Balanced Scorecard: Management Funda; Jan'08

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What does it mean

The Balanced Scorecard (BSC) is a performance measurement framework that focuses on a range of measures under 4 perspectives to provide a balanced view of organization performance. A BSC typically comprise of both leading indicators (measures which drive performance, eg., in sales ‘order bagged’) and lagging indicators (actual results of performance, eg., in sales ‘pipeline value’). By focusing not only on leading indicators like financial outcomes but also on lagging indicators like human issues, the BSC provides a more comprehensive view of a business thus helping organizations act in their long-term interests.

What are the 4 perspectives

The original BSC method developed by Robert S. Kaplan and David P. Norton in the early 1990s as a result of a year’s research with 12 companies, mentioned the following 4 perspectives:-

  • Financial perspective: This examines if the company’s strategy, implementation and execution are contributing to the company’s bottom-line improvement. It incorporates tangible strategy outcomes in traditional financial terms like cash flow, costs, ROI, revenue growth etc.
  • Customer perspective: This defines the value proposition of the organization to satisfy its customers to generate more sales through the most desired (i.e. the most profitable) customer groups. The measures selected for the customer perspective measure both the value delivered to the customer like delivering committed quality or service and the outcomes of this value proposition like customer satisfaction, market share etc.
  • Internal process perspective: This is concerned with the processes that create and deliver the customer value proposition. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently. Some measures are accident ratios, defect rates etc.
  • Learning and growth perspective: This is concerned with the intangible assets - jobs (human capital), the systems (information capital), and the climate (organization capital) of the enterprise basically the infrastructure needed to meet ambitious objectives in the other three perspectives. Measures can include employee satisfaction, internal promotions %, employee turnover etc.

Can other perspectives be used

Yes. Since the introduction of BSC by Kaplan and Norton many writers have suggested alternative headings for these perspectives and use of either additional or fewer perspectives. But basically designing the BSC requires selecting both leading and lagging indicators and selecting five or six good measures for each perspective. Thus the major design challenge faced is justifying the choice of measures made. If users are not confident that the measures are well chosen, they will have less confidence in the information it provides.

Example of a BSC of a Regional Airline


Mission: Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride and Company spirit.
Vision: Continue building on our unique position -- the only short haul, low-fare,high-frequency, point-to point carrier in America.

How does it work

The general steps to using a BSC, which are also illustrated in the above Regional Airline example are as follows:-

  1. Identify a vision: Implementing BSC starts from the company vision ie., where is the organization going?
  2. Identify strategies: By identifying strategies you tell how you will get there.
  3. Define perspectives: This means you have to ask what we have to do well in each perspective.
  4. Identify the measures: From the perspectives defined, measures are identified.
  5. Evaluate: Thereafter ask how do we measure that everything is going the expected way.
  6. Create action plans: Based on this work you should create action plans and plan reporting and operation of the BSC.
  7. Follow up and manage: Here you should have answers to …How will the BSC be managed? Who should have reports and what should they look like?

 

What are it applications

Kaplan and Norton found that companies are using the scorecard to drive strategy execution, to clarify strategy and make strategy operational, to identify and align strategic initiatives, to link budget with strategy, to align the organization with strategy, to conduct periodic strategic performance reviews and to learn about and improve strategy.
 

How can I use it

Before you dismiss this tool as just another organization strategy tool please note like any strategy tool, BSC can also be creatively applied in different spheres of our life. While the implementation of the scorecard generally begins at the corporate level, it can be useful at all levels of an organization. So as a manager you can create a scorecard for your team or as the head of a department you can create a scorecard for your department. All you have to ensure is that there is a good mix of leading and lagging indicators and the different perspectives selected by you provide a balanced approach to improving performance.  Talking of applications for you, would it not be great to see your life’s score card.

References

    • ‘Balanced scorecard’ , http://en.wikipedia.org/wiki/Balanced_scorecard
    • http://www.balancedscorecard.org/Portals/0/PDF/Regional_Airline.pdf.
    • ‘How to use the Balanced Scorecard’, http://thebalancedscorecard.com/how_to_bsc.htm.
    • Missroon, A M,  ‘Demystifying the Balanced Scorecard’, DM Direct, May 1999 , http://www.performance-appraisals.org/cgi-bin/links/jump.cgi?ID=8131.