Management Guide: Balanced Scorecard
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Related Links Balanced Scorecard Collaborative |
Contents What is
the Balanced Scorecard? The
Balanced Scorecard and Measurement-Based Management The
Learning and Growth Perspective The Business Process Perspective |
What is the Balanced Scorecard? A new approach to stategic management was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton (Balanced Scorecard Collaborative). They named this system the 'balanced scorecard'. Recognising some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard 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 external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve centre of an enterprise. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story 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." The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyse it relative to each of these perspectives: Learning and Growth - To achieve our vision, how will we sustain our ability to change and improve? Business Process - To satisfy our shareholders and customers, what business processes must we excel at? Customer - To achieve our vision, how should we appear to our customers? Financial To succeed financially, how should we appear to our shareholders?
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The
Balanced Scorecard and Measurement-Based Management
The
balanced scorecard methodology builds on some key concepts of previous
management ideas such as Total Quality Management (TQM), including
customer-defined quality, continuous improvement, employee empowerment, and
-- primarily -- measurement-based management and feedback. Double-Loop Feedback
In
traditional industrial activity, "quality control" and "zero
defects" were the watchwords. In order to shield the customer from
receiving poor quality products, aggressive efforts were focused on
inspection and testing at the end of the production line. The problem with
this approach -- as pointed out by Deming -- is that the true causes of
defects could never be identified, and there would always be inefficiencies
due to the rejection of defects. What Deming saw was that variation is
created at every step in a production process, and the causes of variation need
to be identified and fixed. If this can be done, then there is a way to
reduce the defects and improve product quality indefinitely. To establish
such a process, Deming emphasized that all business processes should be part
of a system with feedback loops. The feedback data should be examined by
managers to determine the causes of variation, what are the processes with
significant problems, and then they can focus attention on fixing that subset
of processes. The
balanced scorecard incorporates feedback around internal business process
outputs, as in TQM, but also adds a feedback loop around the outcomes of
business strategies. This creates a
"double-loop feedback" process in the balanced scorecard. Outcome Metrics
You can't
improve what you can't measure. So metrics must be developed based on the
priorities of the strategic plan, which provides the key business drivers and
criteria for metrics managers most desire to watch. Processes are then
designed to collect information relevant to these metrics and reduce it to
numerical form for storage, display, and analysis. Decision makers examine
the outcomes of various measured processes and strategies and track the
results to guide the company and provide feedback. So the
value of metrics is in their ability to provide a factual basis for defining:
Management by Fact
The goal
of making measurements is to permit managers to see their company more
clearly -- from many perspectives -- and hence to make wiser long-term
decisions. The Baldrige Criteria (1997) booklet reiterates this concept of
fact-based management: "Modern
businesses depend upon measurement and analysis of performance. Measurements
must derive from the company's strategy and provide critical data and
information about key processes, outputs and results. Data and information
needed for performance measurement and improvement are of many types,
including: customer, product and service performance, operations, market,
competitive comparisons, supplier, employee-related, and cost and financial.
Analysis entails using data to determine trends, projections, and cause and
effect -- that might not be evident without analysis. Data and analysis
support a variety of company purposes, such as planning, reviewing company
performance, improving operations, and comparing company performance with
competitors' or with 'best practices' benchmarks." "A
major consideration in performance improvement involves the creation and use
of performance measures or indicators. Performance measures or indicators are
measurable characteristics of products, services, processes, and operations
the company uses to track and improve performance. The measures or indicators
should be selected to best represent the factors that lead to improved
customer, operational, and financial performance. A comprehensive set of
measures or indicators tied to customer and/or company performance
requirements represents a clear basis for aligning all activities with the
company's goals. Through the analysis of data from the tracking processes,
the measures or indicators themselves may be evaluated and changed to better
support such goals." |
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The
Learning and 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. Government agencies often find themselves unable to hire new technical
workers and at the same time is showing a decline in training of existing
employees. This is a leading indicator of 'brain drain' that must be
reversed. Metrics can be put into place to guide managers in focusing
training funds where they can help the most. In any case, learning and growth
constitute the essential foundation for success of any knowledge-worker
organization. Kaplan
and Norton emphasize that 'learning' is more than 'training'; it also
includes things like mentors and tutors within the organization, as well as
that ease of communication among workers that allows them to readily get help
on a problem when it is needed. It also includes technological tools; what
the Baldrige criteria call "high performance work systems." One of
these, the Intranet, will be examined in detail later in this document. |
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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. In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these processes. The support processes are more repetitive in nature, and hence easier to measure and benchmark using generic metrics. |
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The
Customer Perspective
Recent
management philosophy has shown an increasing realisation 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 thus a leading indicator of future decline, even though the
current financial picture may look good. In
developing metrics for satisfaction, customers should be analysed in terms of
kinds of customers and the kinds of processes for which we are 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. In fact, often there is more than enough
handling and processing of financial data. With the implementation of a
corporate database, it is hoped that more of the processing can be
centralized and automated. But the point is that 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. |
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Updated on August 21, 2002
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Copyright 2002 Allan Low. All rights reserved. Reproduction of this Web Site,
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