Balanced Score Card

BALANCED SCORECARD

Human Resource Development BALANCED SCORECARD

Prepared by:

Submitted to:

2

INDEX

Sr. No.

Particulars

Page. No.

1

INTRODUCTION: Balanced Scorecard

4

2

NEED FOR THE BALANCED SCORECARD

6

3

4 MAJOR PERSPECTIVES OF A BSC

9

4

The Four Perspectives: Cause and Effect

12

relationship 5

BUILDING AND IMPLEMENTING THE SYSTEM USING A BALANCED SCORECARD

17

6

THE BSC MODEL

20

7

FEATURES OF A GOOD BSC

23

8

ADVANTAGES OF BSC

24

9

DISADVANTAGES OF BSC

25

UTILISING THE BALANCED SCORECARD AS A

26

10

STRATEGIC MANAGEMENT TOOL

11

CONCLUSION

29

12

REFERENCES

30

INTRODUCTION: Balanced Scorecard

3

Companies today are in the midst of a revolutionary transformation as Industrial age competition is shifting to Information age competition. The cut-throat competition that businesses faced in the last two decades has made them to look for improvement initiatives like Total Quality Management, Just-in-Time (JIT) systems; Activity based cost management, Employee empowerment and Re-engineering. Though these initiatives resulted in enhanced shareholder value, their structure was disjointed and focused on the short-term survival and growth. The programs centered on achieving breakthrough performance merely by monitoring and controlling financial measures of past performance. This collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has led to a new blend the Balanced scorecard. The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and

strategy

of

the

organization,

improve

internal

and

external

communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. While the phrase BALANCED SCORECARD was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950’s and the work of French process engineers (who created the TABLEAU DE BORD – literally, a "dashboard" of performance measures) in the early part of the 20th century. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into 4

the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The

balanced

scorecard

is

a

management

system

(not

only

a

measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. In a nutshell, the need to link financial and non-financial measures of performance and identifying key performance measures led to the emergence of “Balanced Score Card” approach developed by Norton and Kaplan (1992) in the U.S. The Balanced score card is defined as “an approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasized the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased fashion”.

Kaplan and Norton identified four perspectives representing the important facets of the organization. These were: 1. Financial perspective (how do we look to shareholders) 2. Customer perspective (how the customer see us) 3. Internal business perspective (what we excel at?)

5

4. Innovation & Learning perspective (can we continue to improve and create value)

The idea behind the four perspectives represents a balanced view of any organization and by creating measures under each of these headings all the important areas of business would be covered. It is important to note that the balanced score card itself is just a frame work and it doesn’t say what the specific measures should be. It is a matter for people within the organization to decide upon. The set of measures for each organization or even sections with the organization will be different. Much of the success of score card depends on how the measures are agreed, the way they are implemented and how they are acted upon. So the process of designing a score card is as important as the score card itself.

6

NEED FOR THE BALANCED SCORECARD (BSC) The balanced scorecard is a way of Measuring organizational, business unit or department success; •

Balancing long and short term actions;

•

Balancing different measures of success and

•

o

Financial

o

Customer

o

Internal Operations

o

Human Resource Systems & Development (Learning & growth)

A way of tying strategy to measures of action

The Need for the scorecard The objective of any measurement system should be to motivate all managers and employees to implement successfully the business units strategy.

Those

companies

that

can

translate

their

strategy

into

measurement system will be able to execute their strategy because they communicate their objectives and their targets. The communication makes managers and employees focus on the critical drivers enabling them to align investments, initiatives and actions accomplishing strategic goals. Historically, the measurement system for any business has been financial. Accounting was considered to be the language of business .Innovations in measuring the financial performance of the industrial age companies played a vital role in their successful growth. And financial innovations, such as the Return on Investment (ROI) metric, and operating and cash budgets, were critical to the success of these corporations. However, an over emphasis on achieving and maintaining short-term financial results can cause companies to over invest in short-term fixes and to under invest in long-term value creation, particularly in the

7

intangible and intellectual assets that generate future growth. The pressure for short-term financial performance often causes companies to reduce the resources spent on new product development, process improvements, human resource development, Information technology, databases and systems as well as customer and market development. In the short run, the financial accounting model reports these spending cutbacks as increases in reported income, even when the reductions have cannibalized a company’s stock of assets and its capabilities for creating future economic value. In short, these organizations use the financial and non-financial performance only for tactical feedback and control of shortterm operations.

Linking Strategy with Performance Measures The essential thrust of the balanced scorecard is based on the fundamental proposition that within organizations what gets measured gets done however, organizations dont always get what they measure. If measurement, by itself, had that much impact on human behavior, then anyone that had weighing scales would never get fat. An appropriate measurement system is one that energizes employees in the context of what the organization is trying to do. Thus, the logical starting point for the development of any performance measurement system for an organization must be a clear statement of mission, objectives and resultant strategy. An organization’s mission is its basic function in society and is the reason why the organization exists. Related to this are the objectives to be achieved and they represent a precise statement of purpose for a specific period. Basically a strategy is a shared understanding about how the organization’s mission is to be achieved in a competitive environment. Strategic thinking will focus on customers and competitors as well as internal capabilities and resources. It will include reference to the firm’s competitiveness, quality of output and levels of

8

customer service. In turn, specified performance measures allow all employees understand what the strategy is and how their performance is linked to that overall strategy. The relationship between Mission, Objectives, Strategy and Performance Measures is depicted in Fig.1.

Fig.1

There are at least three reasons why organizations should, and often do, measure their performance: 1. To align mission, strategy, values and behavior 2. To improve the right things 3. To numerically define the meaning of success

9

4 MAJOR PERSPECTIVES OF A BSC The aim of the Balanced Scorecard is to direct, help manage and change in support of the longer-term strategy in order to manage performance. The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the ‘change’ element within the organization. This tool is a comprehensive framework which considers the following perspectives and tries to get answers to the following questions – 1. Financial Perspective - How do we look at shareholders? 2. Customer Perspective - How should we appear to our customers? 3. Internal Business Processes Perspective - What must we excel at? 4. Learning and Growth Perspective - Can we continue to improve and create value?

Hence, from the above lines we can say that this tool has considered not only the financial results to be important but also those factors which actually drive an organization towards future successes as mentioned earlier. The tool has given stress on the other areas which are required to ‘balance’ the financial perspective in order to get a total view about the organizational performance and improve the same. The framework tries to bring a balance and linkage between the – (a) Financial and the Non-Financial indicators, (b) Tangible and the Intangible measures, (c) Internal and the External aspects and (d) Leading and the Lagging indicators.

10

 The Learning & Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Government agencies often find themselves unable to hire new technical workers, and at the same time there is a decline in training of existing employees. This is a leading indicator of 'brain drain' that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools.  The Business Process Perspective This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these 11

processes. The support processes are more repetitive in nature, and hence easier to measure and benchmark using generic metrics.  The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.  The Financial Perspective Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough

handling

and

processing

of

financial

data.

With

the

implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

The Four Perspectives: Cause and Effect Relationship The four perspectives as mentioned above are highly interlinked. There is a logical connection between them. The explanation is as follows : If an

12

organization focuses on the learning and the growth aspect, it is definitely going to lead to better business processes. This in turn would be followed by increased customer value by producing better products which ultimately gives rise to improved financial performance.

A strategy is a set of hypotheses about cause and effect. The chain of cause-and- effect should pervade all four perspectives of the Balanced Scorecard therefore a properly constructed Balanced Score Card should tell the story of the company's strategy.(figure 2)

13

Figure 2

Performance Drivers A good Balanced Score Card should also have a mix of outcome measures (lagging

indicators)

and

performance

drivers

(leading

indicators).

Outcome measures without performance drivers do not communicate how the outcomes are to be achieved or give an early indication about whether the strategy is being implemented successfully. Conversely performance drivers without outcome measures (may achieve short term operational improvements) fail to reveal whether operational improvements have translated into expanded business with enhanced financial performance. Example (Figure 3)

14

Figure 3

A completed organizational score card needs to have the following components: 

Strategic Themes Identified



Strategic Objectives Identified



Measures for the execution of the strategic objectives



Competitive Bench Marks for the measures selected



Short Term and Long term targets for identified measures



Initiatives aligned to the Strategic objectives for execution and review.

15

Once the organizational score card is prepared and finalized the scorecard is to be used as an effective method of alignment see (figure 4). Departmental, Process, and Individual score cards aligned to corporate score card will translate your strategy to daily management.

Links to Six Sigma Six Sigma is a unique variability reduction management strategy for Business improvement. The most powerful aspect of Six Sigma is in the application of the rigorous DMAIC philosophy to projects to achieve higher customer satisfaction and Business results. While Six Sigma helps organizations in elimination of waste in their pursuit to excellence the Balanced Score Card lays the foundation for the implementation of an effective Six Sigma strategy. When one attempts to view the evolution of various measurement systems you could see that Balanced Score Card encompasses Financial, Strategic and Operational measurements. See (Figure 5).It is clear to 16

visualize that implementation of Balanced Score Card followed by the deployment of Six Sigma is a better approach towards Six Sigma deployment. While the proven statistical tool set of Six Sigma operates at the operational level the Balanced Score Card provides the rationale for identification of areas for improvement.

BUILDING AND IMPLEMENTING THE SYSTEM USING A BALANCED SCORECARD

17

Step One of the scorecard building process starts with an assessment of the organization’s Mission and Vision, challenges (pains), enablers, and values. Step One also includes preparing a change management plan for the organization, and conducting a focused communications workshop to identify key messages, media outlets, timing, and messengers. In Step Two, elements of the organization’s strategy, including Strategic Results, Strategic Themes, and Perspectives, are developed by workshop participants to focus attention on customer needs and the organization’s value proposition.

In Step Three, the strategic elements developed in Steps One and Two are decomposed into Strategic Objectives, which are the basic building

18

blocks of strategy

and define the organization's strategic intent.

Objectives are first initiated and categorized on the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages (Strategy Maps) for each Strategic Theme, and then later merged together to produce one set of Strategic Objectives for the entire organization. In Step Four, the cause and effect linkages between the enterprise-wide Strategic Objectives are formalized in an enterprise-wide Strategy Map. The previously constructed theme Strategy Maps are merged into an overall enterprise-wide Strategy Map that shows how the organization creates value for its customers and stakeholders. In Step Five, Performance Measures are developed for each of the enterprise-wide Strategic Objectives. Leading and lagging measures are identified, expected targets and thresholds are established, and baseline and benchmarking data is developed. In Step Six, Strategic Initiatives are developed that support the Strategic Objectives. To build accountability throughout the organization, ownership of Performance Measures and Strategic Initiatives is assigned to the appropriate staff and documented in data definition tables. In

Step

Seven,

the

implementation

process

begins

by

applying

performance measurement software to get the right performance information to the right people at the right time. Automation adds structure and discipline to implementing the Balanced Scorecard system, helps transform disparate corporate data into information and knowledge, and helps communicate performance information. In short, automation helps people make better decisions because it offers quick access to actual performance data. In Step Eight, the enterprise-level scorecard is ‘cascaded’ down into business and support unit scorecards, meaning the organizational level scorecard (the first Tier) is translated into business unit or support unit scorecards (the second Tier) and then later to team and individual scorecards (the third Tier). Cascading translates high-level strategy into lower-

19

level objectives, measures, and operational details. Cascading is the key to organization alignment around strategy. Team and individual scorecards link day-to-day work with department goals and corporate vision. Cascading is the key to organization alignment around strategy. Performance measures are developed for all objectives at all organization levels. As the scorecard management system is cascaded down through the organization, objectives become more operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as ownership is defined at each level. An emphasis on results and the strategies needed to produce results is communicated throughout the organization. In Step Nine, an Evaluation of the completed scorecard is done. During this evaluation, the organization tries to answer questions such as, ‘Are our strategies working?’, ‘Are we measuring the right things?’, ‘Has our environment changed?’ and ‘Are we budgeting our money strategically?’

THE BSC MODEL

20

The Model – An Explanation

Hence, from the aforesaid model, it is clear that the following are to be done so as to utilize the Balanced Scorecard as a strategic management tool : 1. The major objectives are to be set for each of the perspectives. 2. Measures of performance are required to be identified under each of the objectives which would help the organization to realize the goals set under each of the perspectives. These would act as parameters to measure the progress towards the objectives. 3. The next important step is the setting of specific targets around each of the identified key areas which would act as a benchmark for performance appraisal.

21

Hence, a performance measurement system is build around these critical factors.Any deviation in attaining the results should raise a red signal to the management which would investigate the reasons for the deviation and rectify the same. 4. The appropriate strategies and the action plans that are to be taken in the various activities should be decided so that it is clear as to how the organization has decided to pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is often referred to as a blueprint of the company strategies. An example will help to understand it better. Some of the objectives together with a measurement measures are given below.

22

Hence, the above paragraphs show that all the four areas have been given equal importance in measuring performance level. The measures and the objectives, however, depend upon the type of business the organization is in. The financial indicators are complemented by the nonfinancial ones. Since, objectives and goals are set for each of the critical success factors under each of the heads, it brings about a focus on the strategic

vision.

Thus,

all

activities

would

be

directed

towards

achievement of the longterm goals which have been set by the top management. The identification of the key result areas (KRAs) help an organization in moving towards the right strategic direction. This tool creates a link between objectives, measures, targets and initiatives. It is, therefore, absolutely clear that the Balanced Scorecard acts as a focal point for the organisation’s efforts, designing and communicating priorities to the managers, employees, investors and the customers.

FEATURES OF A GOOD BALANCED SCORE CARD:

23

1. It tells the story of a company’s strategy, articulating a sequence of cause and effect relationships. 2. It helps to communicate the strategy to all members of the organization by translating the strategy into coherent and linked set of understandable and measurable operation targets. 3. A balanced score card emphasizes non-financial measures as a part of program to achieve future financial performance 4. The balanced score card limits the number of measures identifying only the most critical areas. The purpose in to focus manager’s attention on measures that most affect the implementation of strategy. 5. The balanced score card highlights less than optimal trade offs that managers may make when they fail to consider operational and financial measures together.

ADVANTAGES OF BSC The balanced scorecard tool is being used by several organizations throughout the world because of certain advantages it has been able to deliver as below:

24

 It translates vision and strategy into action.  It defines the strategic linkages to integrate performance across organizations.  It communicates the objectives and measures to a business unit.  It aligns the strategic initiatives in order to attain the long-term goals.  It aligns everyone within an organization so that all employees understand how they support the strategy.  It provides a basis for compensation for performance. 

The scorecard provides a feedback to the senior management if the strategy is working.

 Focusing the whole organization on the few key things needed to create breakthrough performance.  Helps to integrate various corporate programs. Such as: quality, reengineering, and customer service initiatives.  Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees can see what's required at their level to achieve excellent overall performance.

25

DISADVANTAGES OF BSC

•

It is not easy to implement this tool because it involves a lot of subjectivity.

•

The tool is much more complex compared to the other tools

•

The measures that need to be taken is contingent upon the kind of environment, industry and the business the organization is in.

•

A lot of refinement is still required to be done so that it becomes understandable

to

every

stakeholder

associated

with

the

organization.

26

UTILISING THE BALANCED SCORECARD AS A STRATEGIC MANAGEMENT TOOL

The

tool

has

organizations points,

become to

conflicting

identify

a

weapon the

interests,

for

pressure objectives

setting, prioritization of objectives, planning and budgeting. The four main important steps that need to be taken care of are –

Tata Motors is the first Indian company to be inducted in the Balance Scorecard Hall of Fame.,Joining the thirtymember elite club of organizations including Hilton Hotels, BMW Financial Services, U.S. Army, Korea Telecom, Norwegian Air Force and the city of Brisbane for achieving excellence in

1. Translating the Vision It is to be remembered that the vision of any organization should be understood by each and every employee of the organization. If it is understood by the top management only, then it is definite that the organization will fail to realize its goals. Hence, before starting with the strategic implementation process, the organizations needs to be clear about the reason for its existence, where it wants to see itself after a certain number of years and properly decide its business definition. The managers should build a consensus around the organisation’s vision and strategy. The strategies, in fact, emanate from the vision and mission of the company which means that a linkage is formed between the strategies of the different business units and the vision of the organization. The lofty statements must be translated into an integrated set of objectives and measures. Thus, by using this tool, the overall strategic objectives for the company gets clarified which helps to achieve consensus across different business units on the overall strategic objectives for the company.

27

2. Communicating and Linking Just communicating the vision and the strategies is not an end in itself. The strategic goals and the measures to be set in the different areas have to be decided upon. The long-term strategic goals have to be translated into both departmental and individual goals which should be aligned to each other in order to realize the long-term goals. In fact, each and everyone at different levels in the organizational hierarchy needs to be educated about the action plans and reasons for accepting the same. The tool contains three levels of information: (i) It describes the corporate objectives, measures and the targets (ii) It helps in deciding the business unit targets and (iii) It helps in framing the departmental and the individual objectives which will help in attaining the objectives of the business unit directly which would lead to the attainment of the corporate goals. The employees are given the freedom to decide their measures, objectives and the targets attainment of which would move the organization in the right strategic direction. Then the compensation level is linked to the performance level which in reality involves a lot of subjectivity. 3. Business Planning This step helps in the resource allocation process. One has to keep in mind that objectives form an important criteria in deciding the quantum of resources that are required to be allocated to the various departments, activities and the processes. No strategy can bring successful results to an organization if the allocation is not in line with what is required to meet the results. This allocation is dependent on the budgeted estimates which are decided on the basis of the said objectives. Hence, through this step the Balanced Scorecard tries to bring about an integration between strategic planning and the budgeting exercise. The short-term milestones are also needed to be figured out

28

which in totality brings about a linkage between strategic goals and the budgets. This procedure helps in actualizing what has been set by the organization. Thus, this step brings about a shift from the ‘thinking’ exercise to the ‘doing’ stage and the organization tries to achieve the long-term goals through the short-term actions.

4. Feedback and Learning The first three steps as mentioned above help in the strategic implementation process. But, for knowing whether the organization is in a position to achieve the strategic goals and whether it is in the right track, the process of feedback and learning is essential. The strategic learning consists of acquiring knowledge about which way the organization is moving to, testing whether the premises considered before hold true even now and finally making adjustments wherever required. The corrective measures are required so that the necessary rectifications are made which will help an organization pursue the correct path. Another point is that an organization gets to know whether the cause-andeffect relationships among the different perspectives really hold true, to what extent they are strongly linked and also whether positive results are being obtained. In case, an organization realizes the existence of a gap in the cause effect relationships, an immediate correction would be required so that a positive relationship can be build among the various factors. Thus, the tool with its specification of the causal relationships between performance drivers and objectives allows corporate and the business unit objectives executives to use their periodic review sessions in order to evaluate the validity of the unit’s strategy and the quality of its execution. Also, this feedback and learning exercise may force an organization to change the measures set in each of the perspectives and adopt those, which if attained would ensure the success of the corporate and the business strategies. CONCLUSION 29

The

Balanced

Scorecard

is

therefore

a

very

important

strategic

management tool which helps an organization to not only measure the performance but also decide the strategies which are needed to be adopted so that the long-term goals are achieved. Thus, in other words, the application of this tool ensures the consistency of vision and action which is the first step towards the development of a successful organization. Also, its proper implementation can ensure the development of competencies within an organization which will help it to develop a competitive advantage without which it cannot expect to outperform its rivals.

30

REFERENCES

www.valuebasedmanagement.net. http://en.wikipedia.org www.thebalancedscorecard.com www.managementhelp.org ucsfhr.ucsf.edu/files/implementationguide.doc www.managementparadise.com www.citehr.com

31