What is the Balanced Scorecard (BSC)?

Any of the following statements explain briefly the Balanced Scorecard

 The Balanced Scorecard is a strategic planning and management system

that is used extensively in business and industry, government, and
nonprofit organizations worldwide to align business activities to the
vision and strategy of the organization,
 It is used to improve internal and external communications, and monitor
organization performance against strategic goals.
 A performance measurement framework that added strategic non-
financial performance measures to traditional financial metrics to give
managers and executives a more 'balanced' view of organizational
performance.
 It is used as full strategic planning and management system. The BSC
transforms an organization’s strategic plan from an attractive but passive
document into the "marching orders" for the organization on a daily basis.
 It provides a framework that not only provides performance
measurements, but helps planners identify what should be done and
measured. It enables executives to truly execute their strategies.
 The BSC approach provides a clear prescription as to what companies
should measure in order to 'balance' the financial perspective.
 It is a management system (not only a measurement system) that enables
organizations to clarify their vision and strategy and translate them into
action.
 It provides feedback around both the internal business processes and

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 external outcomes in order to continuously improve strategic performance
and results. When fully deployed, the BSC transforms strategic planning
from an academic exercise into the nerve center of an organization.

Discuss how the Balanced Scorecard perspectives can assist organizations

in the strategic management and planning process.

The balanced scorecard suggests that we view the organization from four (4)
perspectives, and to develop metrics, collect data and analyze it relative to each
of these perspectives:

The Learning & Growth Perspective

This perspective includes employee training and corporate cultural attitudes

related to both individual and corporate self-improvement. In a knowledge-
worker organization, people -- the only repository of knowledge -- are the main
resource.

In the current climate of rapid technological change, it is becoming necessary

for knowledge workers to be in a continuous learning mode. Metrics can be put
into place to guide managers in focusing training funds where they can help the
most.

Learning and growth constitute the essential foundation for success of any
knowledge-worker organization. Learning' is more than 'training'; it also
includes mentors and tutors within the organization, as well as ease of
communication among workers that allows them to readily get help on a
problem when it is needed.
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It also includes technological tools; what the Baldrige criteria call "high
performance work systems."

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this

perspective allow the managers to know how well their business is running, and
whether its products and services conform to customer requirements (the
mission).

These metrics have to be carefully designed by those who know these processes
most intimately; with our unique missions these are not something that can be
developed by outside consultants.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the

importance of customer focus and customer satisfaction in any business.

These are leading indicators: if customers are not satisfied, they will eventually
find other suppliers that will meet their needs. Poor performance from this
perspective is a leading indicator of future decline, even though the current
financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of

the kinds of customers and the kinds of processes for which the organization is
providing a product or service to those customer groups.

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The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data.
Timely and accurate funding data will always be a priority, and managers will
do whatever necessary to provide it.

With the implementation of a corporate database, it is hoped that more of the

processing can be centralized and automated. The current emphasis on
financials leads to the "unbalanced" situation with regard to other perspectives.

There is perhaps a need to include additional financial-related data, such as risk

assessment and cost-benefit data, in this category.

Benefits that can be derived from using the Balanced Scorecard

The BSC provides a powerful framework for building and communicating

strategy.

1. Improved Strategy Communication & Execution – The fact that the

strategy with all its interrelated objectives is mapped on one piece of
paper allows companies to easily communicate strategy internally and
externally. The mapping facilitates the understanding of the strategy and
helps to engage staff and external stakeholders in the delivery and review
of strategy. It may be impossible to execute a strategy that is not
understood by all stakeholders.

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2. Better Management of Information – The BSC approach forces
organizations to design key performance indicators for their various
strategic objectives. This ensures that companies are measuring what
actually matters. Research shows that companies with a BSC approach
tend to report higher quality management information and gain increasing
benefits from the way this information is used to guide management and
decision making.

3. Improved Performance Reporting – Companies using a BSC approach

tend to produce better performance reports than organizations without
such a structured approach to performance management. Increasing
needs and requirements for transparency can be met if companies create
meaningful management reports and dashboards to communicate
performance both internally and externally.

4. Better Strategic Alignment – Organizations using a BSC are able

to better align their strategic objectives. In order to execute a plan well,
organizations need to ensure that all business and support units are
working towards the same goals. Cascading the BSC into those units will
help to achieve their goals and objectives and link strategy to operations.

5. Better Organizational Alignment – A well implemented BSC also help

to align organizational processes such as budgeting, risk management

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 and analysis with the strategic priorities. This will help to create a truly
strategy focused organization.

Benefits will not be realized if the BSC is implemented half-heartedly or

if too many short cuts are taken during the implementation.

The main criticism of the Balanced Scorecard

The balanced scorecard retains traditional financial measures. But financial

measures tell the story of past events. It was better suited for industrial age
companies for which investments in long-term capabilities and customer
relationships were not critical for success.

These financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and
innovation."

Originated by Drs. Robert Kaplan (Harvard Business School) and David Norton

The Balanced Scorecard

Financial measurement and its limitations

As long as business organizations have existed, the traditional method of

measurement has been financial. Bookkeeping records used to facilitate financial
transactions can literally be traced back thousands of years. At the turn of the 20th
century financial measurement innovations were critical to the success of the early

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industrial giants like General Motors. That should not come as a surprise since the
financial metrics of the time were the perfect complement to the machine-like
nature of the corporate entities and management philosophy of the day.
Competition was ruled by scope and economies of scale with financial measures
providing the yardsticks of success.

Financial measures of performance have evolved and today the concept of

economic value added or EVA is quite prevalent. This concept suggests that unless
a firm’s profit exceeds its cost of capital it really is not creating value for its
shareholders. Using EVA as a lens, it is possible to determine that despite an
increase in earnings, a firm may be destroying shareholder value if the cost of
capital associated with new investments is sufficiently high.

The work of financial professionals is to be commended. As we move into the 21st

century, however, many are questioning our almost exclusive reliance on financial
measures of performance. Perhaps these measures are better served as a means of
reporting on the stewardship of funds entrusted to management’s care rather than
charting the future direction of the organization. Let’s take a look at some of the
criticisms levied against the over-abundant use of financial measures:

 Not consistent with today’s business realities: Today’s organizational value

creating activities are not captured in the tangible, fixed assets of the firm.
Instead, value rests in the ideas of people scattered throughout the firm, in
customer and supplier relationships, in databases of key information, and
cultures of innovation and quality. Traditional financial measures were
designed to compare previous periods based on internal standards of
performance. These metrics are of little assistance in providing early
indications of customer, quality, or employee problems or opportunities.

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 Driving by rear view mirror: Financial measures provide an excellent review
of past performance and events in the organization. They represent a
coherent articulation and summary of activities of the firm in prior periods.
However, this detailed financial view has no predictive power for the future.
As we all know, and experience has shown, great financial results in one
month, quarter, or even year are in no way indicative of future financial
performance.
 Tend to reinforce functional silos: Financial Statements in organizations are
normally prepared by functional area: individual department statements are
prepared and rolled up into the business unit’s numbers, which are
ultimately compiled as part of the overall organizational picture. This
approach is inconsistent with today’s organization in which much of the
work is cross-functional in nature. Today we see teams comprised of many
functional areas coming together to solve pressing problems and create value
in never imagined ways. Our traditional financial measurement systems have
no way to calculate the true value or cost of these relationships.
 Sacrifice long-term thinking: Many change programs feature severe cost
cutting measures that may have a very positive impact on the organization’s
short-term financial statements. However, these cost reduction efforts often
target the long-term value creating activities of the firm such as research and
development, associate development, and customer relationship
management. This focus on short-term gains at the expense of long-term
value creation may lead to sub-optimization of the organization’s resources.
 Financial measures are not relevant to many levels of the organization:
Financial reports by their very nature are abstractions. Abstraction in this
context is defined as moving to another level leaving certain characteristics
out. When we roll up financial statements throughout the organization that is
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 exactly what we are doing - compiling information at a higher and higher
level until it is almost unrecognizable and useless in the decision making of
most managers and employees. Employees at all levels of the organization
need performance data they can act on. This information must be imbued
with relevance for their day-to-day activities.

Given the limitations of financial measures, should we even consider saving a

space for them in our Balanced Scorecard? With their inherent focus on short-term
results, often at the expense of long-term value creating activities, are they relevant
in today’s environment? I believe the answer is yes for a number of reasons. As
we’ll discuss shortly, the Balanced Scorecard is just that: balanced. An undue
focus on any particular area of measurement will often lead to poor overall results.

Precedents in the business world support this position. In the 1980s the focus was
on productivity improvement, while in the 1990s quality became fashionable and
seemingly critical to an organization’s success. In keeping with the principle of
what gets measured gets done, many businesses saw tremendous improvements in
productivity and quality. What they didn’t necessarily see was a corresponding
increase in financial results, and in fact some companies with the best quality in
their industry failed to remain in business.

Financial statements will remain an important tool for organizations since they
ultimately determine whether improvements in customer satisfaction, quality, on-
time delivery, and innovation are leading to improved financial performance and
wealth creation for shareholders. What we need is a method of balancing the
accuracy and integrity of our financial measures with the drivers of future financial
performance of the organization.

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 The above was extracted from:

CHAPTER ONE - PERFORMANCE MEASUREMENT AND

THE NEED FOR A BALANCED SCORECARD

Key criticism of the Balanced Scorecard

The balanced scorecard retains traditional financial measures. But financial

measures tell the story of past events. It was better suited for industrial age
companies for which investments in long-term capabilities and customer
relationships were not critical for success.

These financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and
innovation."

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