Balance Score Card

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Dr. Rana Singhwww.ranasingh.org

Professor and Associate Dean-AcademicsCentum U Institute of Management and

Creative Studieswww.centumu.edu.in

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Introduction

The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.

It was originated by Dr. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. 

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Traditional Measures

The traditional performance measures are criticized for the following reasons:

(i) The measures are too financial.

(ii) The measures are not customer driven

(iii) It is not clear how departmental measures are linked to the company’s strategic objectives.

(iv) The measures are irrelevant.

The traditional measures are mainly developed to meet the enterprises who are operating in a selling market. In a seller’s market, the customers are forced to take what the enterprises produces to their own specifications.

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Customer Expectations

The present business enterprises are operating in a buyer’s market with rapid growth, high technology and intense competitive business environment.The customers expectations about the product in a buyer’s market are as follows:

(i) Must meet or exceed explicit customer expectations

(ii) Are delivered on time

(iii) Must be defect free

(iv) Have short lead times

(v) Have low prices and low cost of ownership.

Companies must develop performance measures that track these customers demands.

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Performance Measurement

Attributes of a good performance measurement system are:

(i) A conceptual framework for the performance measurement and management system

(ii) Effective external and internal communications

(iii) Clearly assigned and well understood accountability for results

(iv) It must provide intelligence for decision makers, not just compile data

(v) There should be linkage of compensation, rewards and recognition to performance measurement

(vi) They should be positive not punitive

(vii)Disclosure of results and progress toward programme commitments with employees, customers and stakeholders.

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Balance Score Card (BSC)

The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system.

The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

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Concept of BSC

BSC shows how to link the organizational vision to critical success factors or outcomes and key performance indicators , representing all perspectives of the business. This compels the senior management team to operate as a unified team, balancing competing objectives to achieve the optimum result for the organization as a whole.

BSC expands the set of business unit objectives beyond summary financial measures. Corporate executives can now measure how their business units create value for customers and how they must enhance internal capabilities to improve future performance.

BSC clearly reveals the value drivers for superior long term financial and competitive performance created by skilled, motivated organizational participants, while retaining the financial performance as a short term financial measure.

Contd…

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Concept of BSC

The objectives and measures for BSC are more than just a somewhat ad hoc collection of financial and non-financial performance measures, they are derived from a top down process driven by the mission and strategy of the business unit.

BSC should translate a business unit’s mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers and internal measures of critical business processes, innovation and learning and growth.

BSC is more than a tactical or an operational measurement system. Innovative Companies are using the score card as a strategic management system, to manage their strategy over their long run.

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Concept of BSC

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Concept of BSC

Companies are using the measurement focus of the score card to accomplish critical, management process

Clarifying strategy - the translation of strategic objectives into quantifiable measures clarifies the management team's understanding of the strategy and helps to develop a coherent consensus.

Communicating strategic objectives - the Balanced Scorecard can serve to translate high level objectives into operational objectives and communicate the strategy effectively throughout the organization.

Planning, setting targets, and aligning strategic initiatives - ambitious but achievable targets are set for each perspective and initiatives are developed to align efforts to reach the targets.

Strategic feedback and learning - executives receive feedback on whether the strategy implementation is proceeding according to plan and on whether the strategy itself is successful ("double-loop learning").

The Balanced Scorecard has been applied successfully to private sector companies, non-profit organizations, and government agencies.

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Perspectives of BSC

The objectives and measures view organizational performance from four perspectives:

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Financial Perspective

The financial perspective addresses the question of how shareholders view the firm and which financial goals are desired from the shareholder's perspective. The specific goals depend on the company's stage in the business life cycle. For example:

• Growth stage - goal is growth, such as revenue growth rate• Sustain stage - goal is profitability, such ROE, ROCE, and EVA• Harvest stage - goal is cash flow and reduction in capital

requirements

The financial perspective serves as the focus for the objectives and measures, in the other score card perspectives. This perspective reflects the concern in for profit enterprises that every action should be part of network of cause and effect relationships that culminate in improving short and long run financial performance.

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Customer

The customer perspective addresses the question of how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet the financial objectives.

Generally, customers view the firm in terms of time, quality, performance, and cost. Most customer objectives consist of providing quality goods and services, the effectiveness of their delivery and overall customer service and satisfaction.

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Internal Business Process

Internal business process objectives address the question of which processes are most critical for satisfying customers and shareholders. These are the processes in which the firm must concentrate its efforts to excel.

Key processes are monitored to ensure that outcomes will be satisfactory. Internal business processes are the mechanisms through which performance expectations are achieved.

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Learning & Growth

Learning and growth metrics address the question of how the firm must learn, improve, and innovate in order to meet its objectives. Much of this perspective is employee-centered.

Processes will only succeed if adequately skilled and motivated employees, supplied with accurate and timely information, are driving them.

In order to meet changing requirements and customer expectations, employees may be asked to take on dramatically new responsibilities, and may require skills, capabilities, technologies and organizational designs that were not available before.

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BSC Process

While there are many ways to develop a Balanced Scorecard, Kaplan and Norton defined a four-step process:

1) Define the measurement architecture - When a company initially introduces the Balanced Scorecard, it is more manageable to apply it on the strategic business unit level rather than the corporate level. However, interactions must be considered in order to avoid optimizing the results of one business unit at the expense of others.

2) Specify strategic objectives - The top three or four objectives for each perspective are agreed upon. Potential measures are identified for each objective.

3) Choose strategic measures - Measures that are closely related to the actual performance drivers are selected for evaluating the progress made toward achieving the objectives.

4) Develop the implementation plan - Target values are assigned to the measures. An information system is developed to link the top level metrics to lower-level operational measures. The scorecard is integrated into the management system.

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BSC Implementation

Make a commitment at all levels especially

at the top level

Develop organizational goals

Offer training in improvement techniques

Establish a reward and recognition system to foster

performance improvements

Break down organizational

barriers

Coordinate Headquarters and

Branch Responsibilities

Demonstrate a clear need for

improvement

Make realistic initial attempts at

implementation

Integrate the Score card into the organization

Change the corporate culture

Institutionalize the process

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Implementation

Commitment at all levels especially at the top level:Senior Management leadership is vital throughout the performance measurement and improvement process so that they can realistically foster cross functional, mission oriented performance improvements from senior operating or functional managers throughout an organization. They should also frequently review progress and the results of improvement efforts.

Develop organizational goals:Vision Statements and Strategic / Tactical Plan are important fro performance improvements. To be meaningful they must include measurable objectives along with realistic timetables for their achievement.

Contd…

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Implementation

Offer training in Improvement:Comprehensive training is needed to expand employees’ technical capabilities and to achieve ‘buy in’ for undertaking meaningful improvement efforts. Use of facilitators can provide ‘just in time’ training to members of process action teams.

Establish a reward and recognition system:Employee incentives will tend to reinforce the organizational objectives being measured by the BSC. While handing out rewards to individual employees has its place, group reward and recognition systems are also needed to encourage integrated, cross-functional teams of employees customers and managers to undertake performance improvement.

Contd…

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Implementation

Break down organizational barriers:To overcome unfounded fears about the perceived adverse effects of performance measurement and improvement, the official uses of the BSC need to be spelled out to employees and managers.

Coordinate headquarters and branch responsibilities:Implementation should be a collaborative effort between organization’s corporate office (Headquarters) and its Branch offices. The offices should jointly decide on their respective roles and responsibilities relative to the BSC.

Contd…

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Implementation

Other Key Steps:• Demonstrate a clear need for improvement• Make realistic initial attempts at implementation• Integrate scorecard into the organization• Change the corporate culture• Institutionalize the process.

Performance Management:It is the use of performance measurement information to effect positive changes in organizational culture, system and processes, by helping to set agreed upon performance goals, allocating and prioritizing resources, informing managers to either confirm or change current policy or programme directions to meet those goals, and sharing results of performance in pursuing those goals.

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Benefits

Some of the benefits of the Balanced Scorecard system include:

Translation of strategy into measurable parameters.

Communication of the strategy to everybody in the firm.

Alignment of individual goals with the firm's strategic objectives - the BSC recognizes that the selected measures influence the behavior of employees.

Feedback of implementation results to the strategic planning process.

Since its beginnings as a performance measurement system, the Balanced Scorecard has evolved into a strategy implementation system that not only measures performance but also describes, communicates, and aligns the strategy throughout the organization.

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Potential Pitfalls The following are potential pitfalls that should be avoided when

implementing the Balanced Scorecard:

Lack of a well-defined strategy: The Balanced Scorecard relies on a well-defined strategy and an understanding of the linkages between strategic objectives and the metrics. Without this foundation, the implementation of the Balanced Scorecard is unlikely to be successful.

Using only lagging measures: Many managers believe that they will reap the benefits of the Balanced Scorecard by using a wide range of non-financial measures. However, care should be taken to identify not only lagging measures that describe past performance, but also leading measures that can be used to plan for future performance.

Use of generic metrics: It usually is not sufficient simply to adopt the metrics used by other successful firms. Each firm should put forth the effort to identify the measures that are appropriate for its own strategy and competitive position.

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QUESTIONS ?QUESTIONS ?

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