Idea 2 - Balanced Scorecard (50 Management ideas you really need to know)


Idea 2 - Balanced Scorecard

The balanced scorecard (BSC) was first articulated in a 1992 Harvard Business Review article by Robert S. Kaplan and David Norton. BSC takes an  organization's strategy, separates it into quantifiable goals and then  measures whether the goals are being achieved. It starts with vision- mission statement, perhaps - and breaks that down into strategies, then tactical activities and concludes with metrics. It's the structure of the metrics - the measuring activities - that is 'balanced'.
Kaplan later wrote a book called The Balanced Scorecard: You Can't Drive a Car Solely Relying on a Rearview Mirror, which says it all in a nutshell. The two academics didn't deny the need for financial statistics as an aid to navigation and to keep the shareholders calm, but insisted that other perspectives were necessary. They added another three, giving them four in total.
The financial perspective 'How do we look to shareholders?' Few companies suffer from a shortage of financial information. The organization's financial performance is fundamental to its survival and to satisfying its shareholders. So accurate data such as return on capital employed, unit costs, cash flow, market share and profit growth remain very important bearings on the company's progress. Kaplan and Norton  had little criticism of this aspect of measurement other than to suggest that there was sometimes too much of it. They emphasized, however, that financial data is, by definition, historical. It tells us what has happened to the organization. It may not be as effective as telling us what is happening to the organization right now. And, as they say in financial advertising, past performance is no guarantee of future success.
The customer perspective 'How do we look to customers?' Kaplan and Norton were writing at a time when companies were growing more aware of a need to see things from the customer's point of view, and acknowledging the truth that it costs a lot more to find a new customer than to keep an existing one. 'Customer satisfaction' was developing into a mantra and 'customer relationship management' was about to become the next fashionable management idea - and concern for the customer has certainly not decreased since then. To view the business from this perspective, the company must gauge how satisfied customers are with the products and service they receive. Measurement here includes customer satisfaction, customer retention rates, response rates and reputation.
The business process perspective 'How effective are we internally?' This is an inward-looking, internal perspective, measuring the performance of all those key processes that drive the business. For many companies, particularly those in manufacturing, this was more familiar ground, the realm of people holding stopwatches and clipboards. The measures themselves would depend on the nature of the business but might include manufacturing excellence and quality, time to get new products to market and inventory management. Some frame the question that this perspective seeks to answer: ‘What must we excel at?
The learning and growth perspective 'How can we change and improve?' Answers to this question give a measure of potential future performance, focusing on the need to invest in the development of the organization's people. 'Learning' encompasses more than merely 'training', though it includes that too. Hours spent on training and the number of employee suggestions might be among the measures sought. But Kaplan and Norton also promote the idea of mentors and tutors within the firm, as well as a relaxed style of communication between employees that allows them to get help with problems when needed. Some include innovation in this perspective, adding measures such as research and development as a proportion of sales, for example, or the percentage of sales from new products.
Put the data from these four different points of view together and the results do what it says on  the packet - they give a 'balanced' view of the organization, rather than an overwhelmingly financial one. The link between measurement and strategy comes in the choice of what gets measured - the metrics. But BSC doesn't stop at measurement. The point of measurement is to allow managers to see the organization more clearly, and to manage more effectively - to take better decisions - based on that information.
So Kaplan and Norton, who have built a profitable business out of helping companies to implement BSC, maintain that it is a management as well as a measurement system. They say you can't improve what you can't measure. Feedback from the scorecard is used to adapt the implementation of strategy or, if necessary, strategy itself.
Today, BSC is still widely used among large companies and has gained a following among public sector and non-profit organizations. Some users note that, carried out properly, BSC can be a catalyst for change. They point out that the performance measurement is not an end in itself. As Goodhart's law suggests, measures should not become targets. Instead, they should serve as aids to analysis. They don't have to be accurate, but people must have confidence in them as reliable indicators of what is actually going on.


Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling



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