Balanced Business Scorecard as a Management System



  • sets measures based upon the priorities of the strategic plan

  • identifies the key business drivers



    • Focus: future success not historic performance



    View: rich and holistic



    The Balanced Scorecard is a new approach to strategic management. It was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. The Balanced Scorecard 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.


    Robert Kaplan (Source: Computerworld)

    "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."


    David Norton (Source: Fusion Products)


    Kaplan and Norton describe the innovation of the balanced scorecard as follows: 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:



    (Source: BalancedScorecard.org)



    Perspectives:

    The Learning and Growth Perspective


  • Employee training and corporate cultural attitudes related to both individual and corporate self-improvement
  • People -- the only repository of knowledge -- as 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
  • Kaplan and Norton emphasize that 'learning' is more than 'training':
    • mentors and tutors within the organization
    • ease of communication among workers that allows them to readily get help on a problem when it is needed
    • technological tools


  • Internal business processes
  • How well is the business running, and do the products and services conform to customer requirements (the mission)?

  • If customers are not satisfied, they will eventually find other suppliers that will meet their needs
  • Kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups

  • Timely and accurate funding data will always be a priority
  • Centralized and automated processing of financial data
  • Risk assessment and cost-benefit data should be included



    • A successful launch of BBS requires:

    A scorecard champion who

    • is capable of strategic thinking

    • has a strategic view of the company

    • has the ear of decision makers in the organization, so they can effect change

    the right metrics in order to track the company's progress toward its organizational goals

    Development Goal: to create raving fans among users

    Metrics:
  • Percentage of projects completed on time and on budget.
  • Percentage of projects released to the customer by the agreed-upon delivery date.
  • Client satisfaction as indicated by customer surveys completed at the end of a project.

    • E-Commerce Goal: to avoid manual transactions

    Metrics:
  • reduced number of transactions that require human interface

    • Softer, less technical strategic goals: workforce development and retention

    Metrics:
  • low attrition rates
  • how many employeess have comprehensive development plans and their progress


    • Value drivers:

    reliability

    finance

    creation of a winning culture

    fostering new business models, such as e-commerce

    Buy-In at all levels:


    One organization trained six top-level executives, who agreed it was worthwhile to pursue the methodology. They trained the next 12 managers down the chain and solicited their feedback. The process continued until 80 people were involved. These, in turn, took it to their staffs.


    From "Keeping Score on Strategy." by Tom Duffy, Microsoft Executive Circle, Spring 2004, pp. 38 - 39.



    Anita Tilley, BearingPoint Inc.

    "A mediocre strategy executed really well is better than a perfect strategy not executed at all."


    How many metrics should a scorecard track?
  • Maximum of eight to 10
  • What are the things you worry about when you wake up in the morning?



    • Are vision and strategy the same thing?
  • Vision = overall idea
  • Strategy = various components of the business tied together to acheive the vision



    • Five Principles of the Balanced Scorecard

    Mobilize change through executive leadership.

    Translate the strategy to operational terms.

    Align the organization to the strategy.

    Make strategy everyone's job.

    Make strategy a continual process.


    Why measure Finance, Customers, Internal Business Processes, and Learning and Growth?

  • What's the value proposition?

  • Who are our targeted customers?

  • What are the key processes?

  • What are the skills and capabilities of the people and the systems that will drive performance of these processes?





    Summary of The Balanced Scorecard and Measurement-Based Management


    The balanced scorecard methodology builds on some key concepts of previous management ideas:
  • Total Quality Management (TQM)
  • Continuous improvement
  • Employee empowerment
  • Measurement-based management and feedback.



    • Double-Loop Feedback

    In traditional industrial activity, "quality control" and "zero defects" were the watchwords. In order to shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. The problem with this approach -- as pointed out by Deming -- is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects. What Deming saw was that variation is created at every step in a production process, and the causes of variation need to be identified and fixed. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a system with feedback loops. The feedback data should be examined by managers to determine the causes of variation, what are the processes with significant problems, and then they can focus attention on fixing that subset of processes.

    The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomesof business strategies. This creates a "double-loop feedback" process in the balanced scorecard.

    Outcome Metrics

    You can't improve what you can't measure. So metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics that managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis. Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.

    So the value of metrics is in their ability to provide a factual basis for defining:
  • Strategic feedback to show the present status of the organization from many perspectives for decision makers
  • Diagnostic feedback into various processes to guide improvements on a continuous basis
  • Trends in performance over time as the metrics are tracked
  • Feedback around the measurement methods themselves, and which metrics should be tracked
  • Quantitative inputs to forecasting methods and models for decision support systems

    Management by Fact
    The goal of making measurements is to permit managers to see their company more clearly -- from many perspectives -- and hence to make wiser long-term decisions. The Baldrige Criteria (1997) booklet reiterates this concept of fact-based management:

    "Modern businesses depend upon measurement and analysis of performance. Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect -- that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors' or with 'best practices' benchmarks."

    "A major consideration in performance improvement involves the creation and use of performance measures or indicators. Performance measures or indicators are measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company's goals. Through the analysis of data from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals."



    • Resources:

    Microsoft Executive Circle Scorecard

    Balanced Scorecard Collaborative

    Balanced Scorecard Institute