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The Balanced Scorecard [BSC


Introduction Balanced scorecard is a management system that enables organizations to translate the vision and strategy into action. This system provides feedback on internal business processes and external outcomes to continually improve organizational performance and results. Robert Kaplan and David Norton created the balanced scorecard approach in the early 1990s. Most traditional management systems focus on the financial performance of an organization. According to those who support the balanced scorecard, the financial approach is unbalanced and has major imitations: 1. Financial data typically reflect an organization’s past performance. Therefore, they may not accurately represent the current state of the organization or what is likely to happen to the organization in the future. 2. It is not uncommon for the current market value of an organization to exceed the market value of its assets. There are financial ratios that reflect the value of a company’s assets

relative to its market value. The difference between the market value of an organization and the current market value of the organization’s assets is often referred to as intangible assets. Traditional financial measures do not cover these intangible assets. Conceptual Foundations of the Balanced Scorecard David Norton and Robert S. Kaplan introduced the Balanced Scorecard in a 1992. The Balanced Scorecard was based on a 1990, Kaplan and Norton led a research study of a lot of companies with the purpose of exploring the new methods of performance measurement. The importance of the study was a growing belief that financial measures of performance were ineffective for the modern business enterprise. The group discussed a number of possible alternatives but settled on the idea of a scorecard, featuring performance measures capturing activities from throughout the organization—customer issues, internal business processes, employee activities, and of course shareholder concerns.

Kaplan and Norton introduced the new tool the Balanced Scorecard and later summarized the concept in the first of three Harvard Business Review articles, “The Balanced Scorecard—Measures That Drive Performance.” The Balanced Scorecard has been translated and effectively implemented in both the nonprofit and public sectors. Success stories are beginning to accumulate and studies suggest the Balanced Scorecard is of great benefit to both these organization types. The Balanced Scorecard can be understood as a management system, which is structured according to the logic of the management circle (“plan-do-check-act”). The Balanced Scorecard has become popular and brought about many changes in a variety of organizations. If the quoted authors are right, the Balanced Scorecard even resembles a typical management fashion. Kaplan and Norton position the Balanced Scorecard as a tool for organizations to manage the demands of relevant

stakeholders and to translate strategies into action (“from strategy to action”). Possible stakeholders that are strategically relevant could be shareholders, customers or employees. Their demands are integrated into core management of companies within a “financial”, “customer” or “learning” or “process” perspective. So, the frame of the Balanced Scorecard consists of four perspectives. Each perspective consists of relevant strategic goals, indicators and measures to achieve them. One should emphasize the fact that the concept remains open for integrating further relevant stakeholders or perspectives, e.g. an environmental perspective. . When conceiving the BSC, Kaplan and Norton, maintained that companies lack sophisticated tools for the management of intangible or qualitative assets (e.g. customer satisfaction, processes quality, infrastructures, know-how). Intangible assets, however, seem vital in order to stay competitive in the future. So, the Balanced Scorecard provides ‘enablers’ that focus on the achievement of strategic goals in the future as well as results to depict the effectiveness and efficiency of measures in the past. Strategies can be usually interpreted as a set of hypotheses of causes and effects. So within a BSC the

relevant goals and corresponding indicators are linked to each other revealing this structure of causal relationships. Such relationships are both relevant within each perspective and also between them. Objectives of the “learning” perspective, for instance, serve as ‘enablers’ for the achievement of goals of the other ‘overarching’ perspectives (e.g. customers, finance). The BSC was originally created primarily as a measurement system and as an answer to a criticism concerning the unilateral measurement of the performance ability of a company. It was organized through four different perspectives

Translating Vision and Strategy : Four Perspectives

· The financial perspective : to succeed financially, how should we appear to our shareholders? Examples of this perspective include financial ratios and various cash flow measures. · The customer perspective : to achieve our vision, how should we appear to our customers? Examples of this perspective include the amount of time spent on customer calls and customer survey data. · The internal perspective : to satisfy our shareholders and customers, what business processes must we excel at? The internal business processes that are often classified as mission oriented and support oriented. Examples of this perspective include the length of time spent prospecting and the amount of rework required. · The learning perspective : to achieve our vision, how will we sustain our ability to change and improve? Includes

employee training and organizational attitudes related to both employee and organizational improvement. Examples of this perspective include the amount of revenue that comes from new ideas and measures of the types and length of time spent training staff.

The 4 key perspectives of the Balanced Scorecan are as follows

The key questions these perspectives ask

The starting point of the Balanced Scorecard is the vision and the strategy of a company. The BSC takes the vision and the strategy as a given - the BSC should translate a business unit’s mission and strategy into tangible objectives and measures. The measurement focus of the BSC is used to accomplish the following management processes :

1) clarifying and translating vision and strategy. 2) communicating and linking strategic objectives and measures. 3) planning, setting targets and aligning strategic initiatives. 4) enhancing strategic feedback and learning.

The measures function as a link between the strategy and operative action. The core question is the selection of goals

and measures to monitor the implementation of the vision and the strategy. Kaplan and Norton recommend a nine-step process for creating and implementing the balanced scorecard in an organization. 1. Perform an overall organizational assessment. 2. Identify strategic themes. 3. Define perspectives and strategic objectives. 4. Develop a strategy map. 5. Drive performance metrics. 6. Refine and prioritize strategic initiatives. 7. Automate and communicate. 8. Implement the balanced scorecard throughout the organization. 9. Collect data, evaluate, and revise.

The methodology of the Balanced Scorecard (Kaplan and Norton, 1997)

There are many benefits and challenges to the balanced scorecard. The primary benefit is that it helps organizations translate strategy into action. By defining and communicating performance metrics related to the overall strategy of the company, the balanced scorecard brings the strategy to life. It also enables employees at all levels of the organization to focus on important business drivers.

The main challenge of this system is that it can be difficult and time-consuming to implement. Kaplan and Norton originally estimated that it would take an organization a little more than two years to fully implement the system throughout the organization. Some organizations implement it quicker, for some it takes longer. The bottom line is that the balanced scorecard requires a sustained, long-term commitment at all levels in the organization for it to be effective. There are many benefits and challenges to the balanced scorecard. The primary benefit is that it helps organizations translate strategy into action. By defining and communicating performance metrics related to the overall strategy of the company, the balanced scorecard makes the strategy come alive. It also enables employees at all levels of the organization to focus on important business drivers. 2. Comparing the Balanced Scorecard between private and public sectors

Using the same performance metrics in the public sector as the private sector is likely to be ineffective since public sector goals differ drastically from those of the private sector. Private sector focus is primarily on shareholder value: the bottom line. Funding comes from various sources, and as long as shareholder financial needs are met, the company can function as it pleases.

The public sector faces a quite different environment. Public sector funding comes, in most cases, from the taxpayers it is servicing. the measure of success is not shareholder value or profit but rather how well the agency is meeting the mission given to them by congressional statute or executive order. Although the agency can oftentimes perform this mission in whatever way it sees fit, it is still bound by the directive of the mission. thus, strategic value comes in the form of fulfilling the mission, and fulfilling the mission comes down to customer satisfaction with the agency’s service. however,

defining customer needs is a bit more complex. A second difference evolves through the number of customers or stakeholders that a public sector organization must serve. Financial measures in the BSC relate to financial performance, which is a means to satisfy investors (shareholders, investment firms, bondholders). In the public sector organization, the financial measures are just part of what is needed to please the “investors,” which in this case would be the funding agencies.

Table 1. Comparison of Balanced Scorecards in the Private and Public Sectors (source Nicholas J. Mathys, 2006)

While private sector clients are not concerned with an organization’s internal efficiency so long as their product, price, and service needs are met, internal efficiency is of great concern to the public sector’s stakeholders, taxpayers also require accountability that their tax dollars are being used effectively and efficiently. Therefore, program performance, efficient use of resources, and satisfaction with the service by the public are additional key issues. These differences lead to a different sort of hierarchical model for the balanced scorecard.

Comparing the Scorecards for Government Versus For-Profit Organizations (Nicholas J. Mathys, 2006)

First, as increasing shareholder wealth does not have primacy in a governmental operation, financial performance becomes less critical. reaching the mission of the organization is of key interest to those who fund the organization. Hence, the government model needs some changes in the hierarchical ordering compared to how Kaplan and Norton arranged the hierarchical ordering in their mapping article. Some public sector balanced scorecard advocates have put financial measures at the bottom of the model to indicate the importance of having adequate funding as a precursor to developing the organization. However, to be consistent with usage in the private sector, we look at financial measures as output measures that are precursors to meeting the mission, which will in the end lead to adequate future funding. Internal process management would be similar for government and for profit-seeking enterprises as both relate to the key value-added processes that the organization provides. For a car manufacturer, the key process would be producing automobiles

and trucks. For the government agency, it is providing the service promised through its mission. This is why there is a direct line from internal processes to both customer/user satisfaction and to financial performance. In the world forprofit, the financial ties directly to the overall goal; in government organizations it is only one part of fulfilling the mission, with customer/user satisfaction the other part. cases, learning and growth support the development of internal processes. in summary, the balanced scorecard is an effective management tool that can support improvements in government sector organizations. There needs to be some modification in the basic strategic mapping model provided by Kaplan and Norton to align elements in the BSC to correspond to the environment faced by government organizations. allows a focus on the mission of the organization as the focal point rather than return to shareholders. We now focus on two government organizations that have adopted the balanced scorecard as a major part of the management effort. First, we look at the Defense Finance and Accounting Service and what they did to develop the organization culture as they introduced the

scorecard. the second case, the United States Postal Service, the focus is on the difficult time they had in enacting the scorecard and how reinforcement systems became an important part of their process. Both cases provide two different sorts of initial organizational cultures and environments that needed different approaches to effect a quality scorecard introduction and deployment. The Balanced Scorecard can be effective in the public, if and only if, the current erspectives are rearranged (see Table). The four perspectives of the current version of the The Balanced Scorecard can still be applied in government organizations as long as they are rearranged according to governmental priorities. Therefore, it is clear that above considerations seem to have considerable impact on the ability of the the Balanced Scorecard in ensuring best customer satisfaction. These considerations, if positively dealt with, may contribute to employee satisfaction, superior employee performance, sound internal business process and in turn, may lead to efficient stewardship of taxpayers’ money.

Furthermore, the best possible use of taxpayers’ money may eventually lead to achieving the bottomline objective absolute customer satisfaction. In the light of the above observations, it is clear that some modifications are needed to the current version of the Balanced Scorecard for its use in

the government sector as an effective performance measurement and management tool. Although significant research has taken place and various modifications to the current version of the Balanced Scorecard have been suggested by the researchers for the private sector, no studies have been found recommending a modified Balanced Scorecard model for the government sector. The following diagram (Figure 3) is suggested for the government sector, keeping in mind that “Customer” perspective is the bottom line of government sector.The Balanced Scorecard Institutehas compared the different strategic objectives of the public and private Sectors. Table 2 shows the differences in each strategic level :

Table 2. Comparison of Private and Public Sector Strategies (Marco Ahrendt, 2006)

A special requirement for adoption is needed for the financial perspective. Even though the Balanced Scorecard seems to be balanced all perspectives and measures are aligned to the financial success and profitability of the organisation.

The Public Sector’s financial perspective is mainly adjusted to budget targets, saving potentials, securing the basis for taxes, sustainment of credit worthiness and similar. Some of the facts which are especially important for adoption of the Balanced Scorecard approach in public sector are: • The closeness to political interests needs a special thoughtfulness and sensibility. • It is important to explain employees and representatives the Balanced Scorecard’s usefulness.

The implementation of a Balanced Scorecard requires an effective controlling system which assembles measures, values and other significant reporting data. Public sector still needs to catch up here. Accordingly from the beginning this should be allowed for : • A balance between a tight schedule and adequate time for practice, communication

and feedback during strategy discussion has to be found. To keep motivation high the rollout should be kept short. Adoption needs dynamics, especially in the Public Sector. 3. Strategy mapping The strategy map has turned out to be as important an innovation as the original Balanced Scorecard itself. Executives find the visual representation of strategy both natural and powerful. Strategy maps provide increased granularity for executives to describe and manage strategy at an operational level of detail. A strategy map provides a visual framework for an organization’s strategy – how it intends to create value. Specifically, a good strategy map will link together :

1. The desired productivity and growth outcomes. 2. The customer value proposition which will be needed. 3. Outstanding performance in internal processes. 4. The capabilities required from intangible assets.

In effect, a strategy map captures the organization’s strategy in visual form so that managers can better execute their desired strategy. Strategy maps are built around the structure of these four perspectives. They ensure that the organization’s objectives in each of these perspectives are consistent and internally aligned. That alignment, in turn, means the organization is focused and performing at an optimal level rather than having the actions of one part of the organization impact on the results achieved by another part. Strategy maps clarify all cause-and-effect relationships so that an effective strategy can be developed and then optimized over time. They are the interface between strategy and the Balanced Scorecard. Conceptually, a strategy map links the high level goals of the organization – its mission, values and vision – with meaningful and actionable steps each an employee can take. Strategy maps also provide balance between the various competing dynamics every organization faces :

 Whether to invest in intangible assets that will generate strong long-term revenue growth or focus on cutting costs more aggressively so as to boost short-term results.  How to differentiate your organization from your competitors by clarifying your value strategy.  Which usually involves one of the four different approaches already mentioned :


Offering the lowest total cost to customers

2. Product leadership – always offering superior products 3. Making available complete customer solutions 4. Locking-in customers so that it would be hard to switch to other vendors : a) Which internal processes to focus on and optimize and which to outsource.

b) How to balance the allocation of resources between the various internal processes in such a way that different benefits are delivered at various points of time. c) How to align everything the organization does in such a way that the efforts of achieved elsewhere. d) How to make good management decisions about investments in intangible assets organizational growth in the future. A company or other organization creates value by producing goods and services that can be sold for profit. At one time, it was suggested that managing these processes was the most important duty of management. In today’s competitive environment, however, operational excellence alone is not sufficient to provide a sustainable competitive edge. A strategy map (see Figure 4) helps ensure internal processes are well executed and properly aligned with intangible assets and the customer value proposition. The four as the drivers of one part of the company do not have a negative impact on the results

key internal processes by which organizations create value according to (Kaplan, Norton, 2002) are : Operations management processes Customer management processes Innovation processes Regulatory and social processes

In the operations management area, organizations are:  Attempting to develop deeper relationships with suppliers with the goal of lowering the total cost of procuring all the materials needed to products the customer is offered. Generally, this involves simplifying ordering and accounting functions to lower administrative costs as far as possible.  Looking for new ways to actually produce the products and services as efficiently as possible through continuous

improvement of processes and enhanced efficiency initiatives.  – Attempting to lower the costs of distribution and delivery in any way possible.  – Trying to get a better idea of the risks involved in doing business and then finding effective ways to offset and minimize those risks to a better effect.

By focusing on operations management, organizations attemp to inject key features into their value proposition: 1. Competitive prices 2. High levels of quality 3. Speedy delivery of the goods purchased 4. A comprehensive solution to customer problems. A well thought out and integrated strategy map provides strategic focus to these key internal processes. Or, put differently, a strategy map helps link process improvement

programs to important organizational outcomes. Strategy maps help organizations improve the right things, not just the more obvious things. Strategy maps are also useful where organizations have embarked on quality management programs such as Total Quality Management (TQM), Six Sigma or Activity-based Management (ABM). The strategy map helps embed these quality management efforts within a strategic framework that will provide cause-and-effect accountability and measurement metrics.

Theme Maps Here’s an example of MCAA’s theme map for Strategic Partnering : Mayberry Community Action Agency (MCAA)

Agency-wide Strategy Map and Objectives Developing Theme Maps serves an important purpose – it allows a larger, diverse group of people to have input. This brings good ideas forward, and gives people a sense of buy in. Once Theme Maps are developed, they are combined into an overall Agency-wide Map. Ideally, all the themes should be reflected in it. Combining Theme Maps is done through a process of affinity grouping. As you compare

Objectives within the Themes, look for Objectives with similar topics. For example, there may be two or more Objectives dealing with technology that can be combined into a single, higher altitude Objective. Here is how MCAA’s four theme maps were combined into an Agency-wide map that shows the big picture, yet reflects key elements of each theme:

The Strategy Map is a graphical way to tell the story of your strategy: “By investing in our staff’s knowledge, skills and abilities, and taking steps to remove barriers to motivation, we will be enabled to improve a number of our processes, including partnering with other community groups, working with them to create better programs, resulting in better service quality. This will also be enabled through better technology to track clients, match them with resources and measure results. As a result of better partnering, we will be able to diversify our funding. Better service quality will result in more costeffective service provision. Better partnering will help us advocate for our clients. Finally, our ability to deliver better services will also result in better outcomes for clients, their families and the community of Mayberry as a whole.” Here is the Agency-wide strategy map with a reference to the ROMA goals and the Standards of Excellence that each

objective addresses. Rather than reacting to ROMA and NPI reporting, or Pathways to Excellence assessment, as a “stand alone” project, use of a strategy map as an overall measurement framework puts the Agency in a much more proactive position. Reporting and evaluation becomes a by-product, rather than an end in itself.

Many organizations are weak in one or more of these areas. In customer management terms, organizations are : 1. Segmenting the broader market into niches or target segments which can then be offered a specific and customized value proposition. 2. Attempting to acquire new customers by communicating an attractive value proposition. 3. Working to retain the present customers rather than marketing to replace those who choose competing products or services. Typically, this involves customer loyalty incentives and other programs.

4. Trying to get existing customers to buy more products and services in the future through cross-selling or other partnering relationships.

By focusing on customer management, organizations are attempting to inject into their value propositions 1. A stronger, more vibrant brand image 2. A win-win expanding customer relationship 3. Increased levels of customer loyalty Innovation requires that organizations 1. Anticipate the customer’s future needs and develop entirely new or next-generation products that will meet those needs.

2. Have a portfolio of research and development projects underway. Ideally, these will run the full spectrum from projects that create new science and technology through to breakthrough products, nextgeneration products, derivative products and joint development products. 3. In addition to researching new products, companies also need to be designing the products, doing prototyping and testing, running pilot production tests and planning on how best to ramp-up the manufacture of new products in acceptable volumes. All of these activities need to be completed within an applicable time-frame and budget. 4. At the conclusion of the development cycle, new products and services then need to be made available in commercial quantities. In parallel, the marketing and sales units will also launch their efforts to sell the new products and services to customers. Customers will also be demanding that suitable levels of quality are achieved

Companies and organizations must continually win the right to operate in the communities and countries within which they produce and sell their offerings. They do this by complying with all the applicable laws and regulations, and by contributing to the communities within which they operate. Specifically. 1. Organizations have to use energy wisely, avoid contaminating the environment and minimize the impact on the environment of all products produced and sold. 2. Organizations have to provide a workplace which is safe and healthy for its employees, and to take active measures to reduce employee exposure to dangers wherever possible. 3. Companies need to pay workers appropriately and provide opportunities for employees to gain new skills and competencies.

4. Corporations need to be sensitive to the needs of the broader community and willing to make monetary contributions or allow employees to do volunteer work while still being paid. At a minimum, these social and regulatory internal processes are intended to inject into the customer value proposition. 1. A sense of partnership with the community. 2. An awareness of the need to be a good Citizen. Regulatory and social processes also pave the way for companies to enter new markets in the future. Organizations with a strong track record in this area are welcomed into new regions. There is also the flow-on effect in internal morale when employees take pride in their rganization’s contribution to improving the communities where they live. This, in turn, makes it easier to attract and retain talent. Strategy maps can be used dynamically to create an action plan rather than passively as snapshots of corporate

intent. To use a strategy map and Balanced Scorecard together effectively in this way is a six step process. 1. Establish and define what the current value gap is for shareholders – or in other words, set the financial objectives, measures and targets. Determine how much long-term revenue growth and short-term productivity improvements you will work towards achieving. These should be stretch targets that will challenge the organization. 2. Reconcile your current value proposition – by identifying your current target customer segments, clarifying the value proposition you now use, selecting your measures and reconciling your customer objectives to the goals of financial growth. You might also decide on a new customer proposition that will generate the growth you desire.

3. Establish your projected time line – how quickly you anticipate your new internal processes and themes can

begin to generate the kinds of financial results required. This should indicate which goals are achievable and which goals may need further adjustment.

4. Identify your key strategic themes – those critical few internal processes which will have the greatest impact on the customer value proposition. You also highlight which internal processes are the drivers for those targets and create some linked objectives, measures and targets.

5. Identify and align your intangible assets – by assessing the level of strategic readiness of each intangible asset. You then set targets on how to increase each asset’s level of readiness individually

6. Specify and fund the strategic initiatives required to execute the strategy – so there is clarity about the level and sources of funding required. The cause-and-effect linkage of the strategy map, Balanced Scorecard and action plan should help visualize the logic involved.

These steps mean that passive statements of intent are given substance and relevance. For example, a strategic objective to “Reduce the typical product development cycle” is appealing but also open to individual interpretation. When it is transformed into something like “Reduce the product development cycle from three years to nine months”, everyone in the organization realizes this will require some breakthrough, outside-the-box thinking rather than minor enhancements. Conclusions The Balanced Scorecard was developed, between others, by Robert Kaplan and David Norton. It was originally created primarily as a measurement system and as an answer to criticism concerning the unilateral measurement of the performance ability of a company. It was organized through four different perspectives: the financial perspective, the customer perspective, the internal perspective, the learning perspective.

The Balanced Scorecard provides the cornerstone for a new strategic management system. The scorecard enables organizations to introduce new governance and renew process focusing on strategy. It does not rely on short-term financial measures as the sole indicators of performance but it does the following additional functions (Samir Ghosh, Subrata Mukherjee, 2006) 1. Translate strategy to action, making strategy everyone’s job. 2. Manage the intangible assets e.g. customer loyalty, innovation, employee capabilities. 3. Leverage cross functionality without changing the structure of the business. 4. Measure what matters the critical few vs. the important many in real time, not just after navigation of the business. A Balanced Scorecard, however, suffers from some major drawbacks. The most important among these are (Samir Ghosh, Subrata Mukherjee, 2006). the facts. 5. Create a daily management system for the day-to-day

1. The Balanced Scorecard decomposes the organization’s primary objectives (financial perspective) into customer, internal process and learning and growth objectives (operating perspectives) in a way that is reminiscent of the way that the Dupont formula decomposed the return on capital employed metric into front-line operational measures. 2. To make scorecard useful, it should be prepared in conformity with the overall business strategies. Thus, companies may bias their scorecards to the dimensions that closely support their strategic direction. 3. It is difficult to integrate a company’s scorecard into its planning, budgeting and resource allocation process; especially when scorecard metrics are changed. 4. In order to make the scorecard more useful and practical it is necessary to assign weights to different measures (both financial and non-financial) on the basis of their

importance to the organization for specifying trade-off between financial and nonfinancial measures. 5. To make the scorecard more efficient and useful it should include a large number of both financial and nonfinancial measures and these should be continually modified on the basis of measurement feedback. 6. There are some organizations like investment companies to which Balanced Scorecards have little value as they are interested in improving financial performance only. 7. The creditors, debenture holders and even shareholders of an organization are interested in financial performance rather than operating performance which compels the management to give much emphasis on financial perspective of the organization making the scorecard imbalanced. Creating the balanced scorecard is a critical step in the strategic process. So many organizations create a

strategic plan and then dutifully ignore it because day-today issues / firefighting tends to take precedence. The scorecard periodically reminds the organization what the critical strategic issues are and gives the necessary feedback on the progress toward achieving them. It is important that the scorecard is like a scale. The role of the scale when you are on a diet is not to make you lose weight. The scale merely provides you with feedback on how you are doing. In the same way, building a balanced scorecard will not improve organizational performance. It will simply give you feedback to know how well you are achieving your strategic direction. The real strength of the linkages between the strategy map, Balanced Scorecard and action plan is consistency. Instead of a fragmented approach where one part of the organization pursues a different agenda from another part, everyone uses the same overall

strategy. The vision is consistent with the strategy to get there. People can be inspired to act because they see that it is feasible to get to where the management wants to head.

Link Sustainability to Corporate Strategy Using the Balanced Scorecard

“People and their managers are working so hard to be sure they are doing the right things.” Stephen R. Covey
The Imperative for Sustainability

things are done right, that they hardly have time to decide if

In a recent article¹, the Harvard Business Review compared what it called the “Sustainability Imperative” to other game-changing business megatrends of the past generation, such as the rise of the quality movement, the personal computer, and the Internet. Such game-changing trends profoundly affect the competitiveness, and even the survival, of organizations. Sustainability is an umbrella term for a set of structural changes that impact corporate strategy and performance, and are here to stay, including : • Growing environmental pressures related to increasing population • Resource scarcity and rising costs for energy and materials as billions of people aspire to join the middle class in places such as India, China, and Brazil • Increasing consumer demand for safe and natural products

• Unprecedented levels of transparency arising from the Internet and social media • Stronger demands for accountability and engagement among the “millennial” generation of workers, and stronger demands for improved governance by boards and other stakeholders Sustainability and corporate social responsibility (CSR) have become closely connected terms. Originally,sustainability referred to the long term environmental impacts of human activities, while corporate social responsibility had to do with social impacts. Increasingly, these two are used interchangeably. For purposes of this paper we will use the term “sustainability” in this fuller meaning. Stage 1: Pre-compliance – the company is focused entirely on profits, cuts corners to reduce cost wherever possible and actively resists regulation and other pressures for sustainable behavior.

Stage 2: Compliance – the business manages its liabilities by obeying the law and applicable regulations, but sustainability is treated as a cost. Stage 3: Beyond Compliance – moving from defense to offense, the company realizes it can pro-actively reduce cost and risk by minimizing waste, pollution, energy use and harmful social impacts. Stage 4: Integrated Strategy – the firm re-brands itself as a company committed to sustainability, and integrates sustainability with key business strategies, capturing added value from breakthrough sustainability initiatives that benefit all stakeholders. Stage 5: Purpose and Passion – the company is driven by a passionate commitment to improve the company, society, and the environment because it’s the right thing to do.

Companies that are seeking to move into Stage 3 and beyond must develop a more comprehensive way to measure performance that includes sustainability. The most popular formulation for this new view of performance is the Triple Bottom Line. Simply put, the Triple Bottom Line involves planning, managing, and reporting on business results in three areas : • Economic: Sales, profits, ROI, jobs created, cash flow • Environmental: Impacts on air, water, waste, biodiversity, energy use • Social: Product responsibility, community impacts, labor practices, human rights The Global Reporting Initiative (GRI) is perhaps the bestknown and most widely adopted framework for Triple Bottom Line performance reporting. As of 2009, more than 1400 corporations in 60 countries were producing reports using this framework... GRI guidelines were developed in consultation with a large number of stakeholders, including nongovernmental organizations (NGO’s).

Despite its growing adoption, the Triple Bottom Line approach has serious limitations, including : • Lack of focus on the firm’s distinctive competitive strategy • A potential lack of connection to the “real” business of the firm, as seen by financially-oriented executives and board members • Treatment of social and environmental impacts as an “add-on”, rather than a key part of business strategy • Focus on generic activities and outcomes, with no guidance on “how to get there from here” About the Balanced Scorecard A strategy-based balanced scorecard system involves the collaborative development of a firm’s “Story of the Strategy”, that identifies the connection between organizational capacity, efficient business processes, customer value, stakeholder satisfaction, sustainability performance, and market and financial outcomes. The balanced scorecard has proven to be

one of the more enduring business management ideas of the last 20 years, and has been adopted by more than half of Fortune 500 companies, and many government and nonprofit organizations as well. The balanced scorecard uses four strategic perspectives, shown in Figure 1, below–complementary but distinct lenses for looking at organizational strategy and performance : • Owners, investors and analysts view the organization as a financial system that provides return on investment. • Customers and stakeholders see the business’ products and services as a way to satisfy needs and desires at an appropriate price. • Internal management and staff work on business processes to efficiently turn resources into outputs that can be sold to satisfy customer needs. • Organizational capacity is the foundation of the others – the physical infrastructure, culture, tools and technology, knowledge and skills, and information systems required to

plan, design, and deliver products and services to customers and stakeholders.

Most “sustainability metrics” are, in fact, internal process measures, and in some cases support branding exercises in the customer & stakeholder perspective. These include greenhouse gas emissions, water usage, waste generated, and electricity used. While important, these are only part of the picture.

The Connection between Strategy and Performance Measures

Strategic Management Maturity Model™ that describes the
one extreme, measurement-based balanced scorecards are simple dashboards of performance measures grouped into

The Balanced Scorecard Institute has developed a

evolution of performance management and measurement. At

categories that are of interest primarily to an organization’s managers and executives. Measurement-based scorecards almost always report on operational performance measures, and offer little strategic insight into the way an organization creates value for its customers and other stakeholders. Most sustainability metrics, including GRI reports, fall into this category. At the other extreme, a strategic performance scorecard system is an organization-wide integrated strategic planning, management, and measurement system. These strategy-based scorecard systems align the work people do with corporate vision and strategy, and communicate strategic intent throughout the organization, and externally to interested stakeholders.

In strategy-based balanced scorecard systems, performance measures are the result of thinking about business strategy and what the organization is trying to accomplish first, to measure progress toward goals. In strategy based systems, the first question to answer is the strategic question: “Are we doing the right things?” The operations, process, and tactical questions come later: “Are we doing things right?”

Figure 2, below, shows the logic of how a strategy-based balanced scorecard is developed, starting at the high altitude of mission and vision and linking strategy, step-by-step, to operations on the ground.

Strategic ThemesSustainability becomes strategic when it is integrated into the fabric of the organizational planning and management process. The two most visible places where sustainability should be highlighted are the organization’s high-level strategic themes and the strategic objectives that are the strategic building blocks (“strategy DNA”) of this strategy. A strategic theme is a major “pillar” of the strategy that directly supports achievement of the vision and mission of the organization. A good theme is not just a particular objective,

but a linked set of objectives that touches on all four of the scorecard perspectives. These linked objectives tell the story of the strategy, and form the basis for communicating the strategy story to everyone in a consistent manner. Organizations typically have several common strategic themes or focus areas, such as: Operational Excellence, Product Innovation, or Strategic Partnering. Sustainability could be a theme as well. As a theme, Sustain ability can be described through each of the four perspectives of the balanced scorecard, for example : • From a financial standpoint, sustainability means staying in business, and creating an acceptable return for investors. • From a customer and stakeholder standpoint, sustainability means satisfying and providing value for the growing number of safety and sustainability-conscious consumers.

• From a process standpoint, sustainability means managing materials, energy, and waste in the most ecoefficient way possible. • From an organizational capacity standpoint, sustainability means creating a culture that values sustainability, reflected in the choices that employees make every day. Strategic Objectives Strategic Objectives are the building blocks of strategic themes, and help make strategy actionable for employees. Objectives are expressed as continuous improvement activities that are unique to each perspective and are lower in “strategic altitude” than themes. Strategic objectives are linked together to form a strategy map, and the strategy map shows visually how objectives work together in an integrated, cause and effect fashion to achieve the strategic results associated with each strategic theme.

When building an integrated strategy-based scorecard system, we build a “Strategy Map” for each theme. A strategy map shows the cause and effect links among strategic objectives, across the four perspectives, in a visual map that tells the “Story of the Strategy”.

Figure 3 is a typical strategy map for a “Sustainability” theme.

Here is the story the strategy map tells :

“By creating a strong focus on sustainability in our corporate culture, we will align our people to develop more eco-efficient products, partner with regulators more effectively, and reduce the life cycle impact of our operations. In addition, we build new information technology capabilities that help us track life cycle impacts more effectively. “By producing more eco-efficient products, we will provide value for the increasing number of “green” customers in our market, which will lead to increased sales. Our capability for partnering will enable us to communicate more pro-actively with the regulatory community, allowing us to be an active player rather than responding reactively to government directives. This will reduce business risk. Also, more ecologically safe products will reduce potential product liability risk. Reduced risk will have a positive impact on our cost of capital. “Reduced life cycle impacts will lead to direct cost savings on fuel, water, electricity and waste disposal. Taken

together, increased revenues, reduced risks, and reduced costs will increase our profitability.” Building a strategy-based scorecard planning and management system, and more importantly, a high performance organization, is like building a custom house. Figure 4, below, shows how the strategic themes –the organization’s Pillars of Excellence – support the strategic results that lead to accomplishment of the Mission and Vision.

Once all the theme maps are developed, they are combined to create an overall strategy map for the organization. All of the themes, including sustainability, are merged into a powerful, mutually reinforcing business strategy, shown in Figure 5, below.

Here, the sustainability theme is woven into the bigger vision of organizational success, which also includes the other themes. The larger Story of the Strategy might be :

“We will work to improve our culture, encouraging greater focus on sustainable products, along with more open participation and employee engagement. This is necessary in order to increase our innovation, to create products that satisfy emerging customer needs, to minimize harm to the planet and benefit the communities in which we operate. Developing this culture will also help us find ways to increase efficiencies throughout our operations. This will be supported by better information systems. Taken together, increased innovation and operational efficiency will enable us to produce a better product at less cost, improving value for our customers. This will both reduce our costs, and increase our revenues. “Part of our culture is about recognizing the need to partner with all of our stakeholders, including regulators, suppliers, representatives of the communities we operate in, non-governmental organizations, and others. This will lead to better stakeholder relationships, making it easier to proactively avoid problems that may affect our license to operate. This

will reduce our business risk, positively impacting our cost of capital. “Increased profitability will result from increased revenue, reduced risk, and reduced costs.”

Developing Measures

In a strategy-based balanced scorecard system, measures are a means, not an end. Think of performance measurement as a process, not an event. Meaningful, strategically important measures can only be developed once strategic objectives have been developed and linked together on the strategy map. Figure 6, below, shows how performance measures, targets, and initiatives are developed in service of these objectives.

Each strategic objective is supported by one or more measures. As you can see, the company is tracking life cycle

impacts, has set targets for reducing them, and has identified initiatives to achieve that reduction. This set of measures can still support conventional sustainability reporting requirements and initiatives, but is now linked explicitly to the broader competitive and financial strategy of the firm. The Balanced Scorecard Institute The Balanced Scorecard Institute and our parent company, the Strategy Management Group, have been working in the strategic management and balanced scorecard space for 15 years. In addition to consulting, the Institute has trained over 5000 people in 60 countries, including national governments, Federal and regional governments, state and local governments, business and nonprofit organizations. The Institute’s award-winning framework, Nine Steps to Success TM, is a disciplined, practical approach to developing a strategic planning and management system based on the balanced scorecard. Training is an integral part of the framework, as is coaching, change management, and problem solving. Emphasis is placed on “teaching clients to fish, not

handing them a fish”, so the scorecard system can be sustained. A key benefit of using a disciplined framework is that it gives organizations a way to ‘connect the dots’ between the various components of strategic planning and management, meaning that there will be a visible connection between the projects and programs that people are working on, the measurements being used to track success, the strategic objectives the organization is trying to accomplish and the mission, vision and strategy of the organization. Our projects are conducted on a highly systematic basis, using the proven Nine Steps to Success TM model, as shown below.

Step One of the scorecard building process starts with an assessment of the organization’s Mission and Vision, challenges (pains), enablers, and values. Step One also includes preparing a change management plan for the organization, and conducting a focused communications workshop to identify key messages, media outlets, timing, and messengers. In Step Two, elements of the organization’s strategy, including Strategic Results, Strategic

Themes, and Perspectives, are developed by workshop participants to focus attention on customer needs and the organization’s value proposition. In Step Three, the strategic elements developed in Steps One and Two are decomposed into Strategic Objectives, which are the basic building blocks of strategy and define the organization's strategic intent. Objectives are first initiated and categorized on the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages (Strategy Maps) for each Strategic Theme, and then later merged together to produce one set of Strategic Objectives for the entire organization. In Step Four, the cause and effect linkages between the enterprise-wide Strategic Objectives are formalized in an enterprise-wide Strategy Map. The previously constructed theme Strategy Maps are merged into an overall enterprise-wide Strategy Map that shows how the organization

creates value for its customers and stakeholders. In Step Five, Performance Measures are developed for each of the enterprise-wide Strategic Objectives. Leading and lagging measures are identified, expected targets and thresholds are established, and baseline and benchmarking data is developed. In Step Six, Strategic Initiatives are developed that support the Strategic Objectives. To build accountability throughout the organization, ownership of Performance Measures and Strategic Initiatives is assigned to the appropriate staff and documented in data definition tables. In Step Seven, the implementation process begins by applying performance measurement software to get the right performance information to the right people at the right time. Automation adds structure and discipline to implementing the Balanced Scorecard system, helps

transform disparate corporate data into information and knowledge, and helps communicate performance information. In short, automation helps people make better decisions because it offers quick access to actual performance data. In Step Eight, the enterprise-level scorecard is ‘cascaded’ down into business and support unit scorecards, meaning the organizational level scorecard (the first Tier) is translated into business unit or support unit scorecards (the second Tier) and then later to team and individual scorecards (the third Tier). Cascading translates high-level strategy into lower-level objectives, measures, and operational details. Cascading is the key to organization alignment around strategy. Team and individual scorecards link day-to-day work with department goals and corporate vision. Cascading is the key to organization alignment around strategy. Performance

measures are developed for all objectives at all organization levels. As the scorecard management system is cascaded down through the organization, objectives become more operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as ownership is defined at each level. An emphasis on results and the strategies needed to produce results is communicated throughout the organization. In Step Nine, an Evaluation of the completed scorecard is done. During this evaluation, the organization tries to answer questions such as, ‘Are our strategies working?’, ‘Are we measuring the right things?’, ‘Has our environment changed?’ and ‘Are we budgeting our money strategically?’

Summary The decision to undertake development of a balanced scorecard is a decision to undertake a journey, not work on a project. While there are discrete start and stop points along the way, one should not miss the point that the real value of

an integrated strategy-based scorecard system comes from the continuous self-inquiry and in depth analysis that is at the heart of all successful strategic planning and performance management systems. Start your balanced scorecard with the idea that you are in it for the long term, and that changing behavior and transforming the organization to a higher level of performance is at least as important as measuring performance. A balanced scorecard system provides a basis for executing good strategy well, and managing change successfully. Building a balanced scorecard performance system using the framework described here will cause people to think more strategically about their organization and their work. The balanced scorecard journey changes hearts and minds.

Example Regional Airline Balanced Scorecard Mission: Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. Vision: Continue building on our unique position -- the only short haul, low-fare, highfrequency, point-to-point carrier in America