Is your organization using balanced scorecard performance measurement?

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In the beginning was darkness. We went to work, did our job (well or otherwise) and went home - day in and day out. We did not have to worry about targets, annual assessments, metric-driven incentives, etc... life was simple back then.

Then there came light. Bosses everywhere cast envious eyes towards our transatlantic cousins whose ambition was to increase production and efficiency year-by-year. Like eager younger siblings we trailed behind them on the (sometimes) thorny path to enlightenment.

Early Metric-Driven Incentives - MDIs - were (generally) focused on the financial aspects of an organization by either claiming to increase profit margins or reduce costs. They were not always successful, for instance driving down costs could sometimes be at the expense of quality, staff (lost expertise) or even losing some of your customer base as indicated by Sandra McCarthy and Alan Chapman.


What exactly is a Balanced Scorecard (BSC)? A definition often quoted is: 'A strategic planning and management system used to align business activities to the vision statement of an organization'. More cynically, and in some cases realistically, a Balanced Scorecard attempts to translate the sometimes vague, pious hopes of a company's vision/mission statement into the practicalities of managing the business better at every level.

A Balanced Scorecard approach is to take a holistic view of an organization and co-ordinate MDIs so that efficiencies are experienced by all departments and in a joined-up fashion.

The phrase 'balanced scorecard' primarily refers to a performance management report used by a management team, and typically this team is focused on managing the implementation of a strategy or operational activities - in a recent survey 62% of respondents reported using Balanced Scorecard for strategy implementation management, 48% for operational management. Balanced Scorecard is also used by individuals to track personal performance, but this is less common - only 17% of respondents in the survey using Balanced Scorecard in this way, however, it is clear from the same survey that a larger proportion (about 30%) use corporate Balanced Scorecard elements to inform personal goal setting and incentive calculations.

The critical characteristics that define a balanced scorecard are:

 Its focus on the strategic agenda of the organization concerned,

 The selection of a small number of data items to monitor,

 A mix of financial and non-financial data items.

It is important to recognize that the balanced scorecard by definition is not a complex thing – typically no more than about 20 measures spread across a mix of financial and non-financial topics, and easily reported manually (on paper, or using simple office software).

The processes of collecting, reporting, and distributing balanced scorecard information can be labor-intensive and prone to procedural problems (for example, getting all relevant people to return the information required by the required date). The simplest mechanism to use is to delegate these activities to an individual, and many Balanced Scorecards are reported via ad-hoc methods based on email, phone calls, and office software.

In more complex organizations, where there are multiple balanced scorecards to report and/or a need for co-ordination of results between balanced scorecards (for example, if one level of reports relies on information collected and reported at a lower level) the use of individual reporters is problematic. Where these conditions apply, organizations use balanced scorecard reporting software to automate the production and distribution of these reports.

Recent surveys have consistently found that roughly one-third of organizations use generic office software to report their balanced scorecard, one third used software developed specifically for their own use, and one third used one of the many commercial packages available.

Balanced scorecard designs used a "four perspective" approach to identify what measures to use to track the implementation of strategy.

`The original four "perspectives" proposed by Kaplan and Norton were:

Financial: encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?" Examples: cash flow, sales growth, operating income, return on equity.

Customer: encourages the identification of measures that answer the question "What is important to our customers and stakeholders?" Examples: percent of sales from new products, on time delivery, share of important customers’ purchases, ranking by important customers.

Internal business processes: encourages the identification of measures that answer the question "What must we excel at?"Examples: cycle time, unit cost, yield, new product introductions.

Learning and growth: encourage the identification of measures that answer the question "How can we continue to improve, create value and innovate?". Examples: time to develop new generation of products, life cycle to product maturity, time to market versus competition.

The idea was that managers used these perspective headings to prompt the selection of a small number of measures that informed on that aspect of the organization's strategic performance. The perspective headings show that Kaplan and Norton were thinking about the needs of non-divisional commercial organizations in their initial design. These categories were not so relevant to public sector or non-profit organizations, or units within complex organizations.

These suggestions were notably triggered by the recognition that different but equivalent headings would yield alternative sets of measures, and this represents the major design challenge faced with this type of balanced scorecard design: justifying the choice of measures made. "Of all the measures you could have chosen, why did you choose these?" These issues contribute to dis-satisfaction with early Balanced Scorecard designs, since if users are not confident that the measures within the Balanced Scorecard are well chosen, they will have less confidence in the information it provides.Although less common, these early-style balanced scorecards are still designed and used today.

Implementing the Balanced Scorecard system company-wide should be the key to the successful realization of the strategic plan/vision.

A Balanced Scorecard should result in:

                Improved processes

                Motivated/educated employees

                Enhanced information systems

                Monitored progress

                Greater customer satisfaction

                Increased financial usage

The metrics set up also must be SMART (Specific, Measurable, Achievable, Realistic and Timely) - you cannot improve on what you can't measure! Metrics must also be aligned with the company's strategic plan.

Among the long row of benefits of applying Balanced Scorecard, these are the most significant:

                Strategic initiatives that follow "best practices" methodologies cascade through the entire organization

                Increased Creativity and Unexpected Ideas.

                The Balanced Scorecard helps align key performance measures with strategy at all levels of an organization.

                The Balanced Scorecard provides management with a comprehensive picture of business operations.

                The methodology facilitates communication and understanding of business goals and strategies at all levels of an organization.

                Maximized Cooperation - Team members are focused on helping one another succeed.

                Usable Results - Transforms strategy into action and desired behaviors.

                The Balanced Scorecard concept provides strategic feedback and learning.

                A cross organizational team - More open channels of communications - Enthusiastic People.

                Initiatives are continually measured and evaluated against industry standards

                the Balanced Scorecard helps reduce the vast amount of information the company IT systems process into essentials.

Unique Competitive Advantage

                Reduced Time-frames.

                Improved Decisions and Better Solutions.

                Improved Processes.

Many organizations have difficulty establishing mechanisms that translate strategic vision into concrete goals and actions. Then, every single business, public service, project, or simply any kind of prolonged group effort, will benefit from the power of the Balanced Scorecardaccording to ProSatis A/S.

To best capture the strategic and competitive value of their information storehouses, top-level managers must abandon the belief that traditional business intelligence offers adequate enterprise analysis. Rather, it is vital for managers to expand their analysis perspective to include business performance management capabilities, the power is yours.