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The balanced scorecard in the public sector organization

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 Managing public organizations
in theory and practice

Redakcja naukowa
Magdalena Raczyńska
Krzysztof Krukowski
Marek Siemiński

Olsztyn, 2014
Introduction

The traditional Weber model which functioned efficiently for many years has led to
minimizing the elasticity of organizational structures, increasing the time it takes to make
decisions and inordinately complicating the decision-making process. That is why management
in the public sector requires managers to use modern methods of increasing efficiency of
functioning of public organizations more and more widely. This can be contributed, inter alia,
to increasingly complicated procedures of spending public funds, the arising of rivalry between
public organization in acquiring limited funds for the execution of investments, the increase of
the awareness of citizens regarding spending public funds and the arising of new solutions in
the functioning of public organizations (e.g., the so called participatory budget). Introducing
innovative solutions that improve organizational efficiency of public sector organization is also
an important area of their functioning. One of the trends of public management (New Public
Management) points out the possibilities of improving the effectiveness and efficiency of
functioning of the public sector through implicating solutions from business organizations into
public organizations. This model is becoming increasingly popular in Poland as well, although
it has been known around the world for several decades, and wins more and more supporters
among the management staff of public organizations. Authors of this paper have highlighted
the possibility of using various concepts of management and pointed out the determinants of
their implication in Polish public organizations.
The first part presents ideas and methods of streamlining the processes of functioning
of public organizations on the example of local government units. Attention has been drawn,
inter alia, to the innovation of local governments and various examples of the learning process
of a public organization have been presented. One of the methods of self-evaluation of local
government units, namely the CAF method has also been presented in this part. It has been
presented in the context of the management of the competencies of the municipal office and the
organizational model of excellence.
Deliberations regarding organizational culture and the process of its formation are the
contents of the second part of the paper. The authors have highlighted two issues. One regarding
the process and the conditions of the formation of organizational culture in the municipal offices
on the example of Poland, the other is related to the role of leadership in the formation of
positive organizational culture and positive organizational climate of a public organization.
The third part presents selected elements of the analysis of public organization's
environment. The issue of cross-border tourism management on the example of Warmia and
Mazury voivodeship and the Kaliningrad region is presented in the first article. The other one
presents the theoretical aspects of risk management, with particular reference to real estate
market.
1.1 THE BALANCED SCORECARD IN THE PUBLIC SECTOR ORGANIZATION1

The balanced scorecard was introduced into business practice by the R.S. Kaplan and
D. P. Norton in the early 90s of the twentieth century (Kaplan, Norton 1992, p. 71-79). The
starting point for the work on the creation of this method was the concept of “the corporate
scorecard”. In the course of empirical research the concept has been transformed into a
measurement system that communicates the strategic intent of the company as well as motivates
and monitors its achievements in relation to the designated strategic objectives (Świderska
2002, p. 13-17). Over the past 20 years it has been observed that the concept of the balanced
scorecard has undergone a kind of evolution. The generations of the balanced scorecard designs
are the following:
§ 1990-1993 - originally the balanced scorecard was developed to measure the company's
performance in four themes of the organization: finance, customers, internal processes
and learning and growth. The first generation of the balanced scorecard was a set of
metrics that served managers to make an overall assessment of the activity of the
organization;
§ 1994-1996 - the second generation of the balanced scorecard consists in treating the
concept as a comprehensive system for managing the organization in the strategic and
operational dimensions. This way of using the balanced scorecard helps organizations
develop the organization’s strategy and present it to all employees in order to
synchronize all the activities of the organization with the strategy being realised;
§ 2000-03 - the third generation of the balanced scorecard designs is extended by the so-
called strategy map. With the map it was possible to visualize the strategy and the
occurring cause-and-effect relationships between its various components, which
enables employees to understand the relationship between their own work and the
objectives of the company;
§ since 2004 until today - the balanced scorecard has transformed into a model of
organizational synergy. The creators of the balanced scorecard keep expanding the
concept in the learning and growth perspective, with an emphasis on the measurement
of strategic readiness of intangible assets. (Świerk 2010, p. 54-55; Czekaj 2009, p. 166-
169).

A public organization that knows its strategy of operation and possesses identified key
themes, within which it tries to achieve perfection, can commence the process of the creation
of the balanced scorecard. The development of the balanced scorecard consists of the following
basic steps (Rohm 2002, p. 2): strategic analysis, identification of customers and value
proposition for them; defining the vision and mission statements; defining the strategy/strategic
themes; defining perspectives and strategic objectives; creating a strategic map, targets and
measures of their achievements; developing strategic initiatives for specific areas of activity;
cascading balanced scorecards at lower organizational levels; analysing the results of activities
and undertaking corrective action.

1
dr hab. Maciej Zastempowski, prof. UMK, Uniwersytet Mikołaja Kopernika w Toruniu, dr Krzysztof Krukowski,
Uniwersytet Warmińsko-Mazurski w Olsztynie

1.1.1 THE BALANCED SCORECARD PERSPECTIVES IN PUBLIC
ORGANIZATIONS
The first step in the development of a strategy is to define the themes of possible action.
Afterwards a public organization defines its mission statement that is to be pursued regarding
customers. Out of the mission and vision strategic issues arise, these are the key themes based
on which the entity builds its strategy. Their sources are environmental analysis, research
expectations of buyers of individual and institutional services, analysis of strengths and
weaknesses and the values that guide the managers of the organization. The resulting strategy
is a choice of what the public organization wants to realise in order to fulfil its vision and
mission statements.
Strategic issues are also the vision and mission of the organization translated into
operational terms. They provide the answer to the following question: “How does the entity
want to pursue its mission statement?”
One of the first public sector entities, and also an example of the successful
implementation of the Balanced Scorecard as a management tool, is the city of Charlotte in the
United States. In 1990 the city of Charlotte already had its vision and mission statement
developed and they communicated the desire of the city to ensure high quality public services,
through which the city would be the best place to live, work and leisure in. The city council
decided that the city should allocate its limited financial resources to those initiatives that would
have the greatest impact on the realization of the vision.
The mayor and the city council selected five out of the fifteen proposed themes (Kaplan,
Norton 2001): public safety, transportation, city within a city (conversion and modernization
of the older areas of the city), the restructuring of local government, economic development. In
order to implement effectively these five goals, it was decided to create a team whose task was
to translate the strategic themes into strategic goals. The team decided to put the customer
perspective at the top of the scorecard. This perfectly illustrates a logical relationship between
the mission statement and the role of a local government unit and the construction of the
balanced scorecard. It should be noted, however, that finance in public organizations should be
(or is) the only means to meet the needs of service users. Figure 10 shows a general scheme of
the balanced scorecard for public entities.
 Vision and mission



Customers perspective


Financial perspective Vision and Internal processes
mission
perspective
statement

Learning and growth
perspective


Figure 10. A general scheme of the balanced scorecard for public entities
Source: Compiled based on (Kaplan, Norton 2001, p. 145)

In the case of a public organization, the balanced scorecard reflects the measure of
success in public entities, which, however, is not a financial measure but a customer’s
perspective. In the case of business organizations, the financial perspective is the primary
subject of analysis (tab. 11).

The comparison of balanced scorecards in public organizations and in businesses
Feature
general strategic goals
financial perspective
strategic followers of the
organization (stakeholders)
demanded result
Source: (Arveson 2003, p. 14)
Table 11
Private sector Public sector
successful mission
competitiveness, uniqueness
realisation
activity effectiveness,
profit, growth, market share
creating value
shareholders, buyers, tax payers, beneficiaries,
managers regulators
customer satisfaction customer satisfaction

In the balanced scorecard of public organizations perspectives may differ significantly,

depending on the role the organization plays in relation to its clients (Krukowski, Kamieniak
2006). The number of perspectives may be bigger than the four of the basic set. However, they
are combined by a common idea of developing Balanced Scorecards as a chain of cause-and-
effect linkages between perspectives aimed at an effective strategy implementation.
After defining the strategic themes and perspectives, it is necessary to develop strategy
maps that in a detailed way, by creating targets for each of the selected perspectives, indicate
how the strategy ought to be implemented. A strategy map shows the cause-and-effect linkages
between the objectives in the perspectives of the organization (fig. 11).
In the city of Charlotte the objectives included in the customers perspective were the
main services that the city had decided to provide to its residents. The implementation of the
financial objectives became a factor that allowed the city to achieve the objectives set out in the
customers’ perspective. The financial objectives included providing by the city paid services at
affordable prices, providing financial assistance of external partners. The objectives of the
internal perspective as well as of the learning and growth perspective supported the objectives
contained in the financial perspective and in the customers’ perspective. The team creating the
balanced scorecard developed descriptions of each objective contained in the balanced
scorecard (Kaplan, Norton 2001). They included a financial perspective objective focused on
reducing costs. This shows how the organization sees itself, its services and its responsibility
to society within the scope of managing limited resources possessed. It is a dimension
approaching a public organization in its operations to the logic of a business entity.
A public service should be provided not only at a premium quality, but also with the
rational use of public resources. A balanced scorecard covers all aspects of the achievement of
objectives, grouped into perspectives, which do not allow the omission of any of them. The
cause-and-effect linkages contained in the strategy map allow everyone to understand what the
strategy of the public organization is, and show how one may contribute to the implementation
of this strategy. The map also facilitates the presentation of the strategy by the organization,
and customers or those evaluating local government actions are provided with the criteria for
the evaluation of its activities and not only in the sphere of the implementation of certain
actions, but also in the scope of level and method of implementing the objectives that the
organization has defined for itself. A strategy map does not, and cannot, cover all of the
important services provided by a public organization, which a city is. In the balanced scorecard
of the city of Charlotte the themes included in the overall scorecard related to those services
that the city wanted to improve with a view to making Charlotte the best place to live and work
in (Kaplan, Norton 2001).
A balanced scorecard provides a general outline of what and how the organization wants
to achieve. It is an aggregated form of smaller strategy maps, which described the
implementation of particular strategic themes. A complete scorecard considers also a
synergistic linkage of objectives with specific perspectives, if they contribute to the
implementation of more than one strategic theme. Figure 12 shows part of the balanced
scorecard developed for the theme ‘city within a city’. Fields marked in grey indicate that part
of the Charlotte scorecard.
The next step in the process of strategic planning with the use of the balanced scorecard
is creating measures of the objective realization. The strategy map showed us with objectives
as well as their mutual linkages. This raises the following question: ‘How will we learn that the
objective has been achieved?’ After establishing the strategic objectives and measures for their
implementation, we move on to operational objectives covering a shorter period of time.
Strategic initiatives are concrete actions aimed at achieving the objective. They take
different forms depending on whether they refer to the activities comprising the whole
organization, or elements of scorecards for individual departments. Figure 13 presents the
transition from the strategic objectives to initiatives in the city of Charlotte.
STRATEGIC Restructuring of local Economic
Security of residents City in a city Transport
THEMES government development

BALANCED SCORECARD

Increasing the Strengthening Keeping the Ensuring Promotion of

CUSTOMERS Crime Strengthening
sense of customer competitive safe economic
PERSPECTIVE reduction neighbourhood
security service level of taxes transport opportunities

FINANACIAL Providing partners to Maximizing benefits / cost

Increasing the pool of taxes Obtaining loans
PERSPECTIVE finance the services reduction

INTERNAL Strengthening Increasing

Promotion of team Developing positive
PROCESSES cooperation with the Increasing productivity infrastructure
problem solving relationships
PERSPECTIVE customer capacity

LEARNING AND
Strengthening Information Achieving a positive atmosphere among
GROWTH Eliminating the lack of skills
Management employees
PERSPECTIVE

Figure 11. The strategy map in the city of Charlotte

Source: (Kaplan, Norton 2001)
 STRATEGIC THEMES Restructuring of local
Security of residents City in a city Transport Economic development
government

BALANCED SCORECARD

Keeping the Promotion of

CUSTOMERS Increase in the Strengthening Strengthening Ensuring safe
Crime reduction competitive level of economic
PERSPECTIVE sense of security neighbourhood customer service transport
taxes opportunities

FINANACIAL Providing partners to finance the

Maximizing benefits/cost reduction Increasing the pool of taxes Obtaining loans
PERSPECTIVE services

INTERNAL
Strengthening cooperation Promotion of team Developing positive Increase infrastructure
PROCESSES Increasing productivity
with the customer problem solving relationships capacity
PERSPECTIVE

LEARNING AND
Achieving a positive atmosphere among
GROWTH Strengthening Information Management Eliminating the lack of skills
employees
PERSPECTIVE

Figure 12. Elements of the results scorecard affecting the implementation of the strategic theme “city within a city”
Source: Elaborated based on (Kaplan, Norton 2001)
 Strategic theme
SECURITY OF RESIDENTS
Customer perspective STRATEGIC MEASURE OPERATIONAL INITIATIVES
Crime reduction OBJECTIVE How are we OBJECTIVE the action
What are the going to The required plan/realization
strategy measure the level of
Financial perspective assumptions? objective? performance or
the rate
Maximizing benefits/cost
reduction
STRATEGIC OPERATIONAL
MEASURE INITIATIVES
OBJECTIVE OBJECTIVE


Internal processes perspective Development of The number of 5 in 1 quarter The ‘Contact’
positive contacts per 8 in 2nd project
Developing
Promotion Ensuring
cooperation positive relationships employee quarter
of team
problem with relationships 10 in the 3rd
financing and
solving service quarter
partners


Learning and growth perspective


Achieving a
positive
atmosphere
among
employees
Strengthening Eliminating the
information/kn lack of skills
owledge
management

Figure 13. Measures, operational objectives and initiatives for each of the strategic objectives
Source: (Heald 2004, p. 9)
1.1.2 CASCADING THE BALANCED SCORECARD

After identifying the strategy maps and main linkages leading to the achievement of the
objectives contained in it and joint initiatives for the entire organization, the cascading process
of transferring scorecards on different levels of the organization begins. The key question that
arises is ‘How does a particular department contributes to the implementation of the strategy?’
This is the basis for designating objectives specific to every individual department but also
meeting the strategy assumptions. This encourages the organization to review its structure,
because it replaces the vertical division of the functional areas of management with initiatives
for the strategy implementation. The organization’s dynamics is changing and synergistic
relationships between its parts occur. You need to rethink the structure in terms of its relevance
to the realization of the objectives and the division of powers.
Adjusting the structure of the organization to the new challenges is followed by the
creation of balanced scorecards for individual departments and persons. It is relatively easy
since the operation improvement areas are at the levels of internal processes, and learning and
growth. Each part of the organization, after identifying the strategic objective the
implementation of which it contributes to, describes using the strategy maps how it is going to
achieve this goal and identifies operational objectives, measures and defines the initiative.
Moreover, it may happen that a department within the new organizational structure is part of a
larger project implementation and then becomes a member of the team, taking part in initiatives
that go beyond its usual functions.
The choice of measures depends on the perspective. Having determined the measures,
we set operational targets. They have shorter time horizons, and show the development of the
organization with a view to reaching the objective planned in the strategy. Initiatives are the
way in which the objectives are achieved and these initiatives constitute projects aimed at the
implementation of operational objectives, and in the long-term, at the implementation of
strategic goals. Each initiatives plan consists of the following (Arveson 2003, p.10): the budget,
sponsor, deadlines and resources.
Each initiative is focused on the implementation of the operational objectives that
constitute steps towards the realization of strategic objectives. The strategic objectives are part
of the implementation of the strategic themes and the strategic themes are the vision statement
translated into operational terms (fig. 13). Strategy cascading occurs not only in the area of
increasingly accurate and shorter goals. Based on the balanced scorecard, scorecards
“cascading” to lower operating levels occurs. Balanced scorecards for branches, teams and even
for individuals are developed. They are an elaboration of the main balanced scorecard. Figure
14 presents a scheme of creating balanced scorecards by creating “cascades” - going down to
the lower organizational levels.
Balanced scorecards at each level are consistent and implement a single strategy. This
is not only a way to find their role in providing value to the customer but also an effective way
of communication between departments.
 Serve the local community by improving life for its citizens

The needs of Mission

citizens and Be the municipality offering the best services in Poland
expected
Vision
results
S1: Offer the highest quality service while maintaining low costs
S2: Reduce the level of crime through cooperation of different people and
Strategy S1 S2 institutions

S1-C1: Management optimization (Internal perspective)

Strategic objectives S1-C2: Identify gaps in skills and services (staff)
CS1 CS2 S1-C3: Conduct regularly surveys among citizens
1
S1-C1-M1: Number of employees with the x skill
Measures M1 M2 S1-C1-M2: The cost of service per unit
S1-C1-M3: Citizen satisfaction index

Operational objectives S1-C1-M1-CO1: Level of skill x: 80% in 2005,

CO1 CO2 S1-C1-M1-CO2: 7% cost reduction compared to base value
S1-C1-M1-CO3: 95% in 2005

Initiatives S1-I1: The new customer service program
I1 I2 I3 S1-I2: New communication plan

Figure 14. Diagram of translating strategy into operational terms

Source: Elaborated based on (Kamieniak 2005, p. 65; Rohm 2002, p.7)
 Possessing a management system based on a number of variables requires a system for
collection, processing and presentation of information. There are many systems on the market.
It also requires the creation of computer applications in addition to the creation of an appropriate
work culture focused on information management.
Strategy-oriented organizations apply a double loop - the process of integrating the
management of the budget and operations with strategy management. The system of reporting,
based on a strategic balanced scorecard, allows the monitoring of progress in the
implementation of the strategy and taking corrective action if required.
The strategy-oriented system introduces three solutions that are essential for the
management system (Kaplan, Norton 2001, p. 147):
1. Linking the strategy with the budget: tight objectives of the balanced scorecard combines
the strategy rhetoric with the budget rigor.
2. Strategic feedback systems are a new basis for reporting and a new kind of board meetings.
Managers are no longer held responsible for managing functional siloes, but take
responsibility for strategic management tasks.
3. Testing, learning, adapting. The balanced scorecard formulates explicitly the hypotheses of
the strategy. Managerial teams can test these hypotheses more analytically using feedback
from the balanced scorecard. The strategy is evolving in real time, when new ideas and hints
flow from the organization.

The balanced scorecard has been successfully applied in a number of local government
units. The mayor of the city of Charlotte - Pat McCorry commented on the balanced scorecard:
“The Balanced Scorecard has helped me to present my strategic vision to my voters, citizens
living in our city, and businesses that are considering to base their seats here. It helps the city
managers focus on the things that will have the greatest impact on the city” (Niven 2003). The
success of the city of Charlotte is also manifested by a number of prestigious awards received,
and the use of the balanced scorecard has had a significant impact on the success of the city.
The balanced scorecard is not only a way to implement the strategy, but also a concept of action,
the action-focused strategy. It can be, and already is, successfully implemented in profitable
and non-profit organizations worldwide. It can also be used in Polish local government units,
bringing notable effects.

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