Balance Score Card – Concept, Benefits and Limitation

Balance Score Card - Concept, Benefits and Limitation
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 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 assessment and cost-benefit data, in this category.

2. The customer perspective

Recent management philosophy has shown an increasing realization of the importance of consumer focus and consumer satisfaction in any company. These are called leading indicators: if consumers are not satisfied, they will eventually find other brands to meet their needs. Poor performance from this perspective is thus a leading indicator of future decline.

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 the users’ requirements. These metrics have 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.

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. 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 and other internally dedicated web based platform. Recognition of effort as well as the provision of the learning platform are the most important elements for this perspective to work.

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 and improve 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 Balance Score Card method includes feedbacks around internal business process outputs. Reciprocally, the Balance Score Card provides a feedback for the outcomes of business strategies. This creates a “double-loop feedback” process towards balancing the 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 feedback to show the present status of the organization from many perspectives for decision makers.

•Diagnostic feedback into various processes to guide improvements on a continuous basis.

•Trends in performance over time.

•Feedback around the measurement methods themselves. Which measurements should be tracked?

•Quantitative inputs for forecast methods and for decision support systems.

Cautionary note on using the Balanced Scorecard

ü  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 Theory by Kleiner provides further clues on the mechanisms behind this. Kaplan and Norton recognize this, and urge for a more balanced set of measurements and for the use of proactive use of management judgement. But still, people will work to achieve their scorecard goals, and may ignore important things which have no place on their scorecard.

ü  Balance Score Card works best on participative rather than the command control culture.  It requires an organisational culture with the stomach to manage conflicts in search for a double or even triple loops learning.

Posted in Knowledge & Beyond, Problematising Process.