history of the balanced scorecard

8/14/2019 History of the Balanced Scorecard

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HISTORY OF THE BALANCED SCORECARD

In 1992, an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard -

Measures that Drive Performance" in the Harvard Business Review caused a lot of attention for

their method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy

into Action", published in 1996.

The financial performance of an organization is essential for its success. Even non-profit

organizations must deal in a sensible way with funds they receive. However, a pure financial

approach for managing organizations suffers from two drawbacks:

It is historical. Whilst it tells us what has happened to the organization, it may not

tell us what is currently happening. Nor it is a good indicator of future performance.

It is too low. 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 is resulting from intangible

assets. This kind of value is not measured by normal financial reporting.

THE 4 PERSPECTIVES OF THE BALANCED SCORECARD

The Balanced Scorecard method of Kaplan and Norton is a strategic approach, and performance

management system, that enables organizations to translate a company's vision and strategy into

implementation, working from 4 perspectives:

1. Financial perspective.

2. Customer perspective.

3. Business process perspective.

4. Learning and growth perspective.

This allows the monitoring of present performance, but the method also tries to capture

information about how well the organization is positioned to perform in the future.

BENEFITS OF THE BALANCED SCORECARD

Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard:

Focusing the whole organization on the few key things needed to create

breakthrough performance.

Helps to integrate various corporate programs. Such as: quality, re-engineering,

and customer service initiatives.

Breaking down strategic measures towards lower levels, so that unit managers,operators, and employees can see what's required at their level to achieve excellent

overall performance.

1. THE FINANCIAL PERSPECTIVE

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate

funding data will always be a priority, and managers will make sure to provide it. In fact, there is

often more than sufficient handling and processing of financial data. With the implementation of


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a corporate database, it is hoped that more of the processing can be centralized and automated.

But the point is that the current emphasis on financial issues leads to an unbalanced situation

with regard to other perspectives. There is perhaps a need to include additional financial related

data, such as risk assessmentandcost-benefitdata, in this category.

2. THE CUSTOMER PERSPECTIVE

Recent management philosophy has shown an increasing realization of the importance of

customer focus and customer satisfaction in any company. These are called leading indicators: if

customers are not satisfied, they will eventually find other suppliers that will meet their needs.

Poor performance from this perspective is thus a leading indicator of future decline. Even though

the current financial picture may seem (still) good. In developing metrics for satisfaction,

customers should be analyzed. In terms of kinds of customers, and of the kinds of processes for

which we are providing a product or service to those customer groups.

3. THE BUSINESS PROCESS PERSPECTIVE

This perspective

refers to internal

business

processes.

Measurements

based on this

perspective will

show the

managers how

well their

business is

running, and

whether its

products and

services conform

to customer

requirements.

These metricshave to be

carefully designed by those that know these processes most intimately. In addition to the

strategic management processes, two kinds of business processes may be identified:

Mission-oriented processes. Many unique problems are encountered in these

processes.
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Support processes. The support processes are more repetitive in nature, and

hence easier to measure and to benchmark. Generic measurement methods can be used.

4. LEARNING AND GROWTH PERSPECTIVE

This perspective includes employee training and corporate cultural attitudes related to both

individual and corporate self-improvement. In a knowledge worker organization, people are the

main resource. In the current climate of rapid technological change, it is becoming necessary for

knowledge workers to learn continuously. Government agencies often find themselves unable to

hire new technical workers and at the same time is showing a decline in training of existing

employees. Kaplan and Norton emphasize that 'learning' is something more than 'training'; it also

includes things like mentors and tutors within the organization, as well as that ease of

communication among workers that allows them to readily get help on a problem when it is

needed. It also includes technological tools such as an Intranet.

The integration of these four perspectives into a one graphical appealing picture, has made the

Balanced Scorecard method very successful as a management methodology.

OBJECTIVES, MEASURES, TARGETS, AND INITIATIVES

For each perspective of the Balanced Scorecard four things are monitored (scored):

Objectives: major objectives to be achieved, for example, profitable growth.

Measures: the observable parameters that will be used to measure progress

toward reaching the objective. For example, the objective of profitable growth might be

measured by growth in net margin.

Targets: the specific target values for the measures, for example, 7% annual

decline in manufacturing disruptions.

Initiatives: projects or programs to be initiated in order to meet the objective.

DOUBLE-LOOP FEEDBACK

In traditional industrial activity, "quality control" and "zero defects" were important words. To

shield the customer from receiving poor quality products, aggressive efforts were focused on

inspection and testing at the end of the production line. A problem with these approaches - as

pointed out by Deming - is that the true causes of defects could never be identified, and there

would always be inefficiencies because products with a defect are rejected. Deming understood

that variation is created at every step in a production process, and the causes of variation need to

be identified and repaired. If this can be done, then there is a way to reduce the defects andimprove 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, and what are the processes with

significant problems. Then they can focus their attention on repairing that subset of processes.

The balanced scorecard method includes feedbacks around internal business process outputs. As


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in TQM. Additionally, the Balanced Scorecard provides a feedback for the outcomes of business

strategies. This creates a "double-loop feedback" process in the balanced scorecard.

OUTCOME METRICS

You can't improve what you can't measure. Therefore metrics must be developed based on the

priorities of the strategic plan, which provides the key business drivers and criteria for metrics

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 feedbackto show the present status of the organization from many

perspectives for decision makers.

Diagnostic feedbackinto various processes to guide improvements on a

continuous basis.

Trends in performance over time.

Feedbackaround the measurement methods themselves. Which measurements

should be tracked?

Quantitative inputs for forecast methods and for decision support systems.

MANAGEMENT BY FACT

The goal of measuring is to permit managers to see their company more clearly - from many

perspectives - and hence to make wiser long-term decisions. A 1997 booklet on the Baldrige

Criteria summarizes 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 companyperformance 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
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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."

CAUTIONARY NOTE ON USING THE BALANCED SCORECARD

You tend to get what you measure. People will work to achieve the explicit targets which are set.

For example, emphasizing traditional financial measures may encourage short-term thinking.

The Core Group Theoryby Kleiner provides further clues on the mechanisms behind this.

Kaplan and Norton recognize this, and urge for a more balanced set of measurements. But still,

people will work to achieve their scorecard goals, and may ignore important things which have

no place on their scorecard.

EVOLUTION OF THE BALANCED SCORECARD

In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based

upon the intended method of use within an organization. They describe how the Balanced

Scorecard can be used to support three distinct management activities, the first two being

management control and strategic control. They assert that due to differences in the

performance data requirements of these applications, planned use should influence the type of

BSC design adopted. Later that year the same authors reviewed the evolution of the Balanced

Scorecard as shown through the use ofStrategy Maps as a strategic management tool,

recognizing three distinct generations of Balanced Scorecard design.

Book: Robert S. Kaplan, David P. Norton - The BSC: Translating Strategy into Action -

Book: Paul R. Niven - BSC Step-by-Step: Maximizing Performance and Maintaining Results -

Book: Paul R. Niven - BSC Step-by-Step for Government and Nonprofit Agencies -
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