996, they published a seminal book The Balanced Scorecard,^[4] which continues to be a management bestseller.^{[citation needed]}

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.

Since the initial publications in the early 1990s, the balanced scorecard and its related ideas have been widely adopted in commercial companies, governments and nonprofit organizations. Because of this popularity, the ideas have also become a fertile field of theory, research and consulting practice. The Balanced Scorecard has evolved considerably from its roots as a measure selection framework, and Kaplan and Norton have continued to publish their extensions of the concept in four additional books.^[5][6][7][8]

Although Kaplan & Norton's first book, The Balanced Scorecard, remains the most popular, it was lacking in guidance on how to develop strategies. Their second book, The Strategy Focused Organization, added another innovation, the strategy map. This new tool, which provided a visual way to craft business strategies, quickly became so popular in companies that Kaplan & Norton published a third book of 450 pages entirely devoted to strategy maps in 2004.

Numerous other books and articles continue to be published by many authors, which extend the balanced scorecard to embrace a wider range of variations and applications. There has also been a rapid growth in consulting offerings and software products linked to the balanced scorecard. Its popularity has led to some confusion as to the scope of balanced scorecard practices and a lack of standard terminology

Use

Implementing Balanced Scorecards typically includes four processes:

1. Translating the vision into operational goals;
2. Communicating the vision and link it to individual performance;
3. Business planning; index setting
4. Feedback and learning, and adjusting the strategy accordingly.

The Balanced Scorecard is a framework, or what can be best characterized as a “strategic management system” that claims to incorporate all quantitative and abstract measures of true importance to the enterprise. According to Kaplan and Norton, “The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success”.

Many books and articles referring to balanced scorecards 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.

Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the balanced scorecard itself has no role in the formation of strategy. In fact, balanced scorecards can comfortably co-exist with strategic planning systems and other tools.

Original methodology

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 required selecting five or six good measures for each perspective.

Many authors have since suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives. These suggestions were notably triggered by a recognition that different but equivalent headings would yield alternative sets of measures. The major design challenge faced with this type of Balanced Scorecard is justifying the choice of measures made. "Of all the measures you could have chosen, why did you choose these?" This common question is hard to ask using this type of design process. 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.

In short, 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.

Improved methodology

In the mid 1990s, an improved design method emerged. In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map". With this modified approach, the strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.

To develop a strategy map, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them. A balanced scorecard of strategic performance measures is then derived directly from the strategic objectives. 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 commonly used since 1996 or so.

Several design issues still remain with this enhanced approach to Balanced Scorecard design, but it has been much more successful than the design approach it superseded.

In the late 1990s, the design approach had evolved yet again. One problem with the "2nd generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it ignored the fact that opportunities to intervene, to influence strategic goals are, and need to be anchored in the "now;" in current and real management activity. Secondly, the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument; the Vision or Destination Statement. This device was a statement of what "strategic success," or the "strategic end-state" looked like. It was quickly realised, that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic Activity and Outcome objectives to respond to it. Measures and targets could then be selected to track the achievement of these objectives.

In 2007, the 4th Generation was evolved in the work by Hannabarger, Buchman and Economy. They created linkages between the Strategic, Operational and Tactical levels within organizations through Scorecards and Dashboards that provide drill down / up capability to identify sources and root causes for under-performing scorecard metrics. Soon after this work, Kaplan and Norton revised their approach and acknowledged it had lacked the ability to give focus on measures to the here and now, day-to-day operational and tactical levels within organizations that the Hannabarger, Buchman and Economy work provides.

Popularity

Kaplan and Norton found that companies are using Balanced Scorecards to:

• Drive strategy execution;
• Clarify strategy and make strategy operational;
• Identify and align strategic initiatives;
• Link budget with strategy;
• Align the organization with strategy;
• Conduct periodic strategic 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, business units and corporations as a whole, non-profit organizations, and schools.

Many examples of Balanced Scorecards can be found via Web searches. However, adapting one organization's Balanced Scorecard to another is generally not advised by theorists, who believe that much of the benefit of the Balanced Scorecard comes from the implementation method. Indeed, it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards were often designed remotely by consultants. Managers did not trust, and so failed to engage with and use these measure suites created by people lacking knowledge of the organisation and management responsibility.

Variants, alternatives and criticisms

Since the Balanced Scorecard was popularised in the early 1990s, a large number of alternatives to the original 'four box' Balanced Scorecard promoted by Kaplan & Norton in their various articles and books have emerged. Most have very limited application, and are typically proposed either by academics as vehicles for promoting other agendas (such as green issues),^[9] or consultants to as an attempt at differentiation to promote sales of books and / or consultancy.^[10] Many of the variations proposed are broadly similar, and a research paper published in 2002^[11] attempted to identify a pattern in these variations - noting three distinct types of variation. The variations appeared to be part of an evolution of the Balanced Scorecard concept, and so the paper refers to these distinct types as "Generations". Broadly, the original 'measures in boxes' type design (as proposed by Kaplan & Norton) constitutes the 1st Generation Balanced Scorecard design; Balanced Scorecard designs that include a 'strategy map' or 'strategic linkage model' (e.g. the Performance Prism, later Kaplan & Norton designs,^[12] the Performance Driver model of Olve & Wetter^[13]) constitute the 2nd Generation of Balanced Scorecard design; and designs that augment the strategy map / strategic linkage model with a separate document describing the long-term outcomes sought from the strategy (the "Destination Statement" idea) comprise the 3rd Generation Balanced Scorecard design. Examples of the 3rd Generation Balanced Scorecard design include the Third Generation Balanced Scorecard itself, and the performance management elements of the UN's Results Based Management model.

The Balanced Scorecard has always attracted criticism from a variety of sources. Most has come from the academic community, who dislike the empirical nature of the framework: Kaplan & Norton notoriously failed to include any citation of prior art in their initial papers on the topic. Some of this criticism focuses on technical flaws in the methods and design of the original Balanced Scorecard proposed by Kaplan & Norton,^[14] and has over time driven the evolution of the device through its various Generations. Other academics have simply focused on the lack of citation support.^[15] But a general weakness of this type of criticism is that it typically uses the 1st Generation Balanced Scorecard as its object: many of the flaws identified are addressed in other works published since the original Kaplan & Norton works in the early 1990s.

Another criticism, usually from pundits and consultants, is that the balanced scorecard does not provide a bottom line score or a unified view with clear recommendations: it is simply a list of metrics.^[16] These critics usually include in their criticism suggestions about how the 'unanswered' question postulated could be answered. Typically however, the unanswered question relates to things outside the scope of Balanced Scorecard itself (such as developing strategies).^[17]

There are few empirical studies linking the use of Balanced Scorecards to better decision making or improved financial performance of companies, but some work has been done in these areas. However broadcast surveys of usage have difficulties in this respect, due to the wide variations in definition of 'what a Balanced Scorecard is' noted above (making it hard to work out in a survey if you are comparing like with like). Single organisation case studies suffer from the 'lack of a control' issue common to any study of organisational change - you don't know what the organisation would have achieved if the change had not been made, so it is difficult to attribute changes observed over time to an single intervention (such as introducing a Balanced Scorecard). However, such studies as have been done have typically found Balanced Scorecard to be useful^[18]

Applied information economics (AIE) has been researched as an alternative to Balanced Scorecards. In 2000, the Federal CIO Council commissioned a study^[19] 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 Scorecards. The resulting report found that while AIE was much more sophisticated, it 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 Scorecards felt it simply documented their inputs and offered no other particular insight. However, Balanced Scorecards are still much more widely used than AIE.^{[citation needed]}

The four perspectives

The grouping of performance measures in general categories (perspectives) is seen to aid in the gathering and selection of the appropriate performance measures for the enterprise. Four general perspectives have been proposed by the Balanced Scorecard:

• Financial perspective;
• Customer perspective;
• Internal process perspective;
• Innovation and learning perspective.

The financial perspective examines if the company’s implementation and execution of its strategy are contributing to the bottom-line improvement of the company. It represents the long-term strategic objectives of the organization and thus it incorporates the tangible outcomes of the strategy in traditional financial terms. The three possible stages as described by Kaplan and Norton (1996) are rapid growth, sustain, and harvest. Financial objectives and measures for the growth stage will stem from the development and growth of the organization which will lead to increased sales volumes, acquisition of new customers, growth in revenues etc. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs, by calculating the return on investment, the return on capital employed, etc. Finally, the harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. Some of the most common financial measures that are incorporated in the financial perspective are EVA, revenue growth, costs, profit margins, cash flow, net operating income etc.

The customer perspective defines the value proposition that the organization will apply to satisfy customers and thus generate more sales to the most desired (i.e. the most profitable) customer groups. The measures that are selected for the customer perspective should measure both the value that is delivered to the customer (value proposition) which may involve time, quality, performance and service, and cost, and the outcomes that come as a result of this value proposition (e.g., customer satisfaction, market share). The value proposition can be centered on one of the three: operational excellence, customer intimacy or product leadership, while maintaining threshold levels at the other two.

The internal process perspective is concerned with the processes that create and deliver the customer value proposition. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently. These can include both short-term and long-term objectives as well as incorporating innovative process development in order to stimulate improvement. In order to identify the measures that correspond to the internal process perspective, Kaplan and Norton propose using certain clusters that group similar value creating processes in an organization. The clusters for the internal process perspective are operations management (by improving asset utilization, supply chain management, etc), customer management (by expanding and deepening relations), innovation (by new products and services) and regulatory & social (by establishing good relations with the external stakeholders).

The innovation and learning perspective is the foundation of any strategy and focuses on the intangible assets of an organization, mainly on the internal skills and capabilities that are required to support the value-creating internal processes. The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise. These three factors relate to what Kaplan and Norton claim is the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved. This of course will be in the long term, since an improvement in the learning and growth perspective will require certain expenditures that may decrease short-term financial results, whilst contributing to long-term success.

Key performance indicators

Once a strategy map and strategic objectives are identified, strategic performance metrics or KPIs can be used to track performance. The specific measures should be derived from an organization's strategy; they are not "one size fits all". However, typical performance measures might include the following:

Financial

• Cash flow
• Return on investment
• Financial result
• Return on capital employed
• Return on equity
• Residual income
• Economic Value Added

It defines the value proposition that the organization will apply to satisfy customers and thus generate more sales to the most desired customers

Internal business processes

• Number of activities
• Opportunity success rate
• Accident ratios & Environment compatibility
• Overall equipment effectiveness

Learning and growth

• Investment Rate
• Illness rate
• Internal Promotions
• Employee Turnover
• Gender Ratios

Further lists of general and industry-specific KPIs can be found in the case studies and methodological articles and books presented in the references section.

Software tools

It is important to recognise that the balanced scorecard is not a software product. It is a strategic management concept. Once managers have defined their strategy and measures, a software system can be employed to collect and use the measurements for decision making.

The processes of collecting, reporting, and distributing Balanced Scorecard information are labour intensive and prone to procedural problems (for example, getting all relevant people to return the information required by the required date). The simplest mechanism to use is to delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc methods based around email, phone calls and office software.

In more complex organisations, where there are multiple Balanced Scorecards to report, and a need for co-ordination of results between Balanced Scorecards (for example, if one level of Balanced Scorecard reports relies on information collected and reported at a lower level) the use of individual Balanced Scorecard reporters is problematic. Where these conditions apply, organisations use Balanced Scorecard reporting software to automate the production and distribution of these reports.

A recent survey^[20], found that roughly 1/3 of organisations use office software to report their Balanced Scorecard, 1/3 use bespoke software developed specifically for their own use, and 1/3 use one of the many commercial packages available.

There are currently over 100 vendors of software suitable for Balanced Scorecard reporting (i.e. supporting data collection, reporting and analysis)^[21].

See also

• Activity-based costing
• Applied information economics
• BSC SWOT
• Digital dashboard, also known as business dashboard, enterprise dashboard or executive dashboard
• GQM (goal-question-metric)
• Key performance indicators
• Knowledge management
• Performance management
• Results Based Management
• Strategic management
• Strategy map
• Third generation balanced scorecard

References

1. ^ Art Schneiderman, "The First Balanced Scorecard"
2. ^ "The Balanced Scorecard - Measures that Drive Performance", Harvard Business Review, Feb. 1992
3. ^ "Putting the Balanced Scorecard to Work", Harvard Business Review, Sept. 1993
4. ^ The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Boston (1996).
5. ^ The Strategy Focused Organization, Harvard Business School Press (2001).
6. ^ Strategy Maps, Harvard Business School Press (2004).
7. ^ Alignment: Using the Balanced Scorecard to Create Corporate Synergies, Harvard Business School Press (2006).
8. ^ The Execution Premium: Linking Strategy to Operations for Competitive Advantage, Harvard Business School Press (2008).
9. ^ e.g. Brignall, S. (2002) "The UnBalanced Scorecard: a Social and Environmental Critique", Proceedings, Third International Conference on Performance Measurement and Management (PMA 2002) Boston, MA, USA July 2002; Butler A. Letza S.R. and Neale B. (1997).
10. ^ e.g. e.g. Bourne, M., and Bourne, P. (2000), Understanding the Balanced Scorecard in a Week, Hodder & Stoughton, UK,Olve, N.; Sjöstrand, A., (2002), The Balanced Scorecard, Oxford, UK: Capstone Publishing; Niven P.R. (2002). Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results, Wiley, New York, USA; Parmenter, D., (2002), “Implementing a Balanced Scorecard in 16 Weeks”, Chartered Accountants Journal, Vol. 81 Issue 3, p19.; and Davig, W., Elbert, N., Brown, S., (2004), “Implementing a Strategic Planning Model for Small Manufacturing Firms: An Adaptation of the Balanced Scorecard”. S.A.M. Advanced Management Journal, Vol. 69 Issue 1, p18, Charles Hannabarger, Frederick Buchman, and Peter Economy (2007) Balanced Scorecard Strategy for Dummies Wiley Publishing, Inc. ISBN 978-0-470-13397-2
11. ^ Cobbold, I. and Lawrie, G. (2002a). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002
12. ^ ; Kaplan R.S. and Norton D.P. (2000). The Strategy Focussed Organisation, HBS Press, USA
13. ^ Olve N., Roy J., Wetter M. (1999 - English translation, 1st published in Swedish 1997); “Performance Drivers: A practical guide to using the Balanced Scorecard”, Wiley, UK.
14. ^ e.g. Lingle J.H. and Schieman W.A. (1996). “From Balanced Scorecard to strategic gauges: is measurement worth it”, Management Review, Vol.85; Schneiderman A.M. (1999). “Why Balanced Scorecards fail”, Journal of Strategic Performance Measurement, January, Special Edition 6; Malina, M.A., Selto, F.H., (2001), “Communicating and Controlling Strategy: An Empirical Study of the Effectiveness of the Balanced Scorecard”, Journal of Management Accounting Research, Vol. 13, p47
15. ^ e.g. Norreklit H. (2000), "The balance on the balanced scorecard - a critical analysis of some of its assumptions", Management Accounting Research, 11, pp. 65-88.
16. ^ Jensen, Michael C., "Value Maximization, Stakeholder Theory, and the Corporate Objective Function" (October 2001). Unfolding Stakeholder Thinking, eds. J. Andriof, et al, (Greenleaf Publishing, 2002). Also published in JACF, V. 14, N. 3, 2001, European Financial Management Review, N. 7, 2001 and in Breaking the Code of Change, M. Beer and N. Norhia, eds, HBS Press, 2000.. Available at SSRN: http://ssrn.com/abstract=220671 or DOI: 10.2139/ssrn.220671
17. ^ e.g. Rohm, Howard (2004). "A Balancing Act", Perform Magazine, v. 2 no. 2.
18. ^ e.g. Epstein M.J. and Manzoni J.F. (1997). “The Balanced Scorecard & Tableau de Bord: A Global Perspective on Translating Strategy into Action”; INSEAD Working Paper, 97/63/AC/SM, Mooraj S. Oyon D. and Hostettler D. (1999). “The Balanced Scorecard: A Necessary Good or an Unnecessary Evil?” European Management Journal, Vol.17, No.5, Malina, M.A., Selto, F.H., (2001), “Communicating and Controlling Strategy: An Empirical Study of the Effectiveness of the Balanced Scorecard”, Journal of Management Accounting Research, Vol. 13, p47
19. ^ [1]
20. ^ 2GC Limited (2009), "2GC Balanced Scorecard Usage Survey 2009", “2GC Balanced Scorecard Usage Survey 2009”.
21. ^ 2GC Performance Management Software Database "2GC Performance Management Software Database"

Sources

• Douglas W. Hubbard "How to Measure Anything: Finding the Value of Intangibles in Business" John Wiley & Sons, 2007. ISBN 978-0470110126
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• Cobbold, I and Lawrie, G (2002b). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002.
• International Controller Association: Statement Balanced Scorecard; Gauting, Germany, 2003
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• Kaplan R S and Klein N (1995) “Chemical Bank: Implementing the Balanced Scorecard” Harvard Business School Press
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• Per Nikolaj Bukh & Teemu Malmi "Re-Examining the Cause-and-Effect Principle of the Balanced Scorecard"
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• Papalexandris, A., Ioannou, G., Prastacos, G.P. and Soderquist, K.E. (2005) An integrated methodology for putting the Balanced Scorecard into action. European Management Journal, 23(2), 214-227.
• Rohm, Howard (2004). "A Balancing Act", Perform Magazine, v. 2 no. 2.
• Rohm, Howard and Halbach, L. (2004). "Sustaining New Directions" Perform Magazine v. 3 no. 2.
• 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.
• Case Study for Scorecards "Inspiratum business case"