Balanced scorecard

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In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC), a concept for measuring a company's activities in terms of its vision and strategies. It gives managers a comprehensive view of the performance of a business.

It is a strategic management system that forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, internal process, and learning & growth perspectives.

The system consists of four processes:

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

Contents

[edit] A Comprehensive View of Business Performance

Balanced Scorecard is a method and a tool solely dedicated to the execution of any organizations strategy. Its structure consists of:

  • a strategy map where strategic objectives are placed over four perspectives in order to clarify the strategy and the cause and effect relationships that exists among them.
  • strategic objectives which are smaller parts of the strategy interlinked by cause and effect relationships in the strategy map.
  • measures reflecting the intent of each strategic objective. Their prime purpose is to measure that the desired change or development defined by strategic objectives actually takes place. Measures in a balanced scorecard never track business as usual unless it becomes a necessary part of the overall strategy.
  • strategic initiatives that constitute the actual change as described by strategic objectives

The scorecard drives implementation of strategy from the following perspectives:

  • Financial Perspective - measures reflecting financial performance, for example number of debtors, cash flow or return on investment. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from two major drawbacks:
    • They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance.
    • 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 can be thought of as intangible assets. These figures are not measured by normal financial reporting.
  • Customer Perspective - 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 Perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.
  • Learning and Growth Perspective - measures describing the company's learning curve -- for example, number of employee suggestions or total hours spent on staff training.

The specific measures within each of the perspectives will be chosen to reflect the desired change for associated strategic objectives.

The method can facilitate the separation of strategic policymaking from the implementation, so that organizational 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, we might find that the internal business 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.

In many senses, the objectives chosen are leading indicators of future performance. Effort we make today through the use of strategic initiatives (change programs) is reflected in the future profits of the company. In this way, current expenditure can be viewed as investment in the future of the company.

Balanced Scorecard is sadly often used as a tool to drive business as usual by many organizations, and research made by Balanced Scorecard Collaborativeshows that about 50% of all users fail to implement strategy through the use of Balanced Scorecard Collaborative for this very reason.

[edit] Public Sector Balanced Scorecard

Originally introduced as a tool intended for commercial organizations (which typically focus on financial performance), the Balanced Scorecard has found considerable support and is widely used in the public sector. It is particularly popular as a public sector performance management tool in the United States, the United Kingdom, Australia and Scandinavia.

[edit] Purpose 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

[edit] Evolution of the Balanced Scorecard

This section overlaps with other sections; it should be combined with the rest of the article.
Please post any comments on this issue on the talk page.

In 1992, an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review drew a great deal of attention to 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:

  1. It is historical. Whilst it tells us what has happened to the organization, it may not tell us what is currently happening. Nor is it a good indicator of future performance.
  2. 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 Four 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:

  • Financial perspective.
  • Customer perspective.
  • Business process perspective.
  • 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.

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.

[edit] See also

[edit] References

  • 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

[edit] External links

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