BSC and organization’s performance management
Levasana DOUGLAS Eastern University, Sri Lanka
The Balanced Scorecard (BSC) is a performance management tool for
measuring whether the smaller-scale operational activities of a company
are aligned with its larger-scale objectives in terms of vision and
strategy.
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By focusing not only on financial outcomes but also on the
operational, marketing and developmental inputs to these, the Balanced
Scorecard helps provide a more comprehensive view of a business, which
in turn helps organizations act in their best long-term interests. This
tool is also being used to address business response to climate change
and greenhouse gas emissions.
Organizations were encouraged to measure, in addition to financial
outputs, those factors which influenced the financial outputs. For
example, process performance, market share / penetration, long term
learning and skills development, and so on.
The underlying rationale is that organizations cannot directly
influence financial outcomes, as these are “lag” measures, and that the
use of financial measures alone to inform the strategic control of the
firm is unwise. Organizations should instead also measure those areas
where direct management intervention is possible.
In so doing, the early versions of the Balanced Scorecard helped
organizations achieve a degree of “balance” in selection of performance
measures. In practice, early Scorecards achieved this balance by
encouraging managers to select measures from three additional categories
or perspectives: “Customer,” “Internal Business Processes” and “Learning
and Growth.” Implementing Balanced Scorecards typically includes four
processes:
* Translating the vision into operational goals;
* Communicating the vision and link it to individual performance;
* Business planning; index Setting
* Feedback and learning, and adjusting the strategy accordingly.
The Balanced Scorecard is a framework, or what can be best
characterized as a “strategic management system” that claims to
incorporate all quantitative and abstract measures of true importance to
the enterprise. According to Kaplan and Norton, “The Balanced Scorecard
provides managers with the instrumentation they need to navigate to
future competitive success”.
Although it helps focus managers’ attention on strategic issues and
the management of the implementation of strategy, it is important to
remember that the Balanced Scorecard itself has no role in the formation
of strategy. In fact, Balanced Scorecards can comfortably co-exist with
strategic planning systems and other tools.
Original methodology
The earliest Balanced Scorecards comprised simple tables broken into
four sections typically these “perspectives” were labelled “Financial”,
“Customer”, “Internal Business Processes”, and “Learning and Growth”.
Designing the Balanced Scorecard required selecting five or six good
measures for each perspective.
Many authors have since suggested alternative headings for these
perspectives, and also suggested using either additional or fewer
perspectives. These suggestions were notably triggered by recognition
that different but equivalent headings would yield alternative sets of
measures. The major design challenge faced with this type of Balanced
Scorecard is justifying the choice of measures made. “Of all the
measures you could have chosen, why did you choose these?” This common
question is hard to ask using this type of design process. If users are
not confident that the measures within the Balanced Scorecard are well
chosen, they will have less confidence in the information it provides.
Although less common, these early-style Balanced Scorecards are still
designed and used today.
In short, early-style Balanced Scorecards are hard to design in a way
that builds confidence that they are well designed. Because of this,
many are abandoned soon after completion.
Balanced Scorecard Basics
The balanced scorecard is a strategic planning and management system
that is used extensively in business and industry, government, and
non-profit 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.
While the phrase balanced scorecard was coined in the early 1990s,
the roots of this type of approach are deep, and include the pioneering
work of General Electric on performance measurement reporting in the
1950s and the work. 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.
This new approach to strategic management was 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 centre of an
enterprise.
Perspectives
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:
* The 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 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. 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.
* 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.
* 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 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
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.
Strategy mapping
Strategy maps are communication tools used to tell a story of how
value is created for the organization. They show a logical, step-by-step
connection between strategic objectives (shown as ovals on the map) in
the form of a cause-and-effect chain. Generally speaking, improving
performance in the objectives found in the Learning and Growth
perspective (the bottom row) enables the organization to improve its
Internal Process perspective Objectives (the next row up), which in turn
enables the organization to create desirable results in the Customer and
Financial perspectives (the top two rows). To be continued
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