Balanced scorecard
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In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard, a concept for measuring a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. The key new element is focusing not only on financial outcomes but also on the human issues that drive those outcomes, so that organizations focus on the future and act in their long-term best interest. The strategic management system forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, process, and employee perspectives. Measures are often indicators of future performance.
Since the original concept was introduced, balanced scorecards have become a fertile field of theory and research, and many practitioners have diverted from the original Kaplan & Norton articles. Kaplan & Norton themselves revisited the scorecard with the benefit of a decade's experience since the original article.
Implementing the scorecard typically includes four processes:
- Translating the vision into operational goals;
- Communicate the vision and link it to individual performance;
- Business planning;
- Feedback and learning and adjusting the strategy accordingly.
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[edit] A Comprehensive View of Business Performance
Balanced Scorecard is a method and a tool which includes:
- a strategy map where strategic objectives are placed over four perspectives in order to clarify the strategy and the cause and effect relationships that exist among them.
- strategic objectives which are smaller parts of the strategy interlinked by cause and effect relationships in the strategy map.
- measures directly reflecting strategy. Their prime purpose is to measure that the desired change or development defined by strategic objectives actually takes place.
- strategic initiatives that constitute the actual change as described by strategic objectives.
The scorecard drives implementation of strategy using perspectives which generally include:
- Financial Perspective - measures reflecting financial performance, for example debtor management, cash flow, or return on investment. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from two major drawbacks:
- They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance.
- It is common for the current market value of an organization to exceed the market value of its assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess value can be thought of as intangible assets. These figures are not measured by normal financial reporting.
- Customer Perspective - measures having a direct impact on customers and their satisfaction, for example time taken to process a phone call, time to deliver the products, results of customer surveys, number of complaints or competitive rankings.
- Business Process Perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.
- Learning and Growth Perspective - measures describing the company's learning curve -- for example, number of employee suggestions or total hours spent on staff training.
Specific measures are chosen based upon the organization's goals. Typically organizations "get what they measure" so care in creating measures and revisiting the measures regularly is recommended by most practitioners.
The method helps separate creation of strategy from strategy implementation, which can push power downwards while making the leaders' jobs easier. It can also help detect correlation between activities. For example, the process objective of implementing a new telephone system can help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business.
[edit] Actual Usage of the Balanced Scorecard
Kaplan and Norton found that companies are using the scorecard to:
- Clarify and update budgets
- Identify and align strategic initiatives
- Conduct periodic performance reviews to learn about and improve strategy.
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.
Balanced scorecards have been implemented by government agencies, military units, corporate units and corporations as a whole, nonprofits, and schools; many sample scorecards can be found via Web searches, though adapting one organization's scorecard to another is generally not advised by theorists, who believe that much of the benefit of the scorecard comes from the implementation method.
[edit] See also
- Digital dashboard, also known as business dashboard, enterprise dashboard or executive dashboard
- Key performance indicators
- Performance management
- Performance Prism
- Strategic management
- Strategy map
[edit] References
- Cobbold, I. and Lawrie, G. (2002a). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002
- Cobbold, I and Lawrie, G (2002b). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002.
- Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review Jan – Feb pp71-80.
- Kaplan R S and Norton D P (1993) "Putting the Balanced Scorecard to Work", Harvard Business Review Sep – Oct pp2-16.
- Kaplan R S and Norton D P (1996) "Using the balanced scorecard as a strategic management system", Harvard Business Review Jan – Feb pp75-85.
- Kaplan R S and Norton D P (1996) “Balanced Scorecard: Translating Strategy into Action” Harvard Business School Press
- Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30
[edit] Software tools
Numerous tools are available for scorecard management and relating scorecard measures to individual goals, including modules in SAP and similar software, and standalone programs such as:
- Executive Strategy Manager, developed by Kaplan-Norton's team at Palladium
- ActiveStrategy
- CorVu
- Dialog Software
- Balanced Scorecard Toolkit
- LISA (developed by Research Institute for rationalization (FIR) from the german university RWTH Aachen)
- Strategic Software (Spanish)
- Spider Strategies
- MATRIX V5 Strategic Marketing Software
Many companies do not use any particular software, and have run balanced scorecards for years with existing reporting tools and summaries assembled using word processors.
