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Balanced Scorecard Management

by Faulkner Staff

Copyright 2019, Faulkner Information Services. All
Rights Reserved.

Docid: 00018771

Publication Date: 1906

Report Type: TUTORIAL

Preview

The Balanced Scorecard helps an enterprise approach
strategic goals from four perspectives – financial, consumer, business process,
and growth/learning – and maintain an appropriate balance among them. These
high-level goals are then translated into operational objectives and measurable
actions that are communicated throughout the organization. Through continual
measurement and feedback, a company can refine its objectives and initiatives
and ensure that actions are aligned with strategy at all levels.

Report Contents:

• Executive Summary
• Description
• Current View
• Outlook
• Recommendations
• Web Links
• Related Reports

Executive Summary

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Balanced Scorecard Management helps a company tightly
couple balanced strategic planning with evaluation of the business activities
necessary to achieve its stated goals.

 

Related Faulkner Reports

Total Quality Management Tutorial

The ISO 9001 Quality Management Standard Standards

First, the Balanced Scorecard helps avoid the pitfall
of an over-reliance on lagging financial indicators. Instead, the company is
guided toward a plan that addresses internal and
external measures, objective and subjective measures, and both past performance
and drivers of future results.

Goals are set and results are measured in four areas:

• Financial performance
• Customer satisfaction, retention, and market share
• Internal business processes
• Growth, learning, and innovation within the company

Widely embraced as a process by which organizations
translate vision into action, an effective Balanced Scorecard approach
communicates management goals and objectives throughout the enterprise,
improving overall performance by measuring accomplishment of key strategic
tasks. Creating a scorecard is an incremental process that begins with a
clearly articulated vision of enterprise objectives. Next, management works to
define the strategy by which the vision is to be realized. Finally, objective
scorecard criteria are used to measure actual performance against strategic
benchmarks. Scorecard metrics focus on the functional areas that are critical
to the success of the strategy.

The Balanced Scorecard methodology has proven its
effectiveness as a tool for continuous monitoring and improvement of
performance. It is general enough to be tailored to the needs of almost any
organization. Though made famous by private-sector business gurus Kaplan and
Norton, the theories articulated in Balanced Scorecard Management also inspired
a quality improvement movement in the US federal government, epitomized by the
Baldridge Awards, which recognize performance excellence in the federal
bureaucracy.

Description

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All performance measurement schemes aim to provide a
metric by which management can assess the degree to which strategic plans are
successfully executed by the rank-and-file. However, developing a complete,
accurate, and timely picture of enterprise performance is becoming ever more
complex due to an accelerating trend toward collaborative business processes.
Profitability and success rely heavily on relationships: Customer satisfaction
and supply chain relationships are part of the increasingly important
"extraprise." Balanced Scorecard methodologies allow organizations to
analyze the full spectrum of influences that affect a business, relating
financial performance to critical external and business process factors.

Achieving Balance

Enterprises set goals and measure performance in
order to make informed, effective decisions that lead to successful outcomes.
The most commonly used metric has traditionally been financial performance.
Financial information is objective and inherently numeric, making it straightforward
to compile and compare. Relying on financial metrics alone, however, creates an
unbalanced view of a company that can lead to poor decisions with unintended
outcomes. For example, a decision to increase profits by cutting customer
service staff may in the end actually decrease profits due to reduced customer
satisfaction.

Such mistakes are possible because financial metrics
are a lagging indicator. They focus only on past performance. To achieve
success, a company must also attend to leading indicators that help predict its
future requirements and performance. These are often more subjective, such as
the level of employee expertise and satisfaction in a company. Because it can
be difficult to work with these subjective, prospective influences on
performance, it often happens that a company relies too heavily on financial
goals and metrics.

The Balanced Scorecard was introduced in the early
1990s by Robert Kaplan and David Norton to help companies adopt a broader, more
balanced methodology for measuring organizational success. Also known as the
Corporate Scorecard, the Balanced Scorecard framework ensures that a business
measures not only its financial performance, but also its performance with
respect to its customers, its internal business processes, and the learning and
growth of its personnel. The Balanced Scorecard helps a company view itself,
set goals, and track results from numerous perspectives, striking a balance
between internal and external measures, between objective and subjective measures,
and between past performance and the drivers of future results. 

Aligning Behavior with Goals

A company begins by setting major strategic goals to
be achieved in each of the four quadrants of the Balanced Scorecard system:
financial, customer, internal business process, and growth/learning (sometimes
called people or innovation). The financial category includes traditional
measures such as operating income and return on capital employed. The customer
category includes measures such as customer satisfaction, customer retention,
and market share. The internal business process category includes measures such
as cost, throughput, and quality. The growth/learning category includes
measures such as employee satisfaction, employee retention, and skill sets.

In order to translate these goals into behavior, and
make sure the company’s resources are allocated where they will be most
effective, a company then works backward from each strategic goal to (1)
identify an observable metric to measure progress toward that goal, (2) set
specific target values for that metric at specific times, and (3) define an
initiative (an action) whose execution will result in those targets being met.
Table 1 shows a balanced scorecard template.

Essentially, the
Balanced Scorecard methodology is a protocol for articulating a vision,
relating that vision to an organizational strategy, and developing metrics that
depict progress toward the goals that make up the vision.

Once it is decided which tasks are aligned with a
company’s goals, the company must communicate its expectations to its employees
in an understandable form, and then continually evaluate whether the employees
are executing those tasks, and whether the tasks are having the expected
results. Fundamentally, this is straightforward, common-sense stuff. The genius
of the scheme lies in the fact that in order to initiate the Balanced Scorecard
process, management must first fully assess the existing organizational status.

Asking the Right
Questions

Asking the right questions about where an enterprise
stands is an absolute prerequisite to changing directions, improving quality,
and creating the agility necessary to capitalize on innovation. Before a
management group can even begin to map change, they need a firm grasp of the
status quo.

• Does current
  corporate strategy reflect measurable goals?
• Are individual
  employee performance standards congruent with corporate goals and
  strategy?
• Do employees
  understand these goals and their individual roles in achieving them?
• Are employees
  routinely made aware of their degree of success in meeting performance
  goals?
• Do managers have the
  flexibility and skills to realign employee goals in response to changing
  business circumstances and objectives?
• Are managers
  empowered and informed to link employee pay to performance?

Current View

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Initiating a
Balanced Scorecard program can be an intimidating prospect, beginning with
comprehensive self-assessment, and continuing through planning, design,
implementation, and ongoing realignment based on information delivered by
Scorecard performance metrics. According to one study, it takes almost two
years to implement a Balanced Scorecard in a company.

Kaplan and
Norton identify three major phases in using Balanced Scorecard Management
techniques: mobilize, align, and sustain. 

• Mobilize
  – Make the case for change and build executive
  momentum, with a focus on improving profitability and assessing cost to
  serve. 
• Align –
  Translate the strategy into operational terms (design) and align the
  organization with it (rollout).
• Sustain
  – Turn the discipline of strategy execution into
  a core organizational capability, integrating the Balanced Scorecard
  across the enterprise into other core management processes, and improving
  processes, pricing decisions, and relationships.

In the years
since Kaplan and Norton first published their work, others in the field have
divided these tasks more finely, but regardless of how many phases are
identified, the process is still more or less that identified in the original
research. An organization has to take stock of its current circumstances;
develop a concise articulation of where it wants to go; develop performance
measures that accurately depict progress or lack of it; and continuously apply
intelligence gathered by monitoring protocols to improve performance.

Mobilization

The
Mobilization phase consists of all the activities necessary to making a
strategic assessment of where an organization is, and where it wants to go. The
term "mobilization" implies preparation for motion, and that is
exactly what happens in this phase. Typically, a mobilizing for-profit business
focuses on increasing profitability and competitiveness. In order to do this,
the business first assembles as complete an account as possible of its current
fiscal status, in order to improve profitability. Second, it assesses the
quality and cost to serve of each customer relationship, determining whether it
is highly profitable, average, or under-performing. It can then focus on
growing relationships with the customers who are highly profitable, moving the
average customer relationships in the direction of the more profitable group,
and dramatically changing interactions with the least profitable group. While
this strategy seems obvious and even simplistic, it is one that is rarely
implemented.

Profitability Improvement. During the
1990s, enterprises experienced a dramatic shift in management views on quality.
American industry had been shocked by market share losses in manufacturing,
automotive, and consumer goods to off-shore producers. Quality became a
strategic objective, and American enterprise opened its doors and its
checkbooks to those who promised to show them how to get it back into their
products and services. Managers perceived that quality creates value for the
customer, engendering loyalty and satisfaction. But quality is expensive.
Essentially, it is created by providing the customer with convenience, service,
assurances, and amenities, and the costs of these have to come out of the
profit margin in order to maintain price competitiveness with other, similar
products. On the one hand, improved quality enables businesses to increase
sales by making products more appealing and customers more loyal. On the other
hand, these quality initiatives drive down profit margins on sales.

For a company
to dominate its market niche, it has to have the lowest cost structure of the
competitors in its group. This allows it to weather the lowest prevailing price
structures and still remain profitable when times are lean. Coming out of the
1990s, very few companies had an accurate picture of their true cost of sales,
and most companies therefore lacked insight into the profitability of their
business activities. Because quality enhancement programs are not typically accrued
against revenue from specific customers, it is virtually impossible to tell
whether individual relationships are profitable. For example, costs for
amenities such as small, frequent deliveries; direct deliveries of product to
end-use locations; and communication options such as web sites and phone
response systems are not typically apportioned to those using the services.

Mobilizing
for Balanced Scorecard profitability improvement requires an organization to
examine the full spectrum of activities and relationships that are inherent in
its business. This in itself yields a more acute awareness of the distinction
between business elements that produce revenue and those that produce profit.

Cost to Serve. "Quality"
has come to mean vastly different things to suppliers and consumers. The
traditional definition of quality is that goods or services deliver value for
the dollar, are as represented, and have a high degree of integrity. This is
more or less the definition assumed by accounting practices that compute the
overall cost of sales of goods and services without adding in the cost of
activities to introduce quality. By contrast, customers tend to see quality in
non-chargeable services and amenities connected with their purchases. As demand
for these services and amenities escalates, the cost of providing them can
decimate the profitability of the products to which they attach. But under
traditional accounting practices, the costs for such "free" services
and amenities are not allocated to individual customers, so there is no way to
restrain demand by appropriately recovering costs.

The
traditional approach allows only two possible outcomes when runaway demand for
free services erodes the profitability of a product: the supplier will either
incur losses or stop providing the product. The solution to this problem is to
develop an accurate understanding of the "cost to serve" that will
allow suppliers to develop valid pricing, and to understand which of their
relationships are profitable.

One of the innovations that evolved from Balanced
Scorecard Management is the use of accounting tools that provide insight into
the profitability of individual customers. The scheme for measuring
profitability in this fashion is called Activity-Based Costing (ABC). Companies
with fully implemented ABC tools typically find that 20 percent of their
customers provide between 150 and 300 percent of total profits; the middle 70
percent provide about 10 percent of total profits; and the remaining 10 percent
lose between 50 and 200 percent of total profits. In a flat or shrinking
economy, the only way to weather extended periods of low prices is to create
the lowest possible cost structure. Balanced Scorecard Management techniques
provide a proven, systematic method of managing for profitability by optimizing
individual relationships and business processes. 

Alignment

Design. Management success rests with the
design phase of the Balanced Scorecard process. At this point, management has
clearly articulated both where they are starting and where they are headed.
With specific objectives in hand, the next step is assembly of a diverse,
multi-disciplinary leadership team. The team designs a set of strategic
activities for implementing the management objectives, along with performance
metrics for monitoring progress toward objectives.

Rollout. Communicating the objectives of
the Balanced Scorecard process to the rank and file is a critical part of
making this methodology work to its full potential. Resistance is likely, because
the rollout of any new performance monitoring system implies management
dissatisfaction with the status quo, and because the information yielded by
Balanced Scorecard monitoring tools may well produce significant shifts in the
roles and responsibilities of rank and file workers. Preparing staff to accept
and embrace the foreseeable changes is one of the most important tasks of the
rollout.

Appropriate
training of key mid- and lower-level employees is also pivotal to a successful
rollout. In order to gather the necessary performance data, legacy IT systems
may be replaced, and some new accounting and management software tools may be
required. All employees who will be affected by any operational changes must be
appropriately trained to ensure that the data gathered to support Balanced
Scorecard assessments will be accurate and complete. Because the overall
strategy relies on the trustworthiness of this data, any rollout scheme should
include criteria for measuring how effectively the leadership team trains and
recruits the support of the workforce in the Balanced Scorecard implementation.

Sustainable Execution

Balanced
Scorecard techniques optimize business processes from the bottom up. Focusing
on individual interactions and relationships allows an organization to fully
understand how its efforts and resources are being applied. Normally, this view
exposes some obvious areas of great strength as well as some areas of
surprisingly poor performance. According to Kaplan, organizations typically
look to three kinds of remediation in order to improve the poorly performing
segments:

• Process
  Improvements: Performance assessments show where excess
  resources are being applied to business processes. Management and front
  line staff work together to devise strategies that reduce wasted effort,
  take advantage of automation, or modify existing products and services to
  more closely align with customer preferences.
• Pricing
  Decisions: Organizations shift from "cost to
  produce" to "cost to serve" pricing models. Understanding
  which customers cost the most to serve allows organizations to effectively
  pursue improvements in processes and customer relationships.
• Relationship
  Improvement: Often, the customers who cost the most to serve
  are masking internal problems by making excessive demands on suppliers.
  Understanding the cost of serving an individual customer allows a supplier
  to devise methods of interacting that improve the cost structure for the
  customer, as well as modifying customer behavior in ways that make the
  customer more profitable for the supplier.

Nine Steps to Success

The Balanced
Scorecard Institute’s Nine Steps to Success provide a roadmap companies can
follow to develop a strategic planning and management system based on the
balanced scorecard.

What Is the Payoff?

A properly
conceived and conducted Balanced Scorecard process is both complex and costly,
consuming time and effort that could be applied to existing processes, and
often provoking cultural resistance. So, why bother with Balanced Scorecard
Management techniques? Because the Balanced Scorecard method:

• Couples the strategic plan to specific strategic
  actions.
• Clarifies the management team’s understanding of
  the company’s strategy.
• Facilitates communication of strategic
  objectives throughout an organization.
• Supports continuous implementation of strategy
  through mandated performance monitoring.
• Provides double-loop learning via feedback on
  whether the strategy is being implemented as planned and whether the
  strategy is proving to be successful.
• Shows the profitability of specific business
  activities and customers through activity-based accounting.
• Effectively identifies best practices, so that
  they can be replicated in other functions.
• Improves profitability by reducing costs of
  business processes.
• Reduces risk by identifying true costs of sales.
• Provides visibility.
• Provides objective accountability.
• Provides a mechanism for managing change and
  responding to a changing business climate.
• Meets the Federal Agency mandate requiring a
  strategic plan and a method of measuring performance against the plan.

Outlook

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Continuing
Popularity. The Balanced
Scorecard remains an extremely popular method of addressing the need for
quality management. It has been adopted in diverse institutions, from
manufacturing, technology, pharmaceutical, and service enterprises to
educational institutions and government agencies, including Volkswagen, Citbank,
the City of Charlotte, Philips Electronics, Thomson Reuters, Wells Fargo Bank,
AT&T, Verizon, the FBI, the University of Virginia, and UPS. Government offices often implement the Balanced Scorecard in order to
meet the requirements of the Government Performance and Results Act of 1993.

Thousands of organizations and agencies worldwide
have implemented the Balanced Scorecard. A recent study by Bain and Company reported that more than 50 percent
of North American companies were using the Balanced Scorecard. Senalosa reported that the Balanced Scorecard is
used by over 60 percent of the Fortune 1000. And the editors of
the Harvard Business Review identified the Balanced Scorecard as one of the
most significant ideas of the past 75 years. And for several years Bain and Company survey has found that the Balanced Scorecard
is one of the top 10 most popular management tools.

Ted Jackson lists seven reasons the Balanced Scorecard has remained relevant:

• It ties strategy directly to execution. Jackson’s view is that when bad strategy
  is executed well, it shines a light on the positives and negatives of the strategy,
  and a company can learn from its mistake. But if a potentially good strategy is executed
  poorly, it is not clear whether the problem was with the strategy or with the execution,
  and the company gains nothing.
• Strategy maps provide a consistent view of critical goals and objectives and align
  everyone in the organization around a mission and vision.
• Tracking leading indicators helps a company respond to changes in the competitive
  landscape before they become problems or negatively impact profits.
• It can help a company detect problems with a strategy by using intelligently-selected
  metrics that tie to overall objectives.
• It facilitates the transparency that helps a company prove to stakeholders that it is on a strategic path.
• It links projects to measures, and measures to strategy, to reveal where actions are supporting strategic
  goals, and where there is a lack of alignment between project management and strategic measurement.
• It is adaptable enough to integrate a company’s existing best practices and approaches into a
  scorecard, to achieve whatever goals are important to the company.

Challenging
Applications. It can be less
straightforward to apply the Balanced Scorecard in certain situations. Cedergren
and Larsson (2014) found that managers within software product development are
not satisfied with methods of evaluating performance focused on cost, time, and
quality, because they miss important dimensions of value creation and learning,
and because they are result oriented rather than process oriented. Cedergren and
Larsson recommend that such organizations must change how they perceive
performance in order to develop more relevant performance criteria. Wake (2015)
found that the Balanced Scorecard is not useful in managing knowledge workers,
but that it can still be useful in such organizations to ensure alignment
between strategic objectives and the work the knowledge workers are doing.

Consulting and Software. The continuing interest in this system has created a
market for consultants specializing in Balanced Scorecard projects. The
Balanced Scorecard Institute offers consulting in the areas of strategic
planning and management, key performance indicators, and strategic project
management. Other companies offering training, coaching, and related resources
include Ascendant Strategy Management Group, the Senalosa Group, and QuickScore.

There is also software designed to help companies implement the Balanced
Scorecard method. QuickScore, by Spider Strategies, is recommended by the
Balanced Scorecard Institute. Included in QuickScore is the ability to create
custom strategy maps to track key metrics, visualize data, and monitor trends,
with automatic scoring, weighting, and updating of all values, as well as the
ability to drill down to sub-scorecards or individual measure views.

Recommendations

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The
Balanced Scorecard is a tool for effecting change, either to improve
performance in the present field of endeavor, or to dramatically alter
direction. Change usually makes people somewhat uncomfortable. For this reason,
the success of a Balanced Scorecard initiative relies heavily on the perception
that a specific leader or group of leaders is in charge, focused, and
accountable. A Balanced Scorecard project should be treated like any other
significant, costly organizational initiative. Leaders should be specifically
identified, and the nature of their roles, authority, and responsibilities clearly
communicated to 100 percent of those subject to Balanced Scorecard evaluations.
If the Balanced Scorecard process considers supply chain and customer
relationships, key players outside the organization should also understand its
goals and the plans to measure performance in support of those goals.

Build on Success

In a small
organization, it is both possible and practical to implement a comprehensive
Balanced Scorecard process across the board. Larger organizations should
implement the Balanced Scorecard incrementally, initially choosing one or more
pilot study groups and evaluating results before extending the process to more
diverse areas. Effectively chosen and rigorously documented pilot studies will
allow a company to analyze and improve the Balanced Scorecard development and
implementation process, in addition to creating a body of reusable planning,
budgeting and scheduling information. It may be cost-effective to enlist the
aid of specialized Balanced Scorecard software or consulting services.

Create Teams with a Diversity of Skills

The people
who best effect change are typically the ones most removed from strategy
development. Management can help ensure their buy-in on a Balanced Scorecard
implementation by creating implementation teams that reflect diversity in
skills and organizational culture. As a case in point, one company that
undertook a Balanced Scorecard program in order to increase profitability
raised their margins a full percent in one quarter, by taking advantage of
insights from their loading dock workers. The company, a large food wholesaler,
did not stock certain poultry products, but instead took drop shipments of
chicken parts at the loading dock, based on the assumption that drop shipment
was less costly than stocking and storing the product. Balanced Scorecard
activity analysis revealed that the labor necessary to handle the drop
shipments far exceeded the cost of handling the stocked product. Given this
understanding, the company adopted a "ship from stock" approach. With
no increase in sales and no revenue growth, the company made its existing enterprise
significantly more profitable.

There are
risks. It is no secret that a fully implemented performance assessment system
can be costly. Management, employees, and human resources staff must be
thoroughly trained to ensure that goals are realistic and meaningful, employee
performance incentives are positive, and the assessment process is responsive
to changing operational conditions. Making a Balanced Scorecard system pay its
way is reliant on a comprehensive and appropriately inclusive planning effort.
Another necessary prerequisite to effective planning is a conviction on the
part of management that things, if not exactly broken, are at least ripe for
improvement.

The
Balanced Scorecard method is strongly biased toward integration – that is,
viewing an enterprise in terms of activities and relationships. This view
necessarily blurs or even obliterates the lines between functional components
(IT, accounting, manufacturing, etc.). A company may find that the act of
measuring Balanced Scorecard performance does change what is being measured,
and results over time in a flattening of the hierarchy of the organization and
its processes.

References

Calderan
Molina, M. Angel, et al. "Does the Balanced Scorecard Adoption Enhance the
Levels of Organizational Climate, Employees’ Commitment, Job Satisfaction and
Job Dedication?" Management Decision,
52(5), 983-1010. 2014.
Cedergren, S., &
S. Larsson. "Evaluating Performance in the Development of
Software-Intensive Products." Information
and Software Technology, 56(5), 516-526. 2014.
Wake, N. (2015). "The
Use of the Balanced Scorecard to Measure Knowledge Work." International Journal of Productivity and Performance Management,
64(4), 590. 2015.

Web Links

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• Ascendant Strategy Management Group: https://www.ascendantsmg.com/
• Balanced Scorecard Institute: https://www.balancedscorecard.org/
• Palladium Group: https://www.thepalladiumgroup.com
• Senalosa Group: http://www.senalosa.com/
• Spider Strategies: https://www.spiderstrategies.com

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