BALANCED SCORECARD

Human Resource Development

BALANCED SCORECARD

Prepared by:

Submitted to:

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I N D E X

Sr. No. Particulars Page. No.

1 INTRODUCTION: Balanced Scorecard 4

2 NEED FOR THE BALANCED SCORECARD 6

3 4 MAJOR PERSPECTIVES OF A BSC 9

4 The Four Perspectives: Cause and Effect relationship 12

5 BUILDING AND IMPLEMENTING THE SYSTEM USING A BALANCED SCORECARD

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6 THE BSC MODEL 20

7 FEATURES OF A GOOD BSC 23

8 ADVANTAGES OF BSC 24

9 DISADVANTAGES OF BSC 25

10 UTILISING THE BALANCED SCORECARD AS A STRATEGIC

MANAGEMENT TOOL

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11 CONCLUSION 29

12 REFERENCES 30

INTRODUCTION: Balanced Scorecard

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Companies today are in the midst of a revolutionary transformation as Industrial age

competition is shifting to Information age competition. The cut-throat competition that

businesses faced in the last two decades has made them to look for improvement

initiatives like Total Quality Management, Just-in-Time (JIT) systems; Activity based

cost management, Employee empowerment and Re-engineering. Though these

initiatives resulted in enhanced shareholder value, their structure was disjointed and

focused on the short-term survival and growth. The programs centered on achieving

breakthrough performance merely by monitoring and controlling financial measures of

past performance. This collision between the irresistible force to build long-range

competitive capabilities and the immovable object of the historical-cost financial

accounting model has led to a new blend the Balanced scorecard.

The balanced scorecard is a strategic planning and management system that is

used extensively in business and industry, government, and nonprofit organizations

worldwide to align business activities to the vision and strategy of the organization,

improve internal and external communications, and monitor organization performance

against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business

School) and David Norton as a performance measurement framework that added

strategic non-financial performance measures to traditional financial metrics to give

managers and executives a more 'balanced' view of organizational performance.  While

the phrase BALANCED SCORECARD was coined in the early 1990s, the roots of the this

type of approach are deep, and include the pioneering work of General Electric on

performance measurement reporting in the 1950’s and the work of French process

engineers (who created the TABLEAU DE BORD – literally, a "dashboard" of

performance measures) in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple performance

measurement framework to a full strategic planning and management system. The

“new” balanced scorecard transforms an organization’s strategic plan from an attractive

but passive document into the "marching orders" for the organization on a daily basis. It

provides a framework that not only provides performance measurements, but helps

planners identify what should be done and measured. It enables executives to truly

execute their strategies.

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This new approach to strategic management was first detailed in a series of articles and

books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness

of previous management approaches, the balanced scorecard approach 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.

In a nutshell, the need to link financial and non-financial measures of performance and

identifying key performance measures led to the emergence of “Balanced Score Card”

approach developed by Norton and Kaplan (1992) in the U.S. The Balanced score card is

defined as “an approach to the provision of information to management to assist

strategic policy formulation and achievement. It emphasized the need to provide the

user with a set of information, which addresses all relevant areas of performance in an

objective and unbiased fashion”.

Kaplan and Norton identified four perspectives representing the important facets of

the organization. These were:

1. Financial perspective (how do we look to shareholders)

2. Customer perspective (how the customer see us)

3. Internal business perspective (what we excel at?)

4. Innovation & Learning perspective (can we continue to improve and create

value)

The idea behind the four perspectives represents a balanced view of any organization

and by creating measures under each of these headings all the important areas of

business would be covered. It is important to note that the balanced score card itself is

just a frame work and it doesn’t say what the specific measures should be. It is a matter

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for people within the organization to decide upon. The set of measures for each

organization or even sections with the organization will be different. Much of the

success of score card depends on how the measures are agreed, the way they are

implemented and how they are acted upon. So the process of designing a score card is

as important as the score card itself.

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NEED FOR THE BALANCED SCORECARD (BSC)

The balanced scorecard is a way of Measuring organizational, business unit or

department success;

Balancing long and short term actions;

Balancing different measures of success and

o Financial

o Customer

o Internal Operations

o Human Resource Systems & Development (Learning & growth)

A way of tying strategy to measures of action

The Need for the scorecard

The objective of any measurement system should be to motivate all managers and

employees to implement successfully the business units strategy. Those companies that

can translate their strategy into measurement system will be able to execute their

strategy because they communicate their objectives and their targets. The

communication makes managers and employees focus on the critical drivers enabling

them to align investments, initiatives and actions accomplishing strategic goals.

Historically, the measurement system for any business has been financial. Accounting

was considered to be the language of business .Innovations in measuring the financial

performance of the industrial age companies played a vital role in their successful

growth. And financial innovations, such as the Return on Investment (ROI) metric, and

operating and cash budgets, were critical to the success of these corporations.

However, an over emphasis on achieving and maintaining short-term financial results

can cause companies to over invest in short-term fixes and to under invest in long-term

value creation, particularly in the intangible and intellectual assets that generate future

growth. The pressure for short-term financial performance often causes companies to

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reduce the resources spent on new product development, process improvements,

human resource development, Information technology, databases and systems as well

as customer and market development. In the short run, the financial accounting model

reports these spending cutbacks as increases in reported income, even when the

reductions have cannibalized a company’s stock of assets and its capabilities for

creating future economic value. In short, these organizations use the financial and non-

financial performance only for tactical feedback and control of short-term operations.

Linking Strategy with Performance Measures

The essential thrust of the balanced scorecard is based on the fundamental proposition

that within organizations what gets measured gets done however, organizations dont

always get what they measure. If measurement, by itself, had that much impact on

human behavior, then anyone that had weighing scales would never get fat.

An appropriate measurement system is one that energizes employees in the context of

what the organization is trying to do. Thus, the logical starting point for the

development of any performance measurement system for an organization must be a

clear statement of mission, objectives and resultant strategy. An organization’s mission

is its basic function in society and is the reason why the organization exists. Related to

this are the objectives to be achieved and they represent a precise statement of purpose

for a specific period. Basically a strategy is a shared understanding about how the

organization’s mission is to be achieved in a competitive environment. Strategic

thinking will focus on customers and competitors as well as internal capabilities and

resources. It will include reference to the firm’s competitiveness, quality of output and

levels of customer service. In turn, specified performance measures allow all employees

understand what the strategy is and how their performance is linked to that overall

strategy. The relationship between Mission, Objectives, Strategy and Performance

Measures is depicted in Fig.1.

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Fig.1

There are at least three reasons why organizations should, and often do, measure their

performance:

1. To align mission, strategy, values and behavior

2. To improve the right things

3. To numerically define the meaning of success

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4 MAJOR PERSPECTIVES OF A BSC

The aim of the Balanced Scorecard is to direct, help manage and change in support of

the longer-term strategy in order to manage performance. The scorecard reflects what

the company and the strategies are all about. It acts as a catalyst for bringing in the

‘change’ element within the organization. This tool is a comprehensive framework

which considers the following perspectives and tries to get answers to the following

questions –

1. Financial Perspective - How do we look at shareholders?

2. Customer Perspective - How should we appear to our customers?

3. Internal Business Processes Perspective - What must we excel at?

4. Learning and Growth Perspective - Can we continue to improve and create value?

Hence, from the above lines we can say that this tool has considered not only the

financial results to be important but also those factors which actually drive an

organization towards future successes as mentioned earlier. The tool has given stress

on the other areas which are required to ‘balance’ the financial perspective in order to

get a total view about the organizational performance and improve the same. The

framework tries to bring a balance and linkage between the –

(a) Financial and the Non-Financial indicators,

(b) Tangible and the Intangible measures,

(c) Internal and the External aspects and

(d) Leading and the Lagging indicators.

The Learning & Growth Perspective

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This perspective includes employee training and corporate cultural attitudes related to

both individual and corporate self-improvement. In a knowledge-worker organization,

people -- the only repository of knowledge -- are 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. Government agencies often find themselves unable

to hire new technical workers, and at the same time there is a decline in training of

existing employees. This is a leading indicator of 'brain drain' that must be reversed.

Metrics can be put into place to guide managers in focusing training funds where they

can help the most. In any case, learning and growth constitute the essential foundation

for success of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is 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.

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective

allow the managers to know how well their business is running, and whether its

products and services conform to customer requirements (the mission). These metrics

have to be carefully designed by those who know these processes most intimately; with

our unique missions these are not something that can be developed by outside

consultants.

In addition to the strategic management process, two kinds of business processes may

be identified: a) mission-oriented processes, and b) support processes. Mission-

oriented processes are the special functions of government offices, and many unique

problems are encountered in these processes. The support processes are more

repetitive in nature, and hence easier to measure and benchmark using generic metrics.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance

of customer focus and customer satisfaction in any business. These are leading

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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 look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of

customers and the kinds of processes for which we are providing a product or service to

those customer groups.

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 do whatever

necessary to provide it. In fact, often there is more than enough handling and processing

of financial data. With the implementation of 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 financials leads to the "unbalanced" situation with regard to other

perspectives.

There is perhaps a need to include additional financial-related data, such as risk assessment

and cost-benefit data, in this category.

The Four Perspectives: Cause and Effect Relationship

The four perspectives as mentioned above are highly interlinked. There is a logical

connection between them. The explanation is as follows : If an organization focuses on

the learning and the growth aspect, it is definitely going to lead to better business

processes. This in turn would be followed by increased customer value by producing

better products which ultimately gives rise to improved financial performance.

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A strategy is a set of hypotheses about cause and effect. The chain of cause-and- effect

should pervade all four perspectives of the Balanced Scorecard therefore a properly

constructed Balanced Score Card should tell the story of the company's strategy.(figure

2)

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Figure 2

Performance Drivers

A good Balanced Score Card should also have a mix of outcome measures (lagging

indicators) and performance drivers (leading indicators). Outcome measures without

performance drivers do not communicate how the outcomes are to be achieved or give

an early indication about whether the strategy is being implemented successfully.

Conversely performance drivers without outcome measures (may achieve short term

operational improvements) fail to reveal whether operational improvements have

translated into expanded business with enhanced financial performance. Example

(Figure 3)

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Figure 3

A completed organizational score card needs to have the following components:

Strategic Themes Identified

Strategic Objectives Identified

Measures for the execution of the strategic objectives

Competitive Bench Marks for the measures selected

Short Term and Long term targets for identified measures

Initiatives aligned to the Strategic objectives for execution and review.

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Once the organizational score card is prepared and finalized the scorecard is to be used

as an effective method of alignment see (figure 4). Departmental, Process, and

Individual score cards aligned to corporate score card will translate your strategy to

daily management.

Links to Six Sigma

Six Sigma is a unique variability reduction management strategy for Business

improvement. The most powerful aspect of Six Sigma is in the application of the

rigorous DMAIC philosophy to projects to achieve higher customer satisfaction and

Business results. While Six Sigma helps organizations in elimination of waste in their

pursuit to excellence the Balanced Score Card lays the foundation for the

implementation of an effective Six Sigma strategy.

When one attempts to view the evolution of various measurement systems you could

see that Balanced Score Card encompasses Financial, Strategic and Operational

measurements. See (Figure 5).It is clear to visualize that implementation of Balanced

Score Card followed by the deployment of Six Sigma is a better approach towards Six

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Sigma deployment. While the proven statistical tool set of Six Sigma operates at the

operational level the Balanced Score Card provides the rationale for identification of

areas for improvement.

BUILDING AND IMPLEMENTING THE SYSTEM USING A BALANCED SCORECARD

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Step One of the scorecard building process starts with an assessment of the

organization’s Mission and Vision, challenges (pains), enablers, and values. Step One

also includes preparing a change management plan for the organization, and conducting

a focused communications workshop to identify key messages, media outlets, timing,

and messengers.

In Step Two, elements of the organization’s strategy, including Strategic Results,

Strategic Themes, and Perspectives, are developed by workshop participants to focus

attention on customer needs and the organization’s value proposition.

In Step Three, the strategic elements developed in Steps One and Two are decomposed

into Strategic Objectives, which are the basic building blocks of strategy and define the

organization's strategic intent. Objectives are first initiated and categorized on the

Strategic Theme level, categorized by Perspective, linked in cause-effect linkages

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(Strategy Maps) for each Strategic Theme, and then later merged together to produce

one set of Strategic Objectives for the entire organization.

In Step Four, the cause and effect linkages between the enterprise-wide Strategic

Objectives are formalized in an enterprise-wide Strategy Map. The previously

constructed theme Strategy Maps are merged into an overall enterprise-wide Strategy

Map that shows how the organization creates value for its customers and stakeholders.

In Step Five, Performance Measures are developed for each of the enterprise-wide

Strategic Objectives. Leading and lagging measures are identified, expected targets and

thresholds are established, and baseline and benchmarking data is developed.

In Step Six, Strategic Initiatives are developed that support the Strategic Objectives. To

build accountability throughout the organization, ownership of Performance Measures

and Strategic Initiatives is assigned to the appropriate staff and documented in data

definition tables.

In Step Seven, the implementation process begins by applying performance

measurement software to get the right performance information to the right people at

the right time. Automation adds structure and discipline to implementing the Balanced

Scorecard system, helps transform disparate corporate data into information and

knowledge, and helps communicate performance information. In short, automation

helps people make better decisions because it offers quick access to actual performance

data.

In Step Eight, the enterprise-level scorecard is ‘cascaded’ down into business and support

unit scorecards, meaning the organizational level scorecard (the first Tier) is translated into

business unit or support unit scorecards (the second Tier) and then later to team and

individual scorecards (the third Tier). Cascading translates high-level strategy into lower-

level objectives, measures, and operational details. Cascading is the key to organization

alignment around strategy.

Team and individual scorecards link day-to-day work with department goals and corporate

vision. Cascading is the key to organization alignment around strategy. Performance

measures are developed for all objectives at all organization levels. As the scorecard

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management system is cascaded down through the organization, objectives become more

operational and tactical, as do the performance measures. Accountability follows the

objectives and measures, as ownership is defined at each level. An emphasis on results and

the strategies needed to produce results is communicated throughout the organization.

In Step Nine, an Evaluation of the completed scorecard is done. During this evaluation, the

organization tries to answer questions such as, ‘Are our strategies working?’, ‘Are we

measuring the right things?’, ‘Has our environment changed?’ and ‘Are we budgeting our

money strategically?’

THE BSC MODEL

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The Model – An Explanation

Hence, from the aforesaid model, it is clear that the following are to be done so as to

utilize the Balanced Scorecard as a strategic management tool :

1. The major objectives are to be set for each of the perspectives.

2. Measures of performance are required to be identified under each of the objectives

which would help the organization to realize the goals set under each of the

perspectives. These would act as parameters to measure the progress towards the

objectives.

3. The next important step is the setting of specific targets around each of the identified

key areas which would act as a benchmark for performance appraisal.

Hence, a performance measurement system is build around these critical factors.Any

deviation in attaining the results should raise a red signal to the management which

would investigate the reasons for the deviation and rectify the same.

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4. The appropriate strategies and the action plans that are to be taken in the various

activities should be decided so that it is clear as to how the organization has decided to

pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is often

referred to as a blueprint of the company strategies.

An example will help to understand it better. Some of the objectives together with a

measurement measures are given below.

Hence, the above paragraphs show that all the four areas have been given equal

importance in measuring performance level. The measures and the objectives, however,

depend upon the type of business the organization is in. The financial indicators are

complemented by the non-financial ones. Since, objectives and goals are set for each of

the critical success factors under each of the heads, it brings about a focus on the

strategic vision. Thus, all activities would be directed towards achievement of the

longterm goals which have been set by the top management. The identification of the

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key result areas (KRAs) help an organization in moving towards the right strategic

direction. This tool creates a link between objectives, measures, targets and initiatives.

It is, therefore, absolutely clear that the Balanced Scorecard acts as a focal point for the

organisation’s efforts, designing and communicating priorities to the managers,

employees, investors and the customers.

FEATURES OF A GOOD BALANCED SCORE CARD:

1. It tells the story of a company’s strategy, articulating a sequence of cause and

effect relationships.

2. It helps to communicate the strategy to all members of the organization by

translating the strategy into coherent and linked set of understandable and

measurable operation targets.

3. A balanced score card emphasizes non-financial measures as a part of program

to achieve future financial performance

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4. The balanced score card limits the number of measures identifying only the most

critical areas. The purpose in to focus manager’s attention on measures that

most affect the implementation of strategy.

5. The balanced score card highlights less than optimal trade offs that managers

may make when they fail to consider operational and financial measures

together.

ADVANTAGES OF BSC

The balanced scorecard tool is being used by several organizations throughout the

world because of certain advantages it has been able to deliver as below:

It translates vision and strategy into action.

It defines the strategic linkages to integrate performance across organizations.

It communicates the objectives and measures to a business unit.

It aligns the strategic initiatives in order to attain the long-term goals.

It aligns everyone within an organization so that all employees understand how

they support the strategy.

It provides a basis for compensation for performance.

The scorecard provides a feedback to the senior management if the strategy is

working.

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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.

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DISADVANTAGES OF BSC

It is not easy to implement this tool because it involves a lot of subjectivity.

The tool is much more complex compared to the other tools

The measures that need to be taken is contingent upon the kind of environment,

industry and the business the organization is in.

A lot of refinement is still required to be done so that it becomes understandable

to every stakeholder associated with the organization.

UTILISING THE BALANCED SCORECARD AS A STRATEGIC MANAGEMENT TOOL

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The tool has become a weapon for organizations to identify the pressure points,

conflicting interests, objectives setting, prioritization of objectives, planning and

budgeting. The four main important steps that need

to be taken care of are –

1. Translating the Vision

It is to be remembered that the vision of any

organization should be understood by each and

every employee of the organization. If it is

understood by the top management only, then it is

definite that the organization will fail to realize its

goals. Hence, before starting with the strategic implementation process, the

organizations needs to be clear about the reason for its existence, where it wants to see

itself after a certain number of years and properly decide its business definition. The

managers should build a consensus around the organisation’s vision and strategy. The

strategies, in fact, emanate from the vision and mission of the company which means

that a linkage is formed between the strategies of the different business units and the

vision of the organization. The lofty statements must be translated into an integrated set

of objectives and measures. Thus, by using this tool, the overall strategic objectives for

the company gets clarified which helps to achieve consensus across different business

units on the overall strategic objectives for the company.

2. Communicating and Linking

Just communicating the vision and the strategies is not an end in itself.

The strategic goals and the measures to be set in the different areas have to be decided

upon. The long-term strategic goals have to be translated into both departmental and

individual goals which should be aligned to each other in order to realize the long-term

goals. In fact, each and everyone at different levels in the organizational hierarchy needs

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Tata Motors is the first Indian company to be inducted in the Balance Scorecard Hall of Fame.,Joining the thirty-member elite club of organizations including Hilton Hotels, BMW Financial Services, U.S. Army, Korea Telecom, Norwegian Air Force and the city of Brisbane for achieving excellence in company performance.

to be educated about the action plans and reasons for accepting the same. The tool

contains three levels of information:

(i) It describes the corporate objectives, measures and the targets

(ii) It helps in deciding the business unit targets and

(iii) It helps in framing the departmental and the individual objectives which will help in

attaining the objectives of the business unit directly which would lead to the attainment

of the corporate goals. The employees are given the freedom to decide their measures,

objectives and the targets attainment of which would move the organization in the right

strategic direction. Then the compensation level is linked to the performance level

which in reality involves a lot of subjectivity.

3. Business Planning

This step helps in the resource allocation process. One has to keep in mind that

objectives form an important criteria in deciding the quantum of resources that are

required to be allocated to the various departments, activities and the processes. No

strategy can bring successful results to an organization if the allocation is not in line

with what is required to meet the results. This allocation is dependent on the budgeted

estimates which are decided on the basis of the said

objectives. Hence, through this step the Balanced Scorecard tries to bring about an

integration between strategic planning and the budgeting exercise. The short-term

milestones are also needed to be figured out which in totality brings about a linkage

between strategic goals and the budgets. This procedure helps in actualizing what has

been set by the organization. Thus, this step brings about a shift from the ‘thinking’

exercise to the ‘doing’ stage and the organization tries to achieve the long-term goals

through the short-term actions.

4. Feedback and Learning

The first three steps as mentioned above help in the strategic implementation process.

But, for knowing whether the organization is in a position to achieve the strategic goals

and whether it is in the right track, the process of feedback and learning is essential. The

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strategic learning consists of acquiring knowledge about which way the organization is

moving to, testing whether the premises considered before hold true even now and

finally making adjustments wherever required. The corrective measures are required so

that the necessary rectifications are made which will help an organization pursue the

correct path.

Another point is that an organization gets to know whether the cause-and-effect

relationships among the different perspectives really hold true, to what extent they are

strongly linked and also whether positive results are being obtained. In case, an

organization realizes the existence of a gap in the cause effect relationships, an

immediate correction would be required so that a positive relationship can be build

among the various factors. Thus, the tool with its specification of the causal

relationships between performance drivers and objectives allows corporate and the

business unit objectives executives to use their periodic review sessions in order to

evaluate the validity of the unit’s strategy and the quality of its execution. Also, this

feedback and learning exercise may force an organization to change the measures set in

each of the perspectives and adopt those, which if attained would ensure the success of

the corporate and the business strategies.

CONCLUSION

The Balanced Scorecard is therefore a very important strategic management tool which

helps an organization to not only measure the performance but also decide the

strategies which are needed to be adopted so that the long-term goals are achieved.

Thus, in other words, the application of this tool ensures the consistency of vision and

action which is the first step towards the development of a successful organization.

Also, its proper implementation can ensure the development of competencies within an

organization which will help it to develop a competitive advantage without which it

cannot expect to outperform its rivals.

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REFERENCES

www.valuebasedmanagement.net.

http://en.wikipedia.org

www.thebalancedscorecard.com

www.managementhelp.org

ucsfhr.ucsf.edu/files/implementationguide.doc

www.managementparadise.com

www.citehr.com

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