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Balanced Scorecard

Balanced Scorecard

ImageThe balanced scorecard is a new management concept which helps managers at all levels monitor results in their key areas. An article by Robert Kaplan and David Norton entitled “The Balanced Scorecard – Measures that Drive Performance” in the Harvard Business Review in 1992 sparked interest in the method, and led to their business bestseller, “The Balanced Scorecard: Translating Strategy into Action”, published in 1996.

There’s nothing new about using key measurements to take the pulse of an organization. What’s new is that Kaplan and Norton have recommended broadening the scope of the measures to include four areas:

  • financial performance,
  • customer knowledge,
  • internal business processes,
  • learning and growth.

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

Kaplan and Norton cite the following benefits of using the balanced scorecard:

  • Focusing the whole organization on the few key things needed to create breakthrough performance.
  • Helping to integrate various corporate programs, such as quality, re-engineering, and customer service initiatives.
  • Breaking down strategic measures to local levels so that unit managers, operators, and employees can see what’s required at their level to roll into excellent performance overall.

Similarity to Hoshin Planning

The balanced scorecard has strong similarities to Hoshin Planning or hoshin kanri, the organization-wide strategic planning system used widely in Japanese companies. Both seek breakthrough performance, alignment, and integrated targets for all levels. The balanced scorecard suggests which specific areas should be measured for a balanced picture, but this isn’t contradictory to Hoshin Planning. One thing that the Japanese emphasize is “catchball”, the process of give and take between levels that helps to define strategy in Japanese companies. The balanced scorecard method seems to be more of a one-way street — the executive team creates the strategy, and it cascades down from there.

One cautionary note

You tend to get what you measure for, since people will work to achieve the explicit targets which are set. Dr. Deming feared this effect, noting that people would skew their work to meet particular incentive pay targets. For example, emphasizing traditional financial measures tends to encourage short-term thinking – like rigging shipping schedules to make the monthly sales look good, or aggressively discounting to meet year-end targets. Kaplan and Norton, recognizing this, urge a more balanced set of measurements, which is good. Even so, people will work to achieve their scorecard goals, and may ignore important things which are not on the scorecard. Or, if the scorecard is not refreshed often enough, what looked like an important goal in January may not be very germane in June. Kaplan and Norton recognize these risks, and they don’t pretend that they have said the final word on scorecards.

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What is the Balanced Scorecard?

A new approach to strategic management was developed in the early 1990’s by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the ‘balanced scorecard’. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective.

The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”

The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

  • The Learning and Growth Perspective
  • The Business Process Perspective
  • The Customer Perspective
  • The Financial Perspective

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The Balanced Scorecard and Measurement-Based Management

The balanced scorecard methodology builds on some key concepts of previous management ideas such as Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and — primarily — measurement-based management and feedback.

Double-Loop Feedback

In traditional industrial activity, “quality control” and “zero defects” were the watchwords. In order to shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. The problem with this approach — as pointed out by Deming — is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects. What Deming saw was that variation is created at every step in a production process, and the causes of variation need to be identified and fixed. 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, what are the processes with significant problems, and then they can focus attention on fixing that subset of processes.

The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomesof business strategies. This creates a “double-loop feedback” process in the balanced scorecard.

Outcome Metrics

You can’t improve what you can’t measure. So 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 as the metrics are tracked
  • Feedback around the measurement methods themselves, and which metrics should be tracked
  • Quantitative inputs to forecasting methods and models for decision support systems

Management by Fact

The goal of making measurements is to permit managers to see their company more clearly — from many perspectives — and hence to make wiser long-term decisions. The Baldrige Criteria (1997) booklet reiterates 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.”

1. The 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 — the only repository of knowledge — are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. 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. This is a leading indicator of ‘brain drain’ that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that ‘learning’ is 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; what the Baldrige criteria call “high performance work systems.” One of these, the Intranet, will be examined in detail later in this document.

2. The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these processes. The support processes are more repetitive in nature, and hence easier to measure and benchmark using generic metrics.

3. The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are 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 look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

4. 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 do whatever necessary to provide it. In fact, often there is more than enough 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 financials leads to the “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.

  1. shelli_bloom
    December 10th, 2014 at 11:32 | #1

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  1. May 20th, 2013 at 11:55 | #1

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