In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard, a concept for measuring a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. The key new element is focusing not only on financial outcomes but also on the human issues that drive those outcomes, so that organizations focus on the future and act in their long-term best interest. The strategic management system forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, process, and employee perspectives. Measures are often indicators of future performance.
Since the original concept was introduced, balanced scorecards have become a fertile field of theory and research, and many practitioners have diverted from the original Kaplan & Norton articles. Kaplan & Norton themselves revisited the scorecard with the benefit of a decade's experience since the original article.
Implementing the scorecard typically includes four processes:
- Translating the vision into operational goals;
- Communicate the vision and link it to individual performance;
- Business planning;
- Feedback and learning and adjusting the strategy accordingly.
A Comprehensive View of Business Performance
Balanced Scorecard is simply a concise report featuring a set of measures that relate to the performance of an organization. By associating each measure with one or more expected values (targets), managers of the organization can be alerted when organizational performance is failing to meet their expectations. The challenge with Balanced Scorecard is, and has been since it was popularized by an article in 1992 published in the Harvard Business Review, deciding on which measures to choose.
From the outset, the Balanced Scorecard has been promoted as a tool to help organizations monitor the implementation of organizational strategy.
The earliest Balanced Scorecards comprised simple tables broken into four sections - typically these 'perspectives' were labeled "Financial", "Customer", "Internal Business Processes", and "Learning & Growth". Designing the Balanced Scorecard simply required picking five or six good measures for each perspective. Many writers have since suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives: these suggestions being triggered by a belief that 'better' designs will come from use of different headings. The major design challenge faced with this type of Balanced Scorecard is justfiying the choice of measures made - 'of all the measures you could have chosen why did you choose these...?' is a common question asked (and using this type of design process, hard to answer). If users are not confident that the measures within the Balanced Scorecard are well chosen, they will have less confidence in the information it provides. Although less common, these early style Balanced Scorecards are still designed and used today.
The early style Balanced Scorecards are hard to design in a way that builds confidence that they are well designed. Because of this, many are abandoned soon after completion.
In the mid 1990s an improved design method emerged. In the new method, selection of measures was based on a set of 'strategic objectives' plotted on a 'strategic linkage model' or 'strategy map'. With this modified approach, the strategic objectives are typically distributed across a similar set of 'perspectives' as is found in the earlier designs, but the design question becomes slightly more abstract. Managers have to identify the five or six goals they have within each of the perspectives, and then demonstrate some inter-linking between them by plotting causal links on the diagram. Having reached some consensus about the objectives and how they inter-relate, the Balanced Scorecard's measures are chosen by picking suitable measures for each objective. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through. This style of Balanced Scorecard has been the most common type for the last ten years or so.
Several design issues still remain with this modified approach to Balanced Scorecard design, but it has been much more successful than the design approach it supersedes.
Since the late 1990s, various improved versions of Balanced Scorecard design methods have emerged - examples being The Performance Prism, Results Based Management and Third Generation Balanced Scorecard for example. These more advanced design methods seek to solve some of the remaining design issues - in particular issues relating to the design of sets of Balanced Scorecards to use across an organisation, and in setting targets for the measures selected.
Many books and articles on Balanced Scorecard topics confuse the design process elements and the Balanced Scorecard itself: in particular, it is common for people to refer to a 'strategic linkage model' or 'strategy map' as being a Balanced Scorecard.
Balanced Scorecard is a performance management tool: although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that Balanced Scorecard itself has no role in the formation of strategy. Balanced Scorecard can comfortably co-exist with strategic planning systems and other tools.
Actual Usage of the Balanced Scorecard
Kaplan and Norton found that companies are using the scorecard to:
- Clarify and update budgets
- Identify and align strategic initiatives
- Conduct periodic performance reviews to learn about and improve strategy.
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.
Balanced scorecards have been implemented by government agencies, military units, corporate units and corporations as a whole, nonprofits, and schools; many sample scorecards can be found via Web searches, though adapting one organization's scorecard to another is generally not advised by theorists, who believe that much of the benefit of the scorecard comes from the implementation method.
Comparison to Applied Information Economics
A criticism of balanced scorecard is that the scores are not based on any proven economic or financial theory and have no basis in the decision sciences. The process is entirely subjective and makes no provision to assess quantities like risk and economic value in a way that is actuarially or economically well-founded. Positive responses from users of balanced scorecard may merely be a type of placebo effect. There are no empirical studies linking the use of balanced scorecard to better decision making or improved financial performance of companies.
Applied Information Economics (AIE) has been researched as an alternative to Balanced Scorecards. In 2000, the Federal CIO Council commissioned a study to compare the two methods by funding studies in side-by-side projects in two different agencies. The Dept. of Veterans Affairs used AIE and the US Dept. of Agriculture applied balanced scorecard. The resulting report found that while AIE was much more sophisticated, AIE actually took slightly less time to utilize. AIE was also more likely to generate findings that were newsworthy to the organization while the users of balanced scorecard felt it simply documented their inputs and offered no other particular insight.
Key Performance Indicators
According to each perspective of the balanced scorecard there are a number of KPIs.
- Cash Flow
- Financial Result
- Return on capital employed
- Return on equity
- Delivery Performance to Customer - by Date
- Delivery Performance to Customer - by Quantity
- Internal Business Processes
- Number of Activities
- Opportunity Success Rate
- Learning & Growth
- Investment Rate
- Illness rate