British scientist Lord Kelvin had once said:
I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.
If you can not measure it, you can not improve it.
Aligning with Balanced Scorecards
This need to measure and align what is being done to the overall goal was the impetus behind the development of the Balanced Scorecards.
In a large corporation where managers and employees run the operations based on decisions made with regards to the imperatives of the immediate situation, it is easy to lose the big picture. This occasionally creates a disconnect between the strategy and operations. While the top management wants the company to move in a certain direction in future, the local decision-making pays little heed to it! This is a major reason why strategies though grand and pragmatic often do not deliver to their potential.
A good Performance Management system should include:
i. Integrated KPI Framework with appropriate Measurement system – structured through Balanced Scorecard, Budgeting & Planning and Executive Dashboards
ii. Timely and Accurate Reporting Structure – structured through a Data Warehouse.
The concept of the Balanced Scorecard revolutionizes traditional performance measurement and corporate decision-making systems by providing the big picture of company performance from key perspectives. Balanced scorecard was developed by Robert Kaplan, a Harvard professor, and David Norton, a management consultant and was first introduced in a 1992 Harvard Business Review article – Balanced Scorecard – Measures that Drive Performance. Here is a quick 2.40-minute introduction from Harvard Business Review on what Balanced Scorecards are.Balanced Scorecards: What are they, Implementation Process, and Why Use Scorecards? Click To Tweet
Balanced Scorecard (BSC) takes an organization’s business strategy and translates it to an understandable action plan that allows for measurement and communication of strategic objectives. It becomes the framework for implementing clearly defined meaning of strategic concepts like value, quality, customer satisfaction and growth and provides a means to measure non-financial drivers of future performance and measures how business units create value for their customers.
Cheat Sheet of Balanced Scorecards Key Terms
Here are some of the keywords that you should be familiar with.
- Scorecard: tool to monitor the implementation of a global strategy
- Strategy: the top-most element of a scorecard that expresses how a business plans to deal with business challenges in its environment.
- Objectives: describe the strategic goal from the viewpoint of a perspective; the degree of attainment assessed by the measures defined for each objective.
- Perspective: various ways the implementation of strategies and objectives are viewed (e.g., financial perspective, customer perspective, internal perspective, etc).
- Initiative: a collection of activities that serve to achieve one or more objectives.
- Measure: a quantifiable result assigned to an objective and a freely-definable evaluation scale.
Balanced Scorecard Nuts & Bolts
The Balanced Scorecard incorporates four major perspectives:
- Financial perspective: “How should we act with partners in order to ensure financial success?”
- Customer perspective: “How should we act with customers in order to realize our vision?”
- Internal business processes perspective: “In which business processes must we be the best in order to satisfy our partners and customers?”
- Learning & Growth perspective: “How can we promote our change and growth potential in order to realize our vision?”
Financial performance is important, but solid financial improvements result from the improved effectiveness of employee learning and growth, internal business processes, and customer service in that order. It is these perspectives that build upon each other to drive healthy financial performance. Companies that address any given corporate goal from all four perspectives have a balanced approach and, therefore, a greater chance of success and growth.
With the balanced scorecard, corporate decision makers can measure how individual business units create value. They can then determine what the organization must invest in terms of people, systems, and procedures to improve performance. The balanced scorecard serves as an action plan in a balanced format for all value-creating activities in the enterprise, which ultimately drive financial performance.
Business performance management capabilities are enhanced by the use of Balanced Scorecard methodology as a tool-kit to more effectively organize and manage all facets of company performance. It needs to be used to focus on more intelligent management and alignment of operations and business processes. This provides managers with a concise, focused information framework that is both contextually relevant and independent of organizational inefficiencies caused by such factors such as geography or structure.
Why Strategies Fail and Why Use Balanced Scorecards
Many people have tried to answer this question over time. More and more people have realized that it is not in the planning or development of the strategy that the companies fail – rather they may do that particularly well. Where they fail is translating that strategy into action. Execution is where the failure occurs!
- In their book, “Execution”, Larry Bossidy and Ram Charan claimed “…in the majority of cases – 70% – of the problem isn’t bad strategy [thinking] but bad execution [action]”
- In his book “Profit from the Core”, Chris Zook says that “…more than 2/3 of companies had targets that exceeded 9% real growth; yet less than 1 company in 10 achieved this level of profitable growth.”
In a survey of senior executives of 197 companies, (2004) Marakon Associates, in collaboration with the Economist Intelligence Unit tried to find why the companies fared at translating their strategy into performance? They found the following major reasons.
- Companies rarely track performance against long-term plans (Bad or no performance management systems)
- Multiyear results rarely meet projections (Over-ambitious and unrealistic targets and bad translation to reality)
- A lot of value is lost in translation (Strategy-Execution Gap)
- Performance bottlenecks are frequently invisible to top management (inadequate reporting and analytics)
- The strategy-to-performance gap fosters a culture of underperformance (Failure to keep to strategy’s promise breeds further failure)
In an HBR article titled “Turning Great Strategy into Great Performance“ by Michael Mankins and Richard Steele, the authors put the strategy-performance gap into perspective.
The prize for closing the strategy-to-performance gap is huge—an increase in performance of anywhere from 60% to 100% for most companies. But this almost certainly understates the true benefits. Companies that create tight links between their strategies, their plans, and, ultimately, their performance often experience a cultural multiplier effect. Over time, as they turn their strategies into a great performance, leaders in these organizations become much more confident in their own capabilities and much more willing to make the stretch commitments that inspire and transform large companies. In turn, individual managers who keep their commitments are rewarded—with faster progression and fatter paychecks—reinforcing the behaviors needed to drive any company forward. (emphasis added)
The strategy is of no use if there is no way to achieve it. To enable your strategic plans, you need to have a real Strategic Management system.
The Balanced Scorecard is a strategic management system. The reason for its implementation often stems from the fact that management is not content with the misdirection of a company’s strategy. This misdirection results in incompletion of the organization’s objectives, poor financial results, unhappy employees, or a myriad of other strategy roadblocks. As seen in the figure below, there are several barriers to an organization’s strategy. The Balanced scorecard, by attacking those specific barriers, helps to solve the misdirection and get the organization’s strategy back on track.
Basics of Balanced Scorecard
The Balanced Scorecard methodology, as with most performance-related management methodologies, requires the creation of an organizational strategy. Balanced Scorecard takes the overall mission and takes it down to the most basic measures to manage a business.
The basic components of a Balanced Scorecard are perspectives. KPIs or measures align in each of these perspectives. The four perspectives of the scorecard–financial measures, customer knowledge, internal business processes, and learning and growth–offer a balance between short-term and long-term objectives, between outcomes desired and performance drivers of those outcomes, and between hard objective measures and softer, more subjective measures.
a. Customer (To achieve our vision, how should we appear to our customers)
What is the unique set of products or services that the organization offers to its customers? What makes this organization or its offerings different from every other competition in its industry? In the public sector model, the principal driver of performance is different than in the strictly commercial environment. Foremost, all objectives revolve around mission success. This success is based on the objectives from the customer and stakeholder perspectives. In general, public organizations have a different responsibility and focus than do private sector entities.
b. Financial (To succeed financially, how should we appear to our shareholders)
After analyzing the question posed above (“What is the unique set of products or services that the organization offers to its customers?”), managers should understand that growth, risk, and return are probably the most important results in the eyes of the customers. The financial perspective focuses on results that the department provides to its constituents. Are the company’s financial goals contributing to bottom line-improvement? For many organizations, the goals and objectives listed under the financial perspective are simply to prosper and survive.
c. Internal Business Processes (To satisfy our shareholders and customers, what business processes must we excel at?)
The main objective here is to develop value propositions that will attract and retain customers in targeted market segments. In addition, these processes must be in accordance with rules set forth by the organization and eventually meet shareholder expectations. The traditional approach in developing an organizations strategy for internal business processes includes an attempt to improve existing business processes. In comparison, the Balanced Scorecard method identifies new processes that an organization must strive to meet.
d. Learning & Growth Perspective (To achieve our vision, how will we sustain our ability to change and improve?)
In order for the organization to grow, intellectual ability must expand by the same rate that a corporation expands. Managers must look at current employee abilities and how their alignment under the Scorecard system would contribute to the overall strategy.
8 Steps to Building a Good Scorecard
There are 8 steps involved in building a successful Balanced Scorecard.
Make sure you go through each step diligently and not short-circuit any of the steps. Setting proper targets and implementing them with urgency and ensuring there is communication within the organization are the keys. And it takes executive sponsorship to make this happen.
Evolution of Balanced Scorecard
Over the years, Balanced Scorecard has evolved from being a simple performance management – reporting tool to a component that is linked more closely with the execution and strategy. It is the bridge – not a static one, but a dynamic, flexible and iterative methodology where strategy, when broken down, manifests itself as individual action items. And it is this dynamic and ongoing Strategy-Action linkage (via Strategy Maps and themes) that we consider to be important.
The natural progress of Balanced Scorecard was Strategy Maps – first without and then with Strategic themes, which help to effectively club together main areas of strategy. Let us look into the evolution of Balanced Scorecard.
From the early days of Balanced Scorecards when it was actually applied by many companies, it became apparent that the objectives should be interlinked for maximum power from the framework. Thus the natural evolution was that all the objectives are linked in cause-and-effect relationships along the perspective – starting with employees, continuing through processes and customers, and culminating in a higher financial performance. This need for causal linkages among Balanced Scorecard objectives and measures created the extension called strategy maps.
To help translate the strategy, a strategy map is created. A strategy map is used to illustrate or “tell the story” of the organization’s strategy. It is a visual framework for the organization’s objectives outlining their cause-and-effect relationships. In addition, it gives employees an understanding of how their jobs are linked to the overall objectives of the organization.
Strategic themes are used to group objectives across several perspectives on a strategy map. They provide a way to segment the strategy into several general categories thus reducing the number of cause-and-effect relationships drawn on the strategy map. The themes help manage the linkages within the objectives in a way it can be effective. You can get a very good idea on what the Strategic themes are and how they are used from this paper from BalancedScorecard.org – Strategic Themes – How Are They Used and Why? (PDF)
One of the examples of how this looks like within a balanced scorecard shows the themes, maps, and scorecard.