1. Introduction
During the 20 years of my career while working in different capacities, reporting on metrics or key performance indicators (KPIs) has always been part of my daily or weekly routine.
During the same past 20 years, the world has been – as much as I have been – a witness to major advancements in information technology. The advancements of computer networks and the internet, database servers, database engines and database management software, business applications like ERPs and CRMs, and the emergence of new concepts like Business Intelligence (BI) and decision making tools, have all made it much easier to collect data and to communicate it and to present it in the most useful way. These technology advancements have paved the way for the emergence of business performance management products that have capability to present the business to the executive in a dashboard format that he/she could read at a glance. But, is it really that simple? Is this realistically possible? The answers to these questions are ‘No’ and ‘Yes’ respectively. The kind of reports – never mind dashboards – that executives will need to see and rely on will have to be well designed and accurate. While accuracy is an attribute that we will most likely agree on, this paper will focus on a topic that pertains to the design of the metrics; the identification of the right performance metrics that the organization needs to pay attention to, and how to use these metrics towards achieving the long-term goals of the organization.
In this paper we will shed light on the Balanced Scorecards; a tool that has been around for almost 20 years. It started as a performance management tool and in its current and most recent form is described as a strategic planning and management system that provides the link between the organization’s long-term strategic goals with its short-term operational actions. The Balanced Scorecards help identify these metrics that the organization needs to look it in order to achieve its long-term goals. The organization would still need to monitor its day-to-day performance and the required routine metrics but the Balanced Scorecards come to play in order to help in the identification and introduction of metrics that really count to achieve the long-term goals and vision of the organization.
2. The Evolution of the Balanced Scorecards
Balanced Scorecards (BSC) is a tool that was developed by Robert Kaplan and David Norton and started to gain popularity after publishing their 1992 paper “The Balanced Scorecards – measures that drive performance”. This tool started as a performance management tool and has been evolving ever since and grown to be referred to as a strategic planning and management system that enables organizations to translate vision and strategy into action.
As opposed to measuring the financial performance through financial statements and profits metrics, the BSC calls for a balanced approach in measuring the performance of the organization. Rather than focusing on short-term lagging indicators such as financial indicators, the BSC recommends a balanced approach that considers both lagging and leading indicators. Per the BSC, this can be accomplished by considering the organization from four different perspectives and as follows:
1. Financial perspective: which is concerned with how the shareholders view the organization.
2. Customer perspective: which is concerned with the customer perceives the organization and its products and/or services.
3. Internal business perspective: which is concerned with how the organization runs its operation.
4. Learning and growth perspective: which is concerned with capability of the organization to grow and create value.
It is important to clarify that this balanced approach of performance assessment is not new and was not new back in 1992 when Kaplan and Norton published their first paper. For prior to Kaplan and Norton, the balanced approach of performance reporting is documented to have been used in France from as early as the 1930s (Malo 1992 and Bessire and Baker 2005). Per Malo, French management scholars were surprised of Kaplan and Norton’s claims since the concept was widely known and used in France since the 1930s and under the name Tableau de Bord (TBD). Similarly, in North America, non-financial measures have been in use at General Electric since the 1950s. GE has identified eight non-financial areas of measurement in its assessment of eight of its divisions (Nørreklit 2000).
Even though this balanced approach was not entirely new when Kaplan and Norton published their first paper, the structure that they introduced gained popularity which in turn caused Kaplan and Norton to further develop it and extend it. Here below is a more detailed review of the BSC and the stages of its development. To explain the BSC model and its concepts I thought it would be more convenient to start with the first model and follow the progress path that it took in order to arrive at its current form. By doing so, we will cover all the concepts covered by the model in the same chronological order as they were introduced.
The First Model:
In their year 1992 model, Kaplan and Norton introduced the BSC as “a set of measures that gives top managers a fast but comprehensive view of the business”. The four different perspectives were introduced in that paper with the objective of guarding against sub-optimization by putting equal emphasis on different aspects of the organization. The model was intended to not overload the managers with metrics and to keep the scorecard concise and comprehensive. As shown in the diagram shown in Figure 1 below, the model linked the performance measures together depicting how metrics from different areas affect each other.
Figure 1. BSC, the first model (Kaplan and Norton 1992)
Putting the Balanced Scorecards to Work:
In their year 1993 paper “Putting the Balanced Scorecards to Work”, Kaplan and Norton presented the BSC as the “cornerstone of a company’s current and future success” as it encourages managers to achieve their long-term goals and discourages them to have any preference of external measures over internal measures. It was also presented as a tool to communicate priorities to managers, employees, investors, and even customers. Kaplan and Norton presented what they considered the typical project profile for implementing BSCs and as follows:
1. Preparation: Identifying and understanding the business unit and its boundaries.
2. Interviews – First Round: Educating the executive team on BSCs as well as the internal vision, mission, and strategy, followed by interviews to identify potential BSC measures.
3. Executive workshop – First Round: Formulating the preliminary BSC.
4. Interviews – Second Round: Separate interviews with the executives to discuss the preliminary BSC.
5. Executive workshop – Second Round: Involving senior management to communicate the BSC and to get their approval.
6. Executive workshop – Third Round: To reach final agreement on the BSC and to communicate the BSc to all employees.
7. Implementation: Developing a plan and implementing the BSC and encouraging the development of second level metrics.
8. Periodic Review: Review of the BSC every 3 months and the revisiting and potentially updating the metrics every 12 months.
It was at this point that vision and strategy became part of the BSC model (as shown in Figure 2 below) and the model became more elaborate and took the form of process that requires a special project to implement.
Figure 2. Linking measurements to strategy (Kaplan and Norton 1993)
Using the Balanced Scorecards as a strategic Management System:
In their year 1996 paper “Using the Balanced Scorecards as a Strategic Management System”, Kaplan and Norton extended their model even further. In this paper they positioned the mission and strategy of the organization at the center of the BSC (as depicted in Figure 3 below) and they introduced four processes that individually and in combination help management to tie the long-term goals and strategies with the short-term actions. The four introduced processes were as follows:
1. Translating the Vision: Where the executives are forced to revisit their mission statement and their vision as well as their strategy and accordingly develop specific measures that would make achieving these long-term goals realistically possible. It also might force the executives to review the lofty mission and vision statements and to bring them down to reality. At the end, gaps towards achieving the long-term strategy are identified and objectives, measures, targets, and initiatives to bridge the gaps are placed on the BSC. Gaining consensus on these measures as well at targets and initiatives is very important.
2. Communicating and Linking: Communicating the BSC measures and linking them with the individual actions of managers involves three activities:
a. Communicating and Educating: Which is typically downwards communication and could be upwards to corporate headquarters in some cases where each business unit is free to develop its own BSC. Clearly communicated BSC measures promote motivation and obligation, and is very essential to the success of the BSC.
b. Setting Goals: Since the BSC includes objectives, measures, targets, and initiatives, much of these objectives are translated into personal goals on a personal scorecards. These goals naturally need to be well designed and attainable in order to maintain the needed level of motivation.
Figure 3. Vision and strategy at the center of the BSC (Kaplan and Norton 1996)
Figure 4. The Four processes to manage strategy (Kaplan and Norton 1996)
c. Linking Rewards to Performance Measures: Which could be debatable, as some find that tying financial compensation to performance to be an effective tool, while others find it to be harmful on the long run especially if the rewards were not balanced as well and thereby unfair and lead to sub-optimization.
3. Business Planning: where the BSC gets integrated with the business planning exercise. With the strategy and long-term goals being clear now, organizations can base their long-term business plans and accordingly their business budgets to reflect their BSC goals. Resources can also be allocated and road maps towards achieving goals could be established.
4. Feedback and Learning: Where the BSC articulates the vision in clear operational terms and provides a mechanism to collect feedback through performance reports. This mechanism will allow for continuous correction of the BSC and strategic learning.
Strategy Mapping:
In their year 2000 paper “Having Trouble with Your Strategy?” Then Map it”, Kaplan and Norton introduced a new concept to help in BSC implementations. With strategy now being at the center of the BSC, it is important that the BSC is a true and accurate reflection of that strategy. Per Kaplan and Norton, strategy maps are especially important in the information age when intangible assets are the source of the competitive advantage. As opposed to the classical business model where lagging indicators and financial performance could still be reliable on the short-term and to some extent the longer term, this is not applicable for the more contemporary business model were human resources and customer relationships are considered the main assets of the organization and maintaining them if not developing them and growing them is key to the survival and success of the organization. This places higher significance on monitoring metrics related to these protecting and developing intangible assets.
To build a strategy map, Kaplan and Norton suggest a top down approach that starts with the strategy which is derived from the vison and mission statement, down to the first perspective with the highest level and moving down to the other levels thereafter. For business organizations the levels are typically ordered from top down in the order shown below and typically achieving goals in the lower levels would lead to the achievement of goals in the upper levels.
a. Financial perspective
b. Customer perspective
c. Internal Process perspective
d. Learning and growth perspective
A non-profit organization however, might have different hierarchy of its perspectives. Funds and money in such organizations is a necessity but not a goal. So the hierarchy could as be follows. In this case the ultimate goal or strategy pertains to satisfying the expectations of the customers.
a. Customer perspective
b. Internal Process perspective
c. Learning and growth perspective
d. Financial perspective
The strategy mapping exercise enables the organization to:
1. Identify orphan measures that do not contribute towards achievement of strategy,
2. Detect gaps in the strategies being implemented at the lower levels of the organization, and
3. Provide a visual presentation of the metrics from the different perspectives and how they contribute towards achieving the strategy. This visual presentation will help in communicating the BSC and its goals.
Figure 5 below shows an example of a strategy map.
Figure 5. Strategy Map Example (Kaplan and Norton 2000)
3. So What is Balanced Scorecards
Before proceeding further, at this point we are in a position to define the BSC based on the papers of Kaplan and Norton. The BSC is not a fool proof technique that guarantees strategy management and business success; as a matter of fact, it is not even a technique. It is more of a system of concepts connected together to form a structured and high level framework that enables organizations to manage their strategies and to achieve their long-term goals. BSC is also not a reporting system; it has started as a high level organization performance measurement system and is now considered to be a management system that enables the organization to translate its vision and strategy into action.
The concepts that BSC introduced (or re-introduced) are:
• Balancing leading and lagging performance measures
• Balancing internal and external performance measures
• Balancing performance measures from different perspectives
• Aligning the organization to strategy
• Strategy mapping and translating strategy into targets and plans for performance measures
• Translating long-term strategy to short-term actions
• Making strategy everyone’s everyday job
• Making strategy a continual process
4. Literature Review
Due to the nature of the topic, the literature on the BSC could be authored by academic scholars or business professionals. Business professionals either document their experiences with implementing the BSC or offer their opinion and recommendations for implementations. Critical reviews are related to the theory of the BSC and are mostly from academic scholars.
A notable article on a successful implementation is that of Heinz Ahn (2001). In his paper, Ahn documents his experience with implementing the BSC for a strategic business unit of the ABB Industrie AG. Ahn explains that ABB decided that BSC would help them in addressing three issues:
a. The company strategy was not reflected in the annual action plans.
b. Management information system at ABB is finance centric.
c. ABB lacked the general awareness about the strategy that employees need to pursue.
Upon the successful completion of their project Ahn admits that there were some problems in developing the BSC and later on in using them. But the problems were not specific to the BSC as they were the same kind of problems that are typically associated with the introduction of a new doctrine or system. Nonetheless, Ahn goes on to explain that at ABB they have managed to reap the following benefits from the implementation:
a. The BSC guarantee for a strategy-oriented action planning and budgeting.
b. The BSC being integrated into the process of company control.
c. The BSC aid for communicating strategy.
d. The BSC as a comprehensive management tool.
Ahn ends his article by documenting his critical reflection on the BSC. Ahn starts this part by explaining that the BSC “is not an elaborated system but a framework for performance measurement”. He explains that in order for an organization to maintain its competitive advantage, it should establish a unique BSC that reflects its situation and its future goals and strategies. Worth mentioning that; According to Ahn, ABB needed to hire external expertise to help with translating their strategy into objectives and in selecting the right performance indicators. Ahn also maintains that the BSC concept is far from fully developed as it does not tackle how it would connect to other management tools.
Another implementation article is that of Ronchetti (2006) in which he prescribes guidelines and proposes an approach for implementing the BSC at a non-profit organization; an outreach ministry within a non-profit religious organization. He explains that the non-profit organization aims to deliver high quality services to the community while minimizing their costs and meeting the expectations of their donors. With that in mind, the four perspectives that a non-profit organization is concerned with could be different and their order could change. In terms of strategy map, the perspective that closely translates to strategy is that of the customers or the community. As shown in the list below, financial perspective might well be at the lowest level as it becomes the means rather than end cause.
a. Customer of cummnuity perspective
b. Internal processes perspective
c. Enablers
d. Financial perspective
Mooraj et al (1999) in their “The BSC: a Necessary Good or and Unnecessary Evil?” paper reach the conclusion that BSC is a necessary good. They base their conclusion on their own experience at Tetrapak (a manufacturer of system for processing, packaging, and distribution of liquid foods) as well as literature review. However, they also add that the BSC implementer needs to consider both formal and informal rules in the organization. Informal elements like culture and norms, moral involvement, people and their personalities, and relationships between people, can have an impact on the success of the implementation.
In their paper, Malina and Selto (2001) report evidence on the effectiveness of the BSC as a “strategy communication and management-control device”. The authors base their conclusion on a study conducted on multiple divisions of a large international manufacturing company. Two interesting aspects in this article related to the measures that the authors documented for the organization in hand were:
a. The organization they dubbed DBSC assigned different weights to the different perspectives. With their first BSC, DBSC started with the default equal weight for all four perspectives, but the later modified the weights of the perspectives to be: 4% for learning and growth, 41% for internal processes, 40% for customer value, and 15% for financial success.
b. The goals and measures assigned to the four perspectives also had codes assigned to them. These codes allowed for combining measures from different perspectives sharing the same code to be looked at together to form a new goal or perspective that crosses across the four perspectives. For instance the organization had the code CC for corporate citizenship being assigned to the two measures of “environmental and assessment remediation” which is listed under the customer value perspective and “Safety” which is listed under the internal processes perspective.
In their research, Lipe and Salterio (2000) find that for organizations that implement BSC for multiple units with different measures for those units, the supervisors who at the end review the scorecards of those units tend to focus on the measures that are common across the units and ignore the measures that are unique to the individual units.
Ittner et al (2003) find that when the BSC are used in bonus plans calculations, it is recommended to eliminate any subjective measures. They find that such measures end up allowing for supervisors to ignore many performance measures and to incorporate other non-BSC measures in their evaluation. They recommend that quantitative, outcome oriented measures be used instead.
Pandey (2005) questions whether the BSC should be balanced or not, should it be balanced or rightly balanced? Pandey explains that the BSC put emphasis on the different perspectives; in that sense it is balanced. But he also adds that “the BSC must be implemented as a performance improvement process, it will not serve the purpose if it is used as an IT-driven control system”. The different measures from the four perspectives are inter-related with cause-effect relations and they should all be selected to lead and cause strategy to be executed. So balancing the measures is not really mandatory.
Olsen and Slater (2002) also question if the BSC should be balanced and argue that it should be un-balanced to reflect the strategy of the system.
An article by Atkinson (2006) researches whether the BSC could be used for strategy implementation. She identifies the reasons that could cause strategy implementation to fail and concluded that the BSC could well be in a position to tackle strategy implementation inhibitors like: communication, middle management issues, setting goals and priorities, and translating strategy into managerial actions.
Nørreklit (2000); a BSC critic, finds that Kaplan and Norton assume the causal relationship from measures of organizational learning and growth measures of internal business processes measures of the customer perspective measures financial performance. He argues that this assumption could be problematic and they find that Kaplan and Norton could be more accurate if their assumed causal relationship was a finality relationship rather than cause and effect relationship. Where a finality relationship does not assume that there a general law that could predict a certain outcome. Nørreklit also argues that BSC are based on empiricism rather than theory, and that the referral of Kaplan and Norton to complex case studies is an indication of the gap between BSC and theory. Furthermore, Nørreklit argues that for a strategic control system, BSC is not considering the relationship with external stakeholders and the environment. He argues that the BSC excludes suppliers and public authorities and that it also does not mention competition and benchmarking against competition. Per Nørreklit, it also fails to include market shocks which could have a huge impact on the organization. According to Nørreklit, the BSC top-down approach is not very inviting to the lower level management as well as the employees. Whereas it claims to communicate strategy, per Nørreklit, the BSC asks employees to react rather than act and is actually getting their external commitment rather than internal commitment.
The general theory of the BSC was the topic of the Knapp’s paper (2001). Knapp breaks down the BSC theory into three areas:
a. Measurement,
b. Human relations, and
c. Customer value disciplines.
Figure 6 below shows Knapp’s BSC historical ‘family tree’ which depicts BSC measurement area as drawing on management by objectives, and human relations area being influenced by the human relations school of management and open-book management theories. The BSC’s strategy focused organization as shown is considered by Knapp to be highly influenced by Treacy’s and Weirsema’s (1995) “Discipline of Market Leaders” which ascribes the three customer value disciplines of: operational excellence, product leadership, and customer intimacy.
Figure 6. BSC historical ‘Family Tree” (Knapp 2001)
5. In What Organization Can the Balanced Scorecards be Used
Before discussing the types of organizations is the BSC is suitable for and under what conditions, it might make sense to talk about what we can expect from the BSC.
The BSC system is clearly not a technique; it is more of a philosophy and a set of concepts that enables the organization to translate its long-term strategies to short-term actions. With that in mind, what we can expect from the BSC is an approach that an organization could follow to achieve its long-term goals.
Organizations that could benefit from the BSC are those that need to incorporate their long-term strategies into their short-term actions. Theoretically speaking, every organization whether it be a profit or non-profit organization would need this kind of solution. Should the solution be Kaplan and Norton’s BSC or any other solution, that would be the choice of the organization itself. With the BSC being a collection of concepts within a performance measurement and strategy theme, an organization might as well choose to use different components of the system. As a matter of fact, the different concepts of the BSC are all backed by theories and management concepts that are not exclusive to the BSC.
So, if we assume that all organizations are aware of the need to link their long-term strategies with their short-term actions and to manage their strategies, then the question becomes which organizations need to manage their strategies more closely?
Since the environment that organization operates within can make a big difference in terms of strategy planning requirements, the factors of certainty/uncertainty, stable/dynamic, and simple/complex apply in decisions related to strategy management. An organization that operates in a highly dynamic environment will have to adopt the right strategy and might need to review its strategy more often. To do this, it will need a strategy management system and tools like the BSC might come into play. An organization that is doing well in a stable simple environment, might not feel the urge to invest on integration and long term planning.
So, do non-profit organizations need BSC? To answer this question we need to think of the strategy and the long-term goals. If the management of the organization feels that the organization could do better and perform better service to its customer base or community and that in order to achieve this improvement as long-term strategy is needed, then a BSC or a similar tool might be needed. The performance will need to be measured and it will need to be aligned with the long-term strategy. This could well be applicable to government agencies as well as governments. An organization seeking excellence in its performance of its services rather than maximizing its profit or market growth might also need to monitor its strategy performance and the progress of that performance.
6. When Does Balanced Scorecards Fail
With BSC being a framework rather than a technique, it will be hard to say that BSC fail and it will also be hard to say that they succeed all the time. The failure if it happens will likely not be absolute, and the success will likely not be absolute as well. For a BSC implementation to succeed, there should be a need for it to start with. However, with strategy management being a more advanced level of management, the organization that is struggling with its day-to-day operation might need to do other thinks before thinking BSC. If an organization realizes the need to manage its strategy then it will highly likely consider the BSC or a similar tool.
7. Conclusions
Now that technology is making collecting, compiling, and communicating information much easier, organizations have been building dashboards and reports that have different sorts of key performance indicators (KPIs). However, having dashboards and KPIs in an organization does not necessarily mean that the organization has all the right indicators. A progressive organization will also need a set of balanced leading and lagging indicators to show how the organization is moving with respect to achieving its long-term objectives. Such organization will need to install a process for translating its strategies into operational objectives and goals and to reflect these objectives in its business plans and budgets. Balanced Scorecards is a strategy management system that provides that kind of process to the organization. It is not a theory or a technique but a set concepts making up a framework that could enable the organization to manage its strategies. The BSC is not a panacea for mismanaged organizations; rather, it’s a framework that well-managed organizations could adopt to take the organization to a new higher level through being able to achieve their strategies and long-term goals.
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Maher Hajarat 