Balanced scorecard

In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard, a method intended to give managers a fast, comprehensive view of the performance of a business.

The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from two major drawbacks:

• They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance.
• It is common for the current market value of an organization to exceed the market value of its assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess value can be thought of as intangible assets. These figures are not measured by normal financial reporting.

The scorecard seeks to measure a business from the following perspectives:

• Financial perspective - this will be familiar to business managers and measures such as financial ratios, debtors or cash flow are common.
• Customer perspective - seeks to measure aspects directly impact on customers such as the time taken to deal with calls, customer surveys, complaints or competitive rankings.
• Internal business perspective - looks at the impact of internal processes on the business - how long is spent prospecting? How much rework is required? How successful are we when tendering for new business?
• Innovation and learning perspective - How much revenue comes from new ideas? How many employee suggestions are there? How do we train staff?

The specific measures within each of the perspectives will be chosen to reflect the drivers of that business. The method can facilitate the separation of strategic policymaking from the implementation, so that organizational goals can be broken into task oriented objectives which can be managed by front-line staff. It can also help detect correlation between activities. For example, we might find that the internal business objective of implementing a new telephone system can help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business.

Kaplan and Norton found that companies are using the scorecard to:

• Clarify and update strategy
• Communicate strategy throughout the company
• Align unit and individual goals with strategy
• Link strategic objectives to long term targets and annual budgets
• Identify and align strategic initiatives
• Conduct periodic performance reviews to learn about and improve strategy

In many senses, the objectives chosen are leading indicators of future performance. Effort we make today is reflected in the future profits of the company. In this way, current expenditure can be viewed as investment in the future of the company.

In 1997 Kurtzman found that 64% of companies questioned were measuring performance from a number of perspectives in a similar way to the balanced scorecard.

It is difficult to interpret the impressive survey based adoption statistics for the Balanced Scorecard, however, without being clear on how the term was both defined and understood by those participating in the survey. In practice, it appears, there are wide variations in understanding between organisations. In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon intended method of use within an organisation. They describe how Balanced Scorecard can be used to support two distinct management activities, management control and strategic control, and asserts that due to differences in the performance data requirements of these applications, planned use should influence the type Balanced Scorecard design adopted. They also describe characteristics of Balanced Scorecards appropriate for each purpose, and suggests a framework to help select between them.

Later that year the same authors reviewed the evolution of the Balanced Scorecard as a strategic management tool, recognising three distinct generations of Balanced Scorecard design. In their paper, they relate the empirically driven developments in Balanced Scorecard thinking with literature concerning strategic management within organisations. Cobbold and Lawrie argue that over the dozen years that have passed since its introduction significant changes have been made to the physical design, application and the design processes used to implement the tool within organisations. This Balanced Scorecard evolution can largely be attributed to empirical evidence of changes driven primarily by weaknesses in earlier design processes, rather than in the architecture of the original idea they write. They conclude that It is these changes, in what they refer to as 3rd Generation Balanced Scorecard that have enhanced the utility of Balanced Scorecard as a strategic management tool.

See also

• Strategic management

References

• Cobbold, I and Lawrie G (2002a). “Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools”. Performance Measurement Association 2002 [1] (http://www.2gc.co.uk/pdf/2GC-PMA02-1f.pdf)

• Cobbold, I and Lawrie, G (2002b). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association 2002 [2] (http://www.2gc.co.uk/pdf/2GC-PMA02-3f.pdf). See also Lawrie, G and Cobbold, I (2004). “Third Generation Balanced Scorecard: evolution of an effective strategic control tool” published in International Journal of Productivity and Performance Management, Vol 53, No. 7 - working paper version available from 2GC Web Site [3] (http://www.2gc.co.uk/forum/viewtopic.php?t=122)

• Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review Jan – Feb pp71-80.

• Kaplan R S and Norton D P (1996) "Using the balanced scorecard as a strategic management system", Harvard Business Review Jan – Feb pp75-85.

• Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30

• Balanced Scorecard - An Introduction (http://www.2gc.co.uk/balancedscorecard.asp)

• Balanced Scorecard Basics (http://www.balancedscorecard.org/basics/bsc1.html)

• The Balanced Scorecard User Group (http://www.scorecardsupport.com)de:Balanced Scorecard

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