Robert Kaplan and David Norton: the balanced scorecard.
The Balanced Scorecard is an aid to achieving strategy by showing how key measures inter-relate to track progress towards strategy. Kaplan and Norton argue that adherence to quarterly financial returns and the bottom line alone will not provide the organisation with an overall strategic view. The balanced scorecard though, goes beyond the exploitation of financial measures alone by incorporating three other key perspectives:
* a customer perspective--which addresses how customers see the organisation
* an internal business perspective--which requires the organisation to identify that at which it needs to excel
* a learning/innovation perspective--which addresses what the organisation needs to improve to create value in the future.
By commenting on the present, and indicating the drivers of the future, the scorecard both measures and motivates business performance.
Kaplan and Norton have researched a wide number of organisations in putting the Balanced Scorecard together and an increasing number of organisations are experimenting with it.
Setting up the Balanced Scorecard
Kaplan and Norton argue that strategies often fail because they are not converted successfully into actions that employees can understand and apply in their everyday work. The problem comes with the search for realistic measures which are meaningful to those doing the work, relate visibly to strategic direction, and provide a balanced picture of what is happening throughout the organisation, not just one facet of it. It is this aspect that the balanced scorecard addresses.
The balanced scorecard concentrates on measures in four key strategic areas--finance, customers, internal business processes and learning and innovation--and requires the implementing organisation to identify goals and measures for each of them. Research and experimentation have come up with the following, which seem to be regularly applied in many organisations.
* Goals: survival, success/growth, prosperity.
* Measures: return on capital, cash flow, revenue growth, liquidity, cost reduction, project profitability, performance reliability.
* Goals: Customer acquisition, retention, profitability, satisfaction.
* Measures: Market share, transaction cost ratios, customer loyalty satisfaction surveys/index, supplier relationships, key accounts.
Internal business process perspective
* Goals: Core competencies, critical technologies, business processes, key skills.
* Measures: Efficiency measures of working practices and production processes, cycle times, unit costs, defect rates, time to market.
Learning and innovation perspective
* Goals: Continuous improvement, new product development.
* Measures: Productivity of intrapreneurship, new ideas and suggestions from employees, employee satisfaction, skill levels, staff attitude, retention and profitability, rate of improvement.
The scorecard provides a description of the organisation's strategy. It will indicate where problems lie because it shows the inter-relationships between goals and linked activities. It creates an understanding of what is going on elsewhere in the organisation and shows all employees how they are contributing. Providing that accurate and timely information is fed into the system, it helps to focus attention where change and learning are needed through the cause and effect relationships it can reveal. Examples of the types of insight achieved were detailed in "Linking the balanced scorecard to strategy":
"If we increase employee training about products, then they will become more knowledgeable about the full range of products they can sell;
If employees are more knowledgeable about products, then their sales effectiveness will improve; If their sales effectiveness improves, then the average margins of products they sell will increase."
Implementing the Balanced Scorecard
In "Putting the balanced scorecard to work" Kaplan and Norton identify eight steps towards building a scorecard:
1. Preparation: Select/define the strategy/business unit to which to apply the scorecard. Think in terms of the appropriateness of the four main perspectives defined above.
2. First interviews: Distribute information about the scorecard to senior managers along with the organisation's vision, mission and strategy. A facilitator will interview each manager on the organisation's strategic objectives and ask for initial thoughts on scorecard measures.
3. First executive workshop: Match measures to strategy. The management team is brought together to develop the scorecard. From agreeing the vision statement, the team debates each of the four key strategic areas, addressing the following questions:
* If my vision succeeds, how will I differ?
* What are the critical success factors?
* What are the critical measurements?
These questions help to focus attention on the impact of turning the vision into reality and what to do to make it happen. It is important to represent the views of customers and shareholders and gain a number of measures for each critical success factor.
4. Second interviews: The facilitator reviews and consolidates the findings of the workshop and interviews each of the managers individually about the emerging scorecard.
5. Second workshop: Team debate on the proposed scorecard; the participants discuss the proposed measures, link ongoing change programmes to the measures, and set targets or rates of improvement for each of the measures. Start outlining the communication and implementation processes.
6. Third workshop: Final consensus on vision, goals, measures and targets. The team devises an implementation programme on communicating the scorecard to employees, integrating the scorecard into management philosophy, and developing an information system to support the scorecard.
7. Implementation: The implementation team links the measures to information support systems and databases and communicates the what, why, where and who of the scorecard throughout the organisation. The end-product should be a management information system which links strategy to the shop-floor activity.
8. Periodic review: Balanced scorecard measures can be prepared for review by senior management at appropriate intervals.
The Balanced Scorecard in perspective
Kaplan and Norton first published on the balanced scorecard in early 1992. It is too early, in 1998, to say whether it will be of lasting importance or a passing fad, but an increasing number of organisations are trying it out. David Norton has claimed that 60% of large US companies are using some sort of scorecard combining financial with non-financial measures.
The balanced scorecard should not be regarded as a panacea. In "The design and implementation of the balanced business scorecard: an analysis of three companies in practice", Stephen Letza states that the balanced scorecard should highlight performance as a dynamic, continuous and integrated process, act as an integrating tool, function as the pivotal tool for the organisation's current and future direction, and deliver information that is the backbone of the strategy. He also highlights some of the major drawbacks which may appear when using the balanced scorecard and points out the need to:
* Avoid being swamped by the minutiae of too many detailed measures and make sure that measures relate to the strategic goals of the organisation.
* Make sure all activities are included--this ensures that everyone is contributing to the organisation's strategic goals.
* Watch out for conflict as information becomes accessible to those not formerly in a position to see it and try to harness conflict constructively.
The balanced scorecard can be seen as the latest in a long line of attempts at management control, descending from Taylor through to work measurement systems, quality assurance systems and performance indicators.
Commentators claim that the balanced scorecard could become the management tool of the 1990s given that it is flexible and adaptable to each organisation's use; it is practical, straightforward and devoid of obscure theory. Most importantly it responds to many organisations' requirements to expand strategically on traditional financial measures and points to areas for change.
The balanced scorecard: measures that drive performance, Robert S Kaplan and David P Norton
Harvard Business review, vol 70 no 1, Jan/Feb 1992, pp71-79
Putting the balanced scorecard to work, Robert S Kaplan and David P Norton
Harvard Business Review, vol 71 no 5, Sep/Oct 1993, pp134-147
The balanced scorecard: translating strategy into action, Robert S Kaplan and David P Norton
Boston, MA: Harvard Business School Press, 1996
The strategy-focused organization
Boston, MA: Harvard Business School Press, 2000
The design and implementation of the balanced business scorecard: an analysis of three companies in practice, Stephen Letza
Business Process Reengineering and Management Journal, vol 2 no 3, 1996, pp54-76
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|Date:||Jun 1, 2003|
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