29 Balanced Score Card

1.   Learning Outcome

2. Introduction

3. What is Balanced Scorecard?

4.  Why Use Balanced Scorecard?

5.  Components of Balanced Scorecard

6. Key Performance Indicators

7   Benefits of Balanced Score Card

8   Implementation of Balanced Score Card

9  Summary

1.      Learning Outcome

• After completing this module the students will be able to
• Understand the concepts of balanced scorecard
• Appreciate the need and benefits of balanced score card Describe the components of balanced score card.
• Understand the importance of Key Performance Indicators
• Identify what are the challenges faced during implementation of balanced score card

2.      Introduction

In this global scenario, where companies are facing cut-throat competition it is essential to align the business activities with the vision and mission of the company. Continuous monitoring of the organizational performance with respect to the organizational goals can help the organization to remain globally competitive. Further with stakeholders expecting not only higher returns, but also better relations with the community, it becomes challenging for the firms to maintain internal and external communication with the stakeholders.

Historically managers used only financial and accounting measures to assess the performance of their organization. However according to Dr. Robert Kaplan and Dr. David Norton strategic non-financial measures are equally important while assessing the performance of any organization. On the basis of this argument they proposed the concept of Balanced Score Card during the 1990s which ultimately became a very popular strategic management tool being used in various contexts by organizations across the world.

3.  What is Balanced Scorecard?

A known British scientist Lord Kelvin once said “If you cannot measure it, you cannot improve it”. In light of this statement, it is important to measure various aspects of business performance if the overall business is to be improved.

Balanced scorecard is an innovative approach to performance management which was developed by Robert Kaplan and David Norton with an objective to provide a tool which can help managers to define and track performance among multiple financial and non-financial measures that are considered important for company success.

It is a conceptual framework for translating an organization’s strategic vision into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth. Some indicators are maintained to measure an organization’s progress toward achieving its vision; other indicators are maintained to measure the long term drivers of success. Through the balanced scorecard, an organization monitors both its current performance (finance, customer satisfaction, and business process results) and its efforts to improve processes, motivate and educate employees, and enhance information systems—its ability to learn and improve.

This approach offers a ‘balanced’ view, taking into account all of the various aspects of the organization’s behavior, shifting away from the accepted backwards-looking approach to instead establishing key performance indicators and then measuring external activities and internal procedures against these pre-determined indicators.

4.  Why use Balanced Score Card?

The balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective. There are various advantages of using balanced scorecard as a performance management system. These include

a)  Performance Orientation – The philosophy of the initiatives that follow “best practices” methodologies cascade through the entire organization and create a culture of performance. Also the balanced scorecard provides management with a comprehensive picture of business operations.

b)  Align Strategy and Tasks – Effective implementation of Balanced Score Card helps to align the company’s strategy to the activities and tasks at all the levels of an organization.

c) Unique Competitive Advantage – Usage of Balanced Scorecard helps in achieving unique competitive advantage by improving decision making, reduced time frames and improved processes.

d) Resource Utilization – Implementation of Balanced Scorecard helps in utilizing the organizational resources optimally. Allocation of the resources is based on the requirement and also on the assessment how the resource can help in the overall achievement of the organizational vision and goals. Further the vast amount of information in the organizational intelligence system gets reduced and appropriate information is fed to the decision maker to ensure effective resource utilization.

e) Improved Creativity – The implementation of balanced scorecard facilitates inter and intra organizational communication and better understanding of business goals and strategies at all levels of an organization. This also helps in generation of unexpected and creative ideas across various functions of an organization.

f) Result Orientation – Balanced Scorecard transforms strategy into action and the desired behaviours. The usable results are produced which help in assessing performance against the standards and benchmarks set in. Also because all aspects of performance are measured, it becomes easier to do an objective assessment of the performance of all the units and sub units of an organization. The new initiatives taken by the organization are continually measured and evaluated against the industry standards.

g)  Team Spirit – It has been observed that implementation of balanced score card increases the cooperation among various departments and teams of an organization. More open channels of communication create cross organizational team and therefore the entire organization is more enthusiastic towards the realization of the vision of the organization.

h)  Organizational Learning – The Balanced Scorecard concept provides strategic feedback and learning. It helps in the identification of areas of improvement and thus strategic initiatives can be taken towards training and development of the employees.

i) Linking Strategy with Performance Measures – The essential thrust of the balanced score card is based on the fundamental proposition that within organizations what gets measured gets done however; organizations don’t always get what they measure. Implementation of balanced score card directly links the strategy with the performance measures.

5.  Components of Balanced Scorecard

There are four components of a balanced score card. These include mission, perspectives, objectives and measures. Within the scorecard concept, mission is at the highest level and helps a firm to look for answers to the following questions – “Why do we exists as an organization?” and “What is the overall reason for being”. Mission as we know help companies to determine the direction of future course of action. Also mission helps in shaping the strategy of the company. It is said that clarity of mission brings in clarity at all levels of the organization. Further a powerful mission statement facilitates evaluation and improvement in the working of an organization.

In addition to mission, perspective is an important component of balanced score card. Perspectives represent an overall achievement of the mission and also the various areas that influence performance of an organization. Perspectives are developed based on the need of an organization and typically there are four perspectives which cover the whole of the organization’s activities. The generic Balanced Scorecard proposed by Kaplan and Norton in 1996 consists of four interrelated quadrants, each containing objectives and measures from all the four below mentioned perspectives.

Financial perspective – focuses on objectives and performance measures associated with the shareholders perception. Access to timely and accurate financial data helps managers to assess the overall performance of an organization. One of the major goals of an organization is to achieve the financial target. The levels at which the indicators and measures can be identified are revenue growth, cost reduction, productivity improvement, asset utilization and investment strategy. This perspective can include the measurement of operating income, return on capital, and economic value added.

Customer perspective – focuses on objectives and performance measures associated with  the  customers’  perception.  As  customer  satisfaction  and  winning  customer loyalty are prerequisite for maintaining sustainable competitive advantage, the customer perspective defines the value proposition a firm maintains to win customer loyalty through customer satisfaction. Customer specific measures and objectives typically fall into assessing customer view in terms of time, quality and performance.

Several common measures are customer satisfaction, retention, acquisition, profitability, market share, and account share. Customer centric organizations should develop measures which focus on customer desired outcomes, focuses on product and service attributes that customers want. Also the focus should be to eliminate undesired outcomes which customer dislike.

Internal process perspective – focuses on objectives and performance measures associated with the organizations internal productive processes. This perspective is concerned with the processes that create and deliver the customer value proposition. All the activities and processes that help a firm to deliver value to the customer should be focussed for improvement. Improvements can be brought in by bringing in innovation in operations management or customer management.

Learning and Growth perspective – focuses on objectives and performance measures associated with the development of enabling culture and competencies within an organization. This perspective focuses on identifying and executing employee training programmes which results in individual and corporate self improvement. In present times, when technologies change very fast, it is important for employees to constantly learn and upgrade their knowledge and skills.

6.  Key Performance Indicators

Key Performance Indicators (KPI’s) are important element of balanced scorecard and should be aligned with the corporate strategy. Key Performance Indicators (KPIs) can be defined as “quantitative and qualitative measures used to review an organization’s progress against its goals. These are broken down and set as targets for achievement by departments and individuals. The achievement of these targets is reviewed at regular intervals”. Key Performance Indicators (KPI’s) are performance measures that indicate progress toward a desirable outcome. Once the mission of the company is analyzed and the goals and objectives are defined, the progress towards achievement of goals should be constantly measured. KPIs play a critical role of a measurement tool which assists the company to define and measure progress toward organizational goals and objectives.

Following are the characteristics of well established KPI’s

Good KPI’s are always relevant to the overall strategy and the mission of the organization KPI should be representative of all functional areas and aspects of the business

It is important to set realistic KPI should that adequate resources could be mobilized for their achievement.

Due care should be taken to ensure specificity of KPI’s. Vague or abstract KPIs shall be difficult to achieve KPIs established should be attainable considering the access to resources and competencies. KPIs should be measurable.

The KPIs set forth should be understood by all the stakeholders.

While formulating the KPIs, all the relevant stakeholders should be involved. In other words, a participative approach should be taken to establish agreeable KPIs.

KPIs set forth should be reportable and should be in position to get assessed at period intervals.

Following steps should be considered while developing the KPIs:

Describe the intended result(s) Understand alternative measures

Select the right measurement(s) for each goal/objective Define composite indicators as needed

Set targets and thresholds

Define and document selected performance measures

7.  Benefits of using Balanced Scorecard

Following are the benefits of using a balanced scorecard

Balanced Scorecard puts organizational mission at the centre of the performance management and also translated the mission into tangible measures.

Balanced Scorecard helps the firm to channelize its resources and energies towards achieving the organizational mission as balanced score card helps in defining what must be done to achieve the mission.

Balanced scorecard promotes proactive and forward thinking within an organization. This is in contrast to traditional measures which promotes reactive thinking and only looks at the past data.

Balanced scorecard promotes continuous tracking of performance regarding what is important to achieve the mission of an organization. Managers keep a track of the progress and can bring in timely interventions to ensure the accomplishment of the mission.

Balanced scorecard promotes a comprehensive approach to look at the performance of an organization. Managers can look into non financial perspectives as well and explore the trends and relationships between them. This can help them to identify how each perspective contributes towards achieving the overall mission.

Balanced scorecard helps in communicating the mission to all the employees in the organization and they can relate their role towards the achievement of the mission.

8. Implementation of Balanced Scorecard

Despite being an effective tool, organizations face challenge while implementing the balanced score card primarily because of the following reasons

Limited Understanding of Balanced Scorecard – Top management should ensure that the entire organization has some understanding about the concept, benefits and structure of balanced scorecard. People in the organization should be aware that why implementing balanced score is beneficial for the organization.

Lack of management support – The top management in the organization should own the concept of balanced scorecard, it will never be able to realize its benefits. There should be leaders personal involvement, commitment, and understanding so as to overcome any resistance within the organization

Lack of training – If the company wants to reap the benefits of balanced score card, it should formally train the employees who are going to use balanced score card. If the employees do not understand the tool indepth, they will never be able to integrate the concept in their working.

Not integrating with Strategy – It is important to understand that balanced scorecard is a tool to implement strategy. Balanced scorecard without a proper strategy will result into another performance management system and not result in considerable changes.

Inadequate IT support – For successful implementation of balanced scorecard, proper information technology support is required. IT should act as a facilitator and has an important role in the implementation of balanced scorecard. IT tools helps in easy retrieval of information that will facilitate the decision making.

Not involving the whole organization – Balanced scorecard should cover the organization as a whole. It is important to note that balanced score card is not for selected employees in the organization and therefore employee involvement is critical for its success.

Poorly defined Metrics – While framing the objectives and measures due care should be taken that the metrics are clear, understandable and relevant.

Inadequate Key Performance Indicators – A wrong choice of measures can damage all the efforts of balanced scorecard. The measures should create a chain of cause and effect relationship that communicates the strategy to everyone in the organization.

Lack of planning and communication – Adequate planning and open communication channels within an organization are required for proper implementation of the balanced scorecard. During the implementation phase there should be adequate trust and open communication between various teams and departments. Balanced scorecard is a tool to initiate change and therefore proper planning and communication can help to overcome resistance towards implementation of balanced scorecard.

9.Summary

Balanced scorecard is an innovative approach to performance management

The balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective.

There are four components of a balanced score card. These include mission, perspectives, objectives and measures.

Perspective is an important component of balanced score card.

Four interrelated perspectives include financial perspective, customer perspective, internal business perspective, learning and growth perspective

Key Performance Indicators (KPI’s) are important element of balanced scorecard and should be aligned with the corporate strategy.

KPIs play a critical role of a measurement tool which assists the company to define and measure progress toward organizational goals and objectives.

The various benefits of using balanced scorecard and also there are multiple challenges which the managers have to face while implementing the balanced scorecard.