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, improve internal and external
communications, and monitor organization performance against strategic goals.
It was originated by Drs. Robert Kaplan (Harvard Business School) and David
Norton as a performance measurement (see What is a KPI?) framework that added strategic
non-financial performance measures to traditional financial metrics to give
managers and executives a more 'balanced' view of organizational performance.
While the phrase balanced scorecard was coined in the early 1990s, the roots of
the this type of approach are deep, and include the pioneering work of General
Electric on performance measurement reporting in the 1950’s and the work of
French process engineers (who created the Tableau de Bord – literally, a
"dashboard" of performance measures) in the early part of the 20th
century.
Gartner Group suggests that over 50% of large US firms have
adopted the BSC. More than half of major companies in the US, Europe and Asia
are using balanced scorecard approaches, with use growing in those areas as
well as in the Middle East and Africa. A recent global study by Bain & Co
listed balanced scorecard fifth on its top ten most widely used management
tools around the world, a list that includes closely-related strategic planning
at number one. Balanced scorecard has also been selected by the editors of
Harvard Business Review as one of the most influential business ideas of the
past 75 years.
The balanced scorecard has evolved from its early use as a
simple performance measurement framework to a full strategic planning and
management system. The “new” balanced scorecard 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.
This new approach to strategic management was first detailed
in a series of articles and books by Drs. Kaplan and Norton. Recognizing 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 center 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."
Balanced Scorecard Perspectives and More
Adapted from Robert S. Kaplan and David P. Norton, “Using
the Balanced Scorecard as a Strategic Management System,” Harvard Business
Review (January-February 1996): 76.
Perspectives
The balanced scorecard suggests that we view the
organization from four 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. 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."
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 thus 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 kinds of customers and the kinds of processes for which we
are providing a product or service to those customer groups.
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.
Strategy Mapping
Strategy maps are communication tools used to tell a story
of how value is created for the organization. They show a logical, step-by-step
connection between strategic objectives (shown as ovals on the map) in the form
of a cause-and-effect chain. Generally speaking, improving performance in the
objectives found in the Learning & Growth perspective (the bottom row)
enables the organization to improve its Internal Process perspective Objectives
(the next row up), which in turn enables the organization to create desirable
results in the Customer and Financial perspectives (the top two rows).
Strategy Mapping
Reference: The Institute Way: Simplify Strategic Planning
& Management with the Balanced Scorecard.
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