Balanced Scorecards
What is the basic idea of balanced scorecards?
The term Balanced Scorecard (BSC) was first used by Robert Kaplan and David Norton in 1992[1]. BSC is a strategic measuring system that was invented to fill the need of a complementing non-financial measure to the existing financial measures. BSC makes it possible to measure the performances within a company, and by doing so, increasing the value of the company. BSC contains financial measures that show the results of decisions made in previous years, to which operational measures are now added to make it possible to see the results of the future [2]. BSC focuses on four different perspectives:
The financial perspective - Contains the traditional financial measures, such as company strategy, implementing of that strategy, and how to reach a better result.
The customer perspective – Focuses on what is of real importance for the customer. Quality and company performance are areas that are of importance.
The internal process perspective – In this perspective the internal measures with greatest affect on customer satisfaction is emphasized. It enables the management to focus on the critical internal processes that help meet the customers demands.
The Innovation perspective – In markets of heavy competition it is important for a company to have the possibility to make changes at any time. With a mix of these four perspectives the company receives information regarding both external and internal measures. The difference between BSC and traditional financial measures is that it focuses on the current and future results of a company, instead of results in the past.
In what type of organizations is it suitable to use BSCs?
The Balanced scorecard has since its introduction in the early 1990s been implemented in every organizational aspect concerning performance management, everywhere from government agencies, military units, business units and corporations as a whole, non-profit organizations, and schools. However the Balanced scorecard is not suitable in all businesses and public administrations. It requires that there is a perceived need and a desire to steer an organization from a point of discussion of its strategy and with a relatively long term focus[3]. The introduction of the BSC depends very much on the organization's culture, for example in areas such as decentralization and internationalization. An organization must be ready to implement it and host such an environment for it to be able to implement it.[4] In order to implement the BSC you have to be able to reach out across the whole organization. It is important to have management support and commitment for the work that’s about to be started. Management should also be explanatory in the early stages on why the organization is working with the balanced scorecard. The whole idea is built upon the interactions between the vision / strategy and the daily work, which is the interaction between management and employees[5].
What is new with BSC?
About two decades ago, Kaplan and Norton rejected the financial measures as the right way to control performance in companies, and instead introduced a set of financial and nonfinancial measures which nowadays are called “Balanced scorecard”. What was new at the time with this concept was, for one thing, simplicity. Management could focus on a set of chosen key factors instead of trying to manage endless numbers of statistics. Another new thing about balanced scorecards was that they meant a new language for the managers to communicate in, instead of trying to understand financial numbers. [6] A more recent new concept of the balanced scorecard is the strategy map that Kaplan and Norton developed. This strategy map links up indicators to create a causal chain by which people can visualize and explain their mental models and then share them with others.
To what extent is BSC consistent/ inconsistent with other PM methods? Organizations need to develop control systems of planning and reporting by choosing one or more methods to measure their performance. Small and medium size companies usually implement control systems based on pure financial models such as: ROI (Return on Investment), RI, EVA (economic Value Added) or CFROI (Cash Flow Return on Investment). These methods are easy to implement because they are integrated in all financial reporting & planning software available on the market today. The biggest advantage of these methods is that the reports can be generated automatically, at any time, and show the actual outcome and performance data in real time. These reports are more or less standardised and therefore easy to extract, learn and analyse. The disadvantage of using them is that only the finance & accounting professionals are capable to work with them and to understand the company’s performance behind the reported figures. Financial based and value based models can be used for short term reporting & planning and by companies, which have defined their vision, mission, goals, and strategy and want to control, if their targets have been achieved on a short term basis. The financial planning information helps them to change their strategy, if necessary, and to make better business decisions. During the last 10- 15 years big and multi business companies have been using the BSC as a performance control and management system, which coordinates financial and non- financial measures. By using BSC methodology each member of the organization works off a personal scorecard, striving to achieve personal objectives based on measurements directly linked to the corporate strategy. According to Dr. Robert Davies, the key to the success of the BSC is its simplicity, essentially seeing an organisation from four key perspectives, one driving another. Financial results are driven first by people. People with the right skills, motivation and information create effective and efficient processes, which in turn deliver products, relationships and services that create value for the customer. Customer value in turn delivers profit to meet the organisation’s financial objectives.
What are the advantages and disadvantages of BSC’ s compared to other PM methods? Advantages of BSC comparing to traditional financial reporting & planning method, ROI , RI, EVA or CFROI are following: - The entire organization can be involved in the discussion wrt to the results of measures, which is inspiring and empowering the employees BSC aligns employees with strategic objectives - Very useful in long term target setting and strategic goals - Understandable for every level and segment in the organization - Does not ignore intangible assets - Does not focus on the past only, but measures future gains (f ex if customers are satisfied and are loyal to the company and its products) - Allows to set desired target for the cost of equity capital - BSC is an excellent educational tool (helps staff see how financial results and shareholder value are really created) - Helps managers and teams see and define the actions needed to achieve their objectives
Disadvantages of BSC comparing to traditional financial reporting & planning method, ROI , RI, EVA or CFROI are the following: - Centrally driven targets can ”destroy innovation and experimentation” - It takes a very long time to build and implement this model the organization implement this model the organization - It is a very expensive exercise as it is necessary to get help from experienced consultants, definitely not cost effective - the implementation of BCS within company’s or organization’s IT is usually a challenge. A good system must be developed to produce the scorecards - easy to forget about the strategic purpose when using too many metrics - BSC is an exercise in getting to much information which can not be used - It takes too much time to report measures rather than making a change - Can not be applied to measure performance on short term basis - Difficult to overview and analyse measures and link to desired outcomes - Only internal scanning and assessment tool, not looking for the outside world - Only the top management or outside consultants design the BSC Sources: H. A. Akkermans and K. E. van Oorschot (2005).- Relevance Assumed: A Case Study of Balanced Scorecard Development Using System Dynamics, The Journal of the Operational Research Society. Hallgårde, U. & Johansson, A. (2000) Att införa Balanced scorecard – en praktisk vägledning. Lund: Studentlitteratur Kaplan & Norton,(1992)The Balanced Scorecard: Measures that drive performance Neely, A (2007) The search for meaningful measures. Management Services 51, 2: 14-17 Pandey, I M (2005) Balanced Scorecard Myth and Reality. Interfaces. 30, 1: 51-64 Radnor Z and Lovell B (2003) Defining, justifying and implementing the Balanced Scorecard in the National Health Service. International Journal of Medical Marketing 3,3: 174-188 Samuelson. L (2004) Controllerhandboken, Industrilitteratur Davies, W.Robert (2007) Balanced Scorecard success, advantages and disadvantages www.benchmarkingplus.com.au/perfmeas.htm www.grm.co.za/about.html www.masterforum.com/archives/kaplan/Kaplan_Precis.htm -------------------------------------------------------------------------------- [1] Kaplan & Norton,(1992)The Balanced Scorecard: Measures that drive performance [2] Kaplan & Norton,(1992)The Balanced Scorecard: Measures that drive performance [3] Samuelson. L (2004) Controllerhandboken, Industrilitteratur [4] Hallgårde, U. & Johansson, A. (2000) Att införa Balanced scorecard – en praktisk vägledning. Lund: Studentlitteratur [5] Hallgårde, U. & Johansson, A. (2000) Att införa Balanced scorecard – en praktisk vägledning. Lund: Studentlitteratur [6] H. A. Akkermans and K. E. van Oorschot (2005)
