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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