A Balanced Scorecard (BSC) may be defined as a management strategy that endeavors to complement drivers of previous performance (fiscal measures) with the drivers of future performance, such as development of intellectual and human capital, learning and customer satisfaction.
Standard BSCs do not incorporate environmental considerations. The BSC management tool was developed by David Norton and Robert Kaplan.
A recent global study on usage of management tools revealed the Balanced Scorecard to be the sixth most extensively utilized management tool across the world, and it was also associated with one of the top overall satisfaction ratings.
In this article, we discuss setting up a balanced scorecard for managing your firm’s performance. You’ll read about 1) steps to create a balanced scorecard, 2) common measurements, and 3) some pitfalls to avoid.
- 1 STEPS TO CREATE A BALANCED SCORECARD
- 2 COMMON MEASUREMENTS
- 3 SOME PITFALLS TO AVOID
- 3.1 Poorly-defined strategy
- 3.2 Ineffective data collection, reporting
- 3.3 Utilization of only lagging measures
- 3.4 Excluding stakeholders
- 3.5 Utilizing only generic metrics
- 3.6 No accountability
- 3.7 Management style, centralized measures and staff not empowered
- 3.8 Difference between “strategy” and “KPI” scorecard
- 3.9 No methodology for process improvement
STEPS TO CREATE A BALANCED SCORECARD
Before going into the steps, it is worth pointing out that the execution of a BSC should, at all times, be arranged as a separate project of management system development. It should be planned with the same detail as other organization projects, and the regular project management procedures must be followed.
You should also know that the Balanced Scorecard must be complemented with other less vertically merged tools that provide for greater stakeholder participation in fixing strategic aims, so that everyone feels like a participant and committed to the organization’s future. The capacity to respond to the dynamic business milieu, linked with the required internal alterations, is a challenge that requires particular attention, calling for a higher benefit in a performance management tool. Competitive factors connected to knowledge and innovation is another challenge in the present business climate. The frameworks that pay no heed to this reality could compromise the sustainable future of the businesses, and the Business Scorecard should take this into account.
Step #1: Appraisal
The scorecard building process begins with an evaluation of the organization’s vision and mission, enablers, values and challenges. The first step also involves developing a change management map for the organization, and carrying out a focused communications workshop to spot key messages, timing, messengers and media outlets.
Step #2: Strategy
After the first step, aspects of the organization’s strategy such as strategic themes, strategic results, and perspectives, are created by workshop participants to center attention on customer requirements and the organization’s value proposition.
Step #3: Aims
In this step, the strategic aspects created in the first two steps are broken down into strategic aims, which are the fundamental building blocks of strategy and delineate the organization’s strategic aim. Aims are first started and categorized on the Strategic Theme Level, sorted by Perspective, connected in cause-effect linkages (or Strategy Maps) for each Strategic Theme. Following this, they are joined together to create one set of Strategic Aims for the whole organization.
Step #4: Strategy Map
At this point, the cause and effect linkages between the enterprise-wide Strategic Goals are made official in an enterprise-wide Strategy Map. The Strategy Maps constructed earlier are blended into a by-and-large enterprise-wide Strategy Map that delineates how the organization makes value for its stakeholders and customers.
Step #5: Performance Measures
In this step, performance measures are created for each of the enterprise-wide strategic aims. Leading and lagging measures are spotted, expected targets and thresholds are decided on, and benchmarking and baseline data is created.
Step #6: Endeavors
Strategic Initiatives are created that support the Strategic Aims. To develop accountability throughout the organization, ownership of Strategic Initiatives and Performance Measures is assigned to the pertinent staff and documented in data definition tables.
Step #7: Performance Assessment
In this step, the process of implementation starts by applying performance measurement software to provide the right performance data to the right people at the appropriate time. Automation lends form and discipline to executing the Balanced Scorecard system, assisting with changing disparate corporate data into knowledge and information, and with communicating performance information. To put it concisely, automation helps people with making better decisions owing to the fact that it lends speedy access to genuine performance data.
There are more than a hundred performance management and balanced scorecard automation development companies. A number of choices are particularly meant for performance management and/or the balanced scorecard. Also included in this category are tools that are chiefly meant for data or analytics warehousing, business intelligence, but which have modules meant for performance management.
Step #8: Alignment
Here, the enterprise-level scorecard is ‘cascaded’ down into support and business unit scorecards. This means that the organizational level scorecard (the first Tier) is converted into support unit or business unit scorecards (the second Tier) and then later to individual and team scorecards (the third Tier). Cascading converts high-level tactics into lower-level aims, operational details, and measures. Cascading is the road to organizational alignment surrounding strategy. Individual and team scorecards connect day-to-day work with corporate vision and department aims. Performance measures are created for all aims at organizational levels. With the scorecard management system cascading down across the organization, aims become more tactical and organizational, as do the performance measures. Responsibility follows the measures and objectives, as ownership is delineated at each level. A stress on strategies required to produce outcomes is communicated all through the organization.
Step #9: Evaluation
Here, an assessment of the completed scorecard is carried out. In the course of this assessment, the organization endeavors to answer queries such as: ‘Are we measuring the right things?’ ‘Are we strategically budgeting our money?’ ‘Are our strategies working?’ and ‘Did our environment change?’
Financial measurements are still essential and include things such as return on investment, sales, liquidity measures and profits. Measures that result in financial outcomes include efficiency measures (such as scrap, responsiveness and cycle time), customer satisfaction measures (such as new customers, complaints, survey results and referrals), quality measures (such as returns, accuracy, rework and warrantee costs), growth/innovation measures (such as sales from new products, R&D expenditure and employee suggestions), and employee skills and satisfaction measures (such as certification, absenteeism, survey results, cross training, turnover and training hours). The balanced scorecard can be customized to suit the requirements of any organization.
SOME PITFALLS TO AVOID
Whether a scorecard project succeeds or not depends on whether or not your organization has worked through it well and properly delineated its strategy. Generally, a poorly-defined strategy creates a confusing and empty scorecard. You should either have introduced a strategy developing element at the beginning of the Balanced Scorecard project or toiled through the strategy process in the right manner. Failure to delineate and articulate a lucid strategy would result in a confused and ambiguous scorecard – and prominently one that is deficit in the thread of strategic constancy as the scorecard process is introduced across all functions and areas in the organization.
There may be some high-level strategies that are too vague to convert well into a BSC. Experts advise translation in terms of customer value and aspirational brand positioning, markets and customer segments, and financial targets, all in the perspective of where the organization wishes to be in the next five to ten years.
Ineffective data collection, reporting
A key reason why companies put too much stress on fiscal metrics at the expense of other key operating variables is the plain and simple fact that systems already exist for gathering and reporting economic measures. Companies that intentionally tend to delineate the important few metrics and dedicate the resources to automate data collection and the reporting that follows are inclined to get good outcomes. Unfortunately, in the majority of organizations, if gathering metrics / data takes too much energy and time, they will not be gathered. Hence, it is essential to prioritize key performance indicators to be certain that your investment in metrics is expended on the information that would be most pertinent to enhancing organizational performance.
Utilization of only lagging measures
A lot of managers are of the opinion that they would get the advantages of the Balanced Scorecard by utilizing a wide variety of non-fiscal measures. However, you should be careful to recognize not only lagging measures that delineate past performance, but also leading measures that may be utilized to prepare for future performance.
An example for this is not executing the concept solely in one or two Head Offices. To work, it is necessary to develop a hierarchy of scorecards, mirroring the structure of your organization and how it lends value to the customer. Bear in mind that more than a decade has gone before the scorecard concept was first created. Offshoring and outsourcing are now usual occurrences – make certain that these value generating operations are also incorporated.
Utilizing only generic metrics
It typically is not adequate to only adopt the metrics utilized by other successful businesses. Each company should take the effort to recognize the measures that are suitable for its own plan and competitive position.
Accountability and considerable visibility are required to assist with driving change. This means that each objective, measure, initiative and data source should have an owner. Without this degree of comprehensive execution, a perfectly built-up scorecard will not accomplish success, owing to the fact that nobody would be held liable for performance.
Management style, centralized measures and staff not empowered
Here, you may wish to recall the Management by Objectives (MBO) process. MBO had to go to the recycle bin of unsuccessful management solutions, more than 25 years ago. The key reason for its failure was a problem of management style. Don’t forget that the Balanced Scorecard is not a means for imposing a strategy developed at the top of the organization, or an implement with which you can beat people. In reality, it is a tool to enable people to get involved in the strategy process as well as develop aims and measures that mirror their business area’s endeavors to support a wider corporate strategy. MBO was unsuccessfully owing to a very centralized top-down style.
One of the key benefits of the Balanced Scorecard is that it assists staff with comprehending, creating and applying techniques within their business units. Hence, provide your staff with the freedom to create their aims and measures along with centrally delineated and common aims and measures, as well as ensure that all departments in your organization are incorporated.
It is true that accountability could provide powerful motivation for enhancing performance. However, employees must additionally possess the responsibility, tools and authority required to affect pertinent measures. If not, they would resist ownership and involvement. Initiatives should be funded, and resources made available, to make success a reality.
Difference between “strategy” and “KPI” scorecard
Chances are you don’t have a Balanced Scorecard but rather, a KPI scorecard, if you face problems such as the following:
- Appears that performance management isn’t working for your company.
- The Balanced Scorecard isn’t working the way different institutions are promoting it.
- Though the scorecard is helpful in monitoring KPIs, it helps only a bit with strategy implementation.
While KPI is purely a measurement tool, the Balanced Scorecard is a management tool. A KPI scorecard can or cannot be aligned with suitable actions, and objectives. On the other hand, the Balanced Scorecard has to do with alignment among objectives, actions and measures. The solution to the problem is to move from measuring to managing. Ponder over how your organization’s strategic objectives are connected to specific aims. What do you intend to do to accomplish them (or what is your action plan?)? How do you plan to measure the process and outcomes (KPIs)?
No methodology for process improvement
The worth of the Balanced Scorecard system depends on the belief that once performance issues are recognized, there is an effective and efficient technique for diagnosing and looking into root causes. After this, solutions can be created, and performance gaps closed. If the organization is without toolkits and standard methodologies for addressing process problems, the degree of effort needed to obtain a problem fixing strategy for each fresh performance gap could ultimately spoil the performance improvement program as it would be considered to use up too many resources from regular operations. When this occurs, performance will continue to get worse and there would be no adaptation. Utilizing time-tested process enhancement methodologies, probably along with problem-solving strategies (such as Six Sigma) would greatly reduce this problem.
It is true that there are some expenses associated with introducing the balanced scorecard, though these expenses differ among organizations depending on the quantity of data the business is already capturing. Businesses that capture practically no data may have an additional expense in putting together the infrastructure required to capture key data points. What’s more, owing to the nature of a BSC project, it is difficult to make accurate cost and time estimates for the whole project in advance. The required effort depends to a large extent on how far the organization has progressed in its BSC thinking in addition to the complexity and quantity of scorecards executed. The usual expenses for a standard Balanced Scorecard project comprise: time utilized by customer’s own resources (35 percent), outside implementation consultancy (30 percent), outside process consultancy (20 percent), and software licenses (15 percent).
In spite of the costs associated with the Balanced Scorecard, the expense outlay is usually surpassed by the benefits of the measurements and the information they provide to the organizations’ leaders.