Balanced Scorecard: Understanding the Basics
Over half of the key companies in the U.S, Asia and Europe adopt Balanced Scorecard (BSC) approaches. In addition, a recent international study by Bain & Co. discovered that BSC is one of the top ten most extensively utilized management tools across the globe. Here’s all you need to know about this technique: 1) what is it? 2) history behind it, 3) perspectives, 4) development from four box model to strategy map, 5) benefits and why to use it, and 6) example – Veolia Water.
WHAT IS BALANCED SCORECARD?
Initially brought in by David Norton and Robert Kaplan in a Harvard Business Review article in 1992, the Balanced Scorecard is a strategic performance management framework that assists organizations with measuring and/or monitoring their performance and managing the implementation of their strategy. It helps to identify better a range of internal functions and their consequential external outcomes. The management tool isolates four distinct aspects that have to be analyzed: 1) business process, 2) learning and growth, 3) finance, and 4) customers.
Robert Kaplan and David Norton developed the tool on the basis of a 1990 USA research study on balanced measures of non-financial and financial performance measures in service, technology, manufacturing and heavy industry companies. The study was triggered by the insufficiency of conventional performance management systems, which depended, almost solely on business and financial results. These measures did not provide the full picture. Their concentration was chiefly internal and founded on single dimensions such as cost, schedule or quality. Though these aspects were essential, the problem was that they narrated the story of only past events and lacked consistency with the business realities the organization was facing. In other words, they were “unbalanced.”
BSC assists organizations with connecting their strategic aims to performance measures, and is developed to concentrate on areas of internal as well as external concern. The tool can be utilized by any organization whatever its size and purpose of existence, to integrate their mission and vision with customer needs, to develop organizational capabilities, and to enhance operational efficiencies.
HISTORY BEHIND BALANCED SCORECARDS
In 1990, Kaplan, professor of accounting at the Harvard Business School, and Norton, co-founder of Renaissance Worldwide Inc. (a Massachussetts-based strategy consulting firm) carried out a long research project of one year’s duration and involving 12 big companies. The actual concept behind the study is explained in Management Today by Anita van de Vliet. She mentioned that relying chiefly on financial accounting measures results in over-investment in effortlessly valued assets (by way of mergers and acquisitions), short-term decision making, and inadequate investment in intangible assets, such as process and product innovation, customer satisfaction and employee skills, whose short-term returns are more challenging to measure.
The duo considered the manner by which these companies utilized performance measurements to manage the behavior of employees and managers. They utilized their findings to develop a new performance measurement system that would give businesses an impartial view of operational and fiscal measures. They presented their BSC approach to performance measurement in a few Harvard Business Review articles starting in 1992. In a short time, the BSC had become a hot topic at management conferences across the globe.
In 1996, the duo expanded upon their initial idea in a book called “The Balanced Scorecard: Translating Strategy into Action.” After this, they brought out two other books that expounded on the topic further.
In its easiest form, the Balanced Scorecard divides performance monitoring into four interrelated perspectives.
The internal process perspective: This perspective encompasses internal operational objectives and sketches the main processes required to execute the customer objectives. Measures based on this perspective enable the organization to recognize processes (such as manufacturing, new product development) that are vital to satisfying customer requirements.
The financial perspective: It encompasses the financial aims of an organization and enables managers to monitor shareholder value and financial accomplishments. This perspective is quite vital for a profit-oriented organization considering that an organization’s fiscal performance provides the ultimate definition of its success.
The learning and growth perspective: This encompasses the impalpable drivers of future success such as organizational capital, human capital and informational capital including training, skills, leadership, organizational culture, systems, databases and leadership. It is the basis upon which organizational accomplishment is developed. The measures in this perspective facilitate the other perspectives as they eventually lead the organization to realize its outcomes.
The customer perspective: This perspective encompasses the customer goals such as market share goals and customer satisfaction in addition to service and product attributes. Organizations survive owing to their ability to meet customer’s requirements – the purchasers of their product or service. If customers are satisfied and happy, they would return to purchase more products or services. They may also tell other people about your products or services. This righteous cycle then causes the organization to achieve its mission and develop a sustainable platform for existence. In creating measures for this perspective, customer assessment should be carried out in terms of groups and kinds of customers and the types of processes for which the service or product is given, and what the customers’ value proposition is.
DEVELOPMENT FROM FOUR BOX MODEL TO STRATEGY MAP
In the period when the management tool was first brought out, Balanced Scorecard perspectives were shown in a four-box model. Early adopters developed BSCs that were chiefly used as enhanced performance measurement systems and loads of organizations produced management dashboards to offer a more detailed at-a-glance view of chief performance signifiers in these four perspectives. Now a Strategy Map supersedes the four box model. The Strategy Map which is at the core of modern Balanced Scorecards puts the four perspectives in relation to each other to prove that the goals support each other. The problem with the initial four-box model was that companies can effortlessly develop a number of aims and measures for each perspective without ever connecting them. This can result in silo activities in addition to a strategy that is not integrated or cohesive.
A strategy map emphasizes that delivering the right performance in a single perspective (such as financial success) can only be accomplished by delivering the aims in the other perspectives (such as delivering what customers want). You essentially develop a map of interlinked aims. For example:
- The aims in the internal process perspective (such as delivering superior grade business processes) support the aims in the customer perspectives (such as repeat business and gaining market share).
- The aims in the learning and growth perspective (such as creating the right competencies) support the aims in the internal process perspective (such as delivering superior grade business processes).
- Implementing the customer aims should then result in the accomplishment of the financial aims in the Financial Perspective.
Hence, strategy maps sketch what an organization yearns to achieve (customer and financial aims) and how it intends to achieve it (learning and growth aims and internal process). This cause-and-effect reasoning is one of the most essential ingredients of best practice Balanced Scorecards. It enables companies to develop a truly integrated group of strategic objectives on just one page.
BENEFITS AND WHY TO USE IT
Improved strategic planning
The Balanced Scorecard offers a strong framework for developing and communicating strategy. The business model is pictured in a Strategy Map which compels managers to ponder about cause-and-effect relationships. The method of developing a Strategy Map makes certain that consensus is arrived at over a set of interconnected strategic aims. It indicates that performance results in addition to drivers or chief enablers of future performance (such as the intangibles) are recognized to develop a whole picture of the strategy.
Better strategy communication and implementation
The actuality that the strategy with all its interconnected aims is mapped on a single piece of paper enables companies to effortlessly communicate strategy externally and internally. As everyone knows, “a picture is worth a thousand words.” This ‘plan on a page’ enables the comprehension of the strategy and assists with engaging external stakeholders and staff in the delivery and evaluation of strategy. Finally, it is impossible to implement a strategy that is not understood by everybody.
Better performance reporting
Companies utilizing a Balanced Scorecard approach are apt to create better performance reports than those without such a structured approach to performance management. The soar in requirements and needs for transparency can be satisfied if companies develop dashboards and meaningful management reports to communicate performance both externally and internally.
Encourage balanced and better performance
Scorecards enable balanced performance. Implementing today’s work is without doubt, essential but it also essential to execute the strategic plans that ensure the right balance of strategic and operational factors on your radar screen.
Scorecards trigger better performance. The case is clear that solid feedback boosts performance – across all organizational units and at all levels. When groups and people throughout an enterprise are aware how they are doing and the area(s) that require improving, they do better.
Better management data
The approach compels organizations to devise key performance indicators for their different strategic aims. This guarantees that they are measuring what actually matters. Research reveals that companies with a BSC approach are inclined to report higher quality management information and earn increasing benefits from the manner this information is utilized to guide decision making and management.
Helps identify the gaps (what’s missing)
The scorecards show you what’s missing. Owing to the fact that your scorecard is created to offer a detailed view of how the enterprise is performing and where it is going, the tool would assist you with seeing if there are any missing factors – the gaps stand out. Organizations that utilize unstructured measures bereft of an underlying performance model have no way of making out what may be missing.
Improve organizational alignment
Well-executed Balanced Scorecards also assist with aligning organizational processes such as risk management, analytics and budgeting with the strategic priorities. This in turn would assist with developing a really strategy focused organization.
Improve strategic alignment
The BSC enables better alignment of the organization with strategic aims. To implement a plan well, organizations have to make certain that all business and support units are aiming towards the same aims. Cascading the BSCs into those units would assist with accomplishing that and with linking strategy to operations.
- It develops buy-in for change and employee accountability. The organizational accountabilities and initiatives reprioritized, for everyone, are clarified.
- Stakeholder involvement is incredibly high, thereby decreasing commitment to enabling strategy to happen.
- It helps with identifying strategic initiatives and vital performance measures.
- It helps with concentrating on strategy and strategic outcome and making certain that strategic aims are connected to annual budget and clear targets.
- The BSC is adaptable for any kind of organization, whatever the size.
EXAMPLE – VEOLIA WATER (2013 data)
Veolia Water North America is a geographically mixed business, extending across Canada and the United States. It provides detailed wastewater and water partnership services to industrial and municipal customers, delivering services to over 14 million people in about 650 communities. The business is culturally diverse too, and very local.
In 2008, the company changed to a new CEO. A new arrival from Japan, Laurent Auguste required a winning strategy with a very high objective of boosted revenue. However, successful execution of this strategy would call for a partner who could execute and guide Veolia Water through the process of the Balanced Scorecard.
At Auguste’s direction, the company’s executive leaders got in touch with the Balanced Scorecard institute to delineate a strategic planning and management system founded on the Balanced Scorecard.
Working in close collaboration with the institute, Veolia Water was able to execute a system meant to assist with translating organizational strategy into something that staff could comprehend and utilize. The BSC at Veolia Water is made to enhance organizational performance, increase concentration on strategy and outcomes, break down obstacles to communication between departments and business units, assist the company with better comprehending and responding to customer requirements and prioritizing and budgeting resources and time more effectively.
After successfully executing the Balanced Scorecard in its business unit, the company began integrating the tool deeper into its organization, utilizing an e-learning tool created to train chief staff. The e-learning course, a personalized edition of an institute overview e-learning program, comprises six modules that together take no longer than an hour to finish. The e-learning course has assisted with getting employees acquainted with the Balanced Scorecard and showing how they contribute to the company’s goals when they accomplish their personal goals.
Veolia Water considered the creation of this e-learning course to be the next step in their Balanced Scorecard implementation and it was meant to assist employees not involved in the first phase of BSC development. The program assisted employees with comprehending technology and best practices pertaining to BSC strategic planning and development so that they could contribute to additional development and use of the management tool at Veolia Water.
In due course, the tool assisted Veolia Water with building a framework to measure the progress of its geographically varied facilities while also assisting with maximizing resources. The Balanced Scorecard Institute was helpful in coming up with comprehensible, lucid metrics that would assist Veolia Water with better working and managing across its individual projects. The company continues to refine and execute the BSC system to support external and internal growth projects. A case study is available here.
The concept of the Balanced Scorecard is easy but very powerful if executed well. This tool should lead you to improved performance provided you use the main ideas of the BSC a) to bring the organization and its processes in line with the objectives recognized in the strategic map, b) to develop a unique strategy and picturize it in a cause-and-effect map, c) to plan meaningful key performance indicators, and d) to utilize them to enable learning and better decision making.