Core Objectives (e.g.) Measures (e.g.)
1. Information Availability for - The extent of reliable management information
Strategic Decision-making
2. Quality Workforce - % of employee meeting mandatory qualification
standards
3. Quality Work Environment - % of employees satisfied with the work
environment
Each perspective can be explained by a key question with which it is associated. The answers to each key question become the objectives associated with that perspective, and performance is then judged by the progress to achieving these objectives. There is an explicit causal relationship between the perspectives: good performance in the Learning and Growth objectives generally drives improvements in the Internal Business Process objectives, which should improve the organisation in the eyes of the customer, which ultimately leads to improved financial results.
Though there are four basic perspectives proposed, it is important to understand that these perspectives reflect a unique organisational strategy. So the perspectives and key questions should be amended and supplemented as necessary to capture that strategy. For example, a non-profit or government organisation would not have the same perspectives as a for-profit corporation.
To facilitate measurement, the Balanced Scorecard adopts the following approach. Within each elements it specifies:
- Critical success factors (CSFs). These represent the things the organisation has to achieve in order to successfully implement its strategy
- Measures for each CSF
- Targets to be reached for each measure
- Key initiatives that will enable the targets to be reached
In order to obtain a satisfactory overview of performance, the organisation’s objectives & each measures chosen need to be agree. Then organisation and managerial performance is assessed by comparing actual attainment on each measure with the target set for that measure.
Advantages from adopting the Balance Scorecard
Initially the Balance Scorecard was seen as a useful tool for performance measurement. In this role, it seen as integrating financial/ non-financial, internal/ external and leading/ lagging information on organisation performance in a coherent fashion.
Later it was realized that it could play a essential role in the strategic management process. It requires management to explain and obtain consensus on the organisation’s strategy objectives, communicate the chosen strategy consequently aligning the both efforts of individuals and departments. Effective implementation of a Balance Scorecard will generally involve the expansion a series of hierarchical scorecards. Given the overall corporate scorecard, supporting scorecards can be developed for each department within the organisation. Within each department, a scorecard can be developed for each manager which links the objectives on each perspective for that manager back to the objectives for each perspective outlined in the scorecard for the department and finally, back to the objectives listed in the organisation’s overall scorecard.
In recent years, many organisations have move from a tall hierarchical structure to a flatter, team-based organisational structure. The Balance Scorecard can help clarify the objectives and the critical success factors for the newly formed teams.
Other than the communication and co-ordination roles, the Balance Scorecard can be used to link strategy to specific critical success factors by the four perspectives areas. By setting both short and long-term targets for each measure and by comparing actual attainment against target, feedback is obtained on how well the strategy is being implemented and on whether the strategy is working.
Traditional methods of investment appraisal such as discounted cash flow do not cope well with investments which generate indirect rather than direct financial returns. Examples of these include investments which enhance the future ‘flexibility’ of a organisation or investments in the organisation’s infrastructure, such as an enhanced management information system. The Balance Scorecard can assist management’s investment appraisal decisions as it provides managers with a mechanism to incorporate the strategic aspects of the investment into the appraisal process. This could be achieved by using a weighting system developed from a organisation’s Balanced Scorecard measures to evaluate new projects. An index score would be calculated for each investment opportunity and projects would then be ranked and selected based on this score.
Other benefits of Balanced Scorecard are summary as follows:
- Provide managers with complex information at a glance
- Ensures that managers are managing all the important variables (rather than all their favorites variables, or the historic variables)
- Balances time perspectives – current performance as well as the drivers of future performance can be integrated into the scorecard
- Prevents information overload by limiting the number of measures used – it applies the ‘loose/tight’ principle
Common drawback of Balanced Scorecard
Despite its well-publicized successes, the have some organisations that adopt a scorecard fail to reap the rewards they expect. Some are as follows:
Measures that do not focus on strategy.
A common problem is that an organisation will adopt some new non-financial measures, but fail to align the measures adequately with strategy. According to Dr. Norton,
“The biggest mistake that organisations make is thinking that the scorecard is just about measures. Quite often they will develop a list of financial and non-financial measures and believe they have a scorecard. This, I believe, is dangerous.”
For example, in one case a bank’s IT department had identified measures and benchmarks for being a world class IT department. According to those measures, they had done very well. However, the measures used by the IT department were not tied in with the overall business strategy and therefore discouraged the IT department from meeting the strategic business needs.
Failure to communicate and educate.
A scorecard is only effective if it is clearly understood throughout an organisation. Frequently, scorecards will be developed at the executive level, but not communicated or cascaded down through an organisation. Without effective communication throughout the organisation, a balanced scorecard will not spur lasting change and performance improvement.
Measures tied to compensation too soon.
It is generally a good idea to tie compensation to the Balanced Scorecard. However, several factors suggest it can be a mistake to do that too early in the lifecycle of the scorecard.
- Rarely is an initial scorecard left unrevised. So, if an organisation ties compensation to measures that are not in fact driving desired behavior, a powerful motivator has been instituted that will drive an unwise action.
- Data may be incomplete or inaccurate, so measures may not be correct. If employees’ paychecks are adversely impacted, serious morale problems and invalidation of the scorecard inevitably result.
- It may take time to determine realistic targets, and penalizing people for failing to achieve an unreachable target will surely have a negative impact on morale and eventually profits.
No accountability.
Accountability and high visibility are needed to help drive change. This means that each measure, objective, data source, and initiative must have an owner. Without this level of detailed implementation, a perfectly constructed scorecard will not achieve success, because nobody will be held accountable for performance.
Employees not empowered.
While accountability may provide strong motivation for improving performance, employees must also have the authority, responsibility and tools necessary to impact relevant measures. Otherwise they will resist involvement and ownership. Resources must be made available, and initiatives funded, to achieve success. Employees are likely to need new information tools to help them understand the drivers of measures for which they are responsible so they can take action. These tools can include systems for analysis and early warning indicators, exception reports and collaboration.
Too many initiatives.
Large, decentralized organisations usually find that crossover and duplication among initiatives can be identified. Cross-matching scorecard objectives with current and planned initiatives can be an important way to focus and align a company. This method will identify cases where objectives are supported inappropriately. Rather than relying on budgeting for strategic funding, this process eliminates waste, speeds scorecard implementation, and helps an organisation prioritize their initiatives to better support their strategy.
Essential of automating the Balanced Scorecard
A successful Balanced Scorecard program relies comprehensively on data, education, and communication to promote, monitor, and reinforce behavior modifications—all processes that can be facilitated easily by information technology.
Automation is essential in order to manage the huge amount of information related to a company’s mission and vision, strategic goals, objectives, perspectives, measures, causal relationships, and initiatives. The alternative is a manual process, which significantly increases the effort and cost of scorecard development and sets back progress in the early stages of the Balanced Scorecard development, when momentum is critical.
Automation can foster quicker culture change, both during development and in the ongoing use of the Balanced Scorecard. If the software used is intuitive and can be deployed through an organisation readily, it can bring visibility to the Balanced Scorecard process, ease a cultural transition, and enable participation by a wider audience.
The success story on application of Balanced Scorecard
The Westpac Merchant Cards group is an end-to-end business unit of 200 staff within Westpac Banking Corporation, one of Australia’s 4 major banks, providing card receivable solutions for businesses.
The Merchant Cards group’s commercial challenges in 1998 were to achieve significant growth targets amidst increasing downward pricing pressure, limited resources, and an increasingly competitive market.
The management planning processes involved annual objective setting for financial, customer and staff perspectives. These were communicated in traditional fashion, leading to limited understanding of the critical drivers across the business. Measurement of progress was largely financial, with few non-financial measures in place to progress of customer and internal drivers.
At the onset of a new strategic planning period, the group initially determined their key strategic themes, to act as overarching intentions of direction. The group then conducted a scorecard design process, which enabled translation of themes into a Strategic Road Map, and defined strategic measures of success. Targets were set against measures, and people took ownership of various measures. The strategic road map served to articulate the thinking behind the strategy for improved communication to the wider staff group.
After 3 months, the group conducted its first quarterly review. This required a level of discipline and activity that was new to many of the group, including capturing data against measures for which they had taken ownership. The quality of initial data gathered in the first review was in many cases circumspect.
Nevertheless, when the group came together for a first Strategy Review meeting, they were able to assess the progress that had been made toward objectives, identify and drill down on roadblocks and develop short to medium term solutions. As well, they were able to re-evaluate the cause and effect relationships they had initially mapped in the design, with actual data enabling better validation.
Because of the first review, the group resolved to ramp up their efforts toward some of the previously planned objectives. They also saw the benefit of capturing quality data, and so there was increased commitment to developing methods of data collection against new measures in the following quarter. They also became clearer about high priority projects and initiatives needed to drive some of this activity. In some cases, these initiatives had been noted in the design, but which had not necessarily been given the priority attention they now were deemed to deserve.
With a second strategy review after another quarter, the group was much more in tune with the importance of data capture. Because of more effective and timely reporting of data, they were able to gain greater understanding of their current situation. When the group came together for a 2nd Strategy Review Meeting, they were able to generate more insightful dialogue about corrective actions and refinements to the cause and effect thinking behind the strategy, because of this enhanced awareness of performance successes and obstacles.
After 2 ½ years of using the Balanced Scorecard, the group’s net profit has increased by 150%. Particularly, the Business-banking network is now a satisfied and effective sales channel. Satisfaction and ‘mind share’ ratings have risen from an initial 40% up to 86% in the latest survey. This has driven improved sales results, with a 35% lift in sell through by the network.
()
The successful implementation of a Balanced Scorecard is not a trivial matter as many organizations have found to their cost. The concept of a Balanced Scorecard is simple but its implementation can be a time consuming and costly task.
(2401 words)
Bibliographies
1) Robert S. Kaplan & David P. Norton (1996) The Balance Scorecard – Translating Strategy Into Action; Harvard Business School
2) CIMA Technical Briefing (Mar 2001) The Balance Scorecard – An Overview; CIMA
3) Tony Brabazon (Dec 1999) The Balanced Scorecard; ACCA Student Newsletter
4) Mark Lee Inman (Feb 2000) The Balanced Scorecard; ACCA Student Newsletter
5) Peter C Barnes (Jul 1999) Emplyee surveys and the ‘Balance Scorecard’; ACCA Student Newsletter
6) What is the Balance Scorecard
7) Why your Balanced Scorecard will not be successful- unless…
8) The Balance Scorecard
9) Case Study