Balanced Scorecard
Definition
Balanced Scorecard (BSC) is a new approach to Strategic Management which was developed by Robert Kaplan and David Norton. It is a performance management and strategy deployment methodology that helps executives translate an organization’s mission statement and overall business strategy into specific, quantifiable goals and monitors the organization’s performance in terms of these goals. The BSC also aligns budgets to strategy and helps in developing an enterprise performance management system.
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.”
Indeed BSC is a way “to translate strategy into action”, as depicted in the figure below:
Four Perspectives
The BSC suggests that we take a holistic view of the organization and look at it from four perspectives and develop metrics to collect data and analyze it relative to each of these perspective
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. The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well the 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 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.
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. Metrics can be put in 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.
The emerging realization is 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 like the Intranet.
The financial perspective:
This does 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.
Performance Measures
A list of suggested measures that drive performance under each of the four perspectives, as given by Robert Kaplan & David Norton is noted below:
Characteristics of Measures
a) The measures can be classified as “Lead Indicators” and “Lag Indicators”. A lead indicator such as time spent with customers on product development cycle that drive performance are known as lead indicators. A lag indicator is an outcome measures and tells only what has happened in the past.
b) The BSC includes both financial and non-financial parameters. In fact the non-financial parameters are dominant because it is these measures that are a guide to the actual performance.
c) Both internal and external information is built into the system and thus influences that are operating in the environment are brought into the organization.
d) The cause and effect relationship is clearly brought about through the balanced scorecard as given below:
e) Key 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.
The Key Performance Indicators in the balanced scorecard serve as a dashboard or control panel to facilitate the safe and smooth navigation of an organization through a turbulent environment.
Application in Private Sector
BSC has been very successfully applied in a number of private sector companies throughout the world. In India, Tata Motors was the fi rst company to win the BSC Hall of Fame award.
BSC adoption rate is 45% in corporate India which compares favourably with 44% in US as per an IIM, Ahmedabad research study.
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