Balanced scorecard
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In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC), a method 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.
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A comprehensive view of business performance
The scorecard seeks to measure a business 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 companies 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 drivers of the particular business. 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 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.
Public sector Balanced Scorecard
Originally introduced as a tool intended for commercial organizations (which are focused 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 USA, UK , Australia and Scandinavia.
Purpose of the balanced scorecard
Kaplan and Norton found that companies are using the scorecard to:
- Clarify and update strategy
- Communicate strategy throughout the company
- Align unit and individual goals with strategy
- Link strategic objectives to long term targets and annual budgets
- Identify and align strategic initiatives
- Conduct periodic performance reviews to learn about and improve strategy
Evolution of the Balanced Scorecard
In 1997 Kurtzman found that 64% of companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.
It is difficult to interpret the impressive survey based adoption statistics for the Balanced Scorecard, however, without being clear on how the term was both defined and understood by those participating in the survey. In practice, it appears, there are wide variations in understanding between organisations. In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon intended method of use within an organisation. They describe how Balanced Scorecard can be used to support two distinct management activities, management control and strategic control, and assert that due to differences in the performance data requirements of these applications, planned use should influence the type of Balanced Scorecard design adopted. They also describe characteristics of Balanced Scorecards appropriate for each purpose, and suggests a framework to help select between them.
Later that year the same authors reviewed the evolution of the Balanced Scorecard as a strategic management tool, recognising three distinct generations of Balanced Scorecard design. In their paper, they relate the empirically driven developments in Balanced Scorecard thinking with literature concerning strategic management within organisations. Cobbold and Lawrie argue that over the dozen years that have passed since its introduction significant changes have been made to the physical design, application and the design processes used to implement the tool within organisations. This Balanced Scorecard evolution can largely be attributed to empirical evidence of changes driven primarily by weaknesses in earlier design processes, rather than in the architecture of the original idea they write. They conclude that it is these changes, in what they refer to as 3rd Generation Balanced Scorecard that have enhanced the utility of Balanced Scorecard as a strategic management tool.
See also
- Strategic management
- Chief Performance Officer
- Strategy Map
- Business Dashboard
- Enterprise Dashboard
- Executive Dashboard
References
- Cobbold, I and Lawrie G (2002a). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002 [1]
- Cobbold, I and Lawrie, G (2002b). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002 [2].
- 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.
- Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30
- Lawrie G J G and Cobbold I M (2004) “Third Generation Balanced Scorecard: evolution of an effective strategic control tool”. International Journal of Productivity and Performance Management , Vol 53, No. 7. (working paper version available from 2GC Web Site [3]da:Balanced scorecard
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