Quadrant I. Module 25: Balanced Scorecard

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2 Quadrant I Module 25: Balanced Scorecard 1. Learning Outcomes 2. Introduction 3. Balanced Scorecard Framework 4. Balanced Scorecard 5. Organisational Effectiveness 6. Balanced Scorecard & Organisational Effectiveness 7. Summary Module 25: Balanced Scorecard 1. Learning outcomes After completing this module the students will be able to: Understand the Balanced Scorecard framework and its implementation Learn about the linkage between Balanced Scorecard & Organisational Effectiveness Source: 2.Introduction

3 The balanced scorecard is a strategic performance management tool, a semi -standard structured report, supported by design methods and automation tools which can be used by managers to keep a track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. A 'balanced scorecard' (BSC) is commonly used in two broad forms: 1. As individual scorecards that contain measures to manage performance, those scorecards may be operational or have a more strategic intent. 2. As a Strategic Management System, as originally defined by Kaplan & Norton. The critical characteristics that define a balanced scorecard are Its focus on the strategic agenda of the organization concerned Selection of a small number of data items to monitor A mix of financial and non-financial data items. 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 to monitor organization performance against strategic goals. 2. Balanced Scorecard Framework The Kaplan and Norton model of balanced scorecard are referred for this module:

4 Kaplan and Norton Balance Scorecard It is a strategic approach and performance management system that enables organizations to translate a company s vision. 1. Financial perspective 2. Customer perspective 3. Business process perspective 4. Learning & Growth 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. There is lot of handling and processing of financial data. With the implementation of a corporate database more of the processing can be centralized and automated. Customer perspective: There is an increase in realization of the importance of customer focus and customer satisfaction in any business. The leading indicators are: if customers are not satisfied, they will eventually find other

5 suppliers that will meet their needs. Poor performance is thus a leading indicator of future decline, even though the current financial picture may look good. Business perspective: It refers to internal business processes. Metrics based on this perspective helps the manager to know that business is running smooth and whether its products and services conform to customer requirements. There are 2 kinds of business processes may be identified i. Mission oriented processes ii. Support processes Mission oriented processes are the special functions of government offices and many unique problems are encountered in these processes. The support processes are more repetitive in nature and is easier to measure and benchmark using generic metrics. Learning and Growth It includes employee training and corporate cultural attitudes related to both individual and corporate self improvement. In a knowledge worker organization people are the main resource. In the current climate of rapid technological change it is 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. Kaplan and Norton emphasize that learning is more than training as 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 such as an Intranet. This learning and growth includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge based organization, people the only repository of knowledge are the main resource. In this rapid technological change, it is necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. Learning and growth constitute the essential foundation for success of any knowledge-worker organization. Typical learning and growth objectives Three objectives for the Learning and Growth: Employee capabilities - core competencies and skills which include employees obtaining the skills necessary to support the strategy. Facilitating people to gain a better understanding of the company s aspects like marketing, sales, etc. Information system capabilities Explore what information systems (CRM, ERP, BMP) might need to execute in your strategy effectively.

6 The Learning & Growth Perspective focuses on the intangible assets of an organization, mainly on the internal skills and capabilities of the employees that are required to support the value-creating internal processes. The Learning & Growth Perspective focuses on: Human Capital-Jobs and people issues Information Capital- Systems and technology issues Organization capital- Organizational climate and quality of work-life The Learning and Growth objectives describe how the people, technology, and organizational climate combine to support strategy. Measures in this perspective are lead indicators for improvements in the internal processes, customer and financial perspectives. 3. Balanced Scorecard The good part about balanced scorecard method is that it is tactical and concrete. While strategic planning documents often tend to be passive, they only say what should be accomplished but they do not say how it will be measured, balanced scorecard attempts to be active. The balanced scorecard method transforms an organization s strategic plans and goals from mere statements into execution plans and orders. This can be done at a very granular level if needed. Balanced scorecard provides a framework that not only provides performance measurements, but it also helps planners identify what should be done and how it should be measured. Balanced scorecard enables executives to truly execute their strategies. How is balanced scorecard implemented in real business? Major units throughout organizations often establish their own scorecard which is then integrated with the scorecards of other units to achieve the scorecard of the overall organization. The balanced scorecard method today is often implemented as a full strategic planning and management system where data is fed directly from accounting and company IT systems into the model to calculate metrics and compare them with strategic goals and plans. A balanced scorecard is a performance management tool that enables a company to translate its vision and strategy into a tangible set of performance measures. But it is morethan a measuring device. The scorecard provides an enterpriseview of an organization s overall performance by integratingfinancial measures with other key performance indicatorsaround customer perspectives, internal business processes, and organizational growth, learning and innovation. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditionalfinancial measures. But financial measures explains the past events - industrial age companies forwhich investments in long-term capabilities and customerrelationships were not critical for success.

7 These financial measures are inadequate, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers,employees,processes, technology, and innovation because Kaplan and Norton assume the following causal relationship - measures of organisational learning and growth, measures of internal business processes, measures of the customer perspective and financial measures. The measures of organisational learning and growth are therefore the driversof the measures of the internal business processes. The measuresof these processes are in turn the drivers of the measures of the customer perspective,while these measures are the drivers of the financial measures. According to Kaplan and Norton agood balanced scorecard should have an appropriate mix of outcomes lagging indicators and leading indicators (performance drivers). Metrics used in the balanced scorecard are typically called Key Performance Indicators (KPIs) because they measure how well the organisation performs against predefined goals and targets. There are two major types of KPIs: leading Indicators Lagging indicators Leading indicators measure activities that have a significant effect on future performance, they are powerful measures because it gives managers more time to influence the outcome.whereas, laggingindicators measure the output of the past activity (financial metrics). Types of Balanced scorecards 1. A specific multidimensional framework for strategic performance measurement that combines financial and non-financial strategic measures. 2. It additionally describes strategy by using cause-and-effect relationships. 3. It also implements strategy by defining objectives, action plans, results and connecting incentives with BSC. 4.The challenge of implementing the Balanced Scorecard Many large companies use a performance measurement system like the Balanced Scorecard and small and medium enterprises (SMEs) do not have a performance measurement system. Companies that start with a performance measurement system face difficulties with the implementation. Some of the key issues that can cause a Balanced Scorecard initiative to fail are: Poorly Defined Metrics Metrics need to be relevant and clear. They should be depicted with visual indicators that are easily understood. In addition, metrics need to be collected at the ideal frequency for making decisions, and

8 defined in such a way that the measurement can be consistently applied across the firm, even if their targets of performance differ (and they should). A system that has sloppy or inconsistently defined metrics will be vulnerable to criticism by people who want to avoid accountability for results. Lack of Efficient Data Collection and Reporting A primary reason that companies overemphasize financial metrics at the expense of other important operating variables is the simple fact that systems already exist for collecting and reporting financial measures. Companies that deliberately plan to define the vital few metrics and commit the resources to automate data collection and subsequent reporting tend to achieve good results. Unfortunately, in most organizations, if collecting metrics data consumes too much time and energy, they will not be captured. That is why it is important to prioritize key performance indicators so you can be confident that your investment in metrics is spent on the information that will be most relevant to improving organizational performance. Lack of a Formal Review Structure Scorecards work best when they are reviewed frequently enough to make a difference. If a metric value changes on a daily basis and the variables within the control of management can be affected on a daily basis, then the metric should be reviewed on a daily basis. Additionally, metrics review meetings should follow a standard agenda, with clearly defined roles for all attendees and an expectation that follow through on any agreed upon actions will be monitored at each meeting. Finally, review of metrics is ideally cross-functional, including peer groups who have a shared responsibility for process results. It is important to begin these meetings as early as possible in the deployment of a new metrics system. Do not wait until all of the metrics are defined, automated and deployed. Start with the metrics you already have defined and with manual data collection, if necessary. This is an important behavior change, which is essential for the success of your metrics program. No Process Improvement Methodology The value of Balance Scorecard systems relies on the premise that once performance problems are identified, there is an efficient and effective method for diagnosing and addressing root causes. Solutions can then be developed and performance gaps can be closed. If the organization does not have standard methodologies and toolkits for addressing process problems, the amount of effort required to derive a problem solving approach for each new performance gap could eventually damage the performance improvement program as it will be seen as taking too many resources away from daily operations. When this happens, there can be no adaptation and performance will continue to deteriorate. Using time-tested process improvement methodologies, perhaps in combination with problem solving methodologies (e.g. Six Sigma) can greatly alleviate this problem.

9 Too Much Internal Focus One major criticism of the Balanced Scorecard is that it encourages an internal focus. This is not as much an indictment of the principle as it is the way companies put the principle into practice. To help overcome this problem, you should ALWAYS start with an external focus the view of your organization s Super System. The goal is to achieve a balance of enterprise level metrics as you assess the organization s market, shareholders, competitors, employees and stakeholders. Executives will use data about their Super System to assess Strengths, Weaknesses, Opportunities and Threats (SWOT). This will then guide them to gaps in their enterprise level metrics. Then, all other levels of metrics are tested for alignment with the enterprise level metrics, thereby ensuring that even internal metrics link to external performance drivers. 5.Organizational effectiveness As per a research article(reference cited in Quad 3) states that the organization and management science emerged in the early 1900s in conjunction with the industrial revolution, an evolution has occurred in concepts about the nature and function of organizations and the criteria for organizational effectiveness. The early management literature assumed that organizations were fairly generic. For example Drucker described management as a generic function, which faces the same basic tasks in every country and in every society. These generic functions include: Defining mission and establishing purpose and goals, Leading and motivating, Strategizing and planning, Structuring, organizing, and designing, Controlling and establishing roles and authorities, Setting performance standards and value expectations,

10 Staffing, developing, and managing human resources, Budgeting and allocating resources, Evaluating, learning, and improving, Managing external relations. One of the most widely used tools for assessing organizational effectiveness, the Malcolm Baldrige Quality Award (1999), still reflects this basic, generic approach. The seven Baldrige performance criteria (leadership, strategic planning, customer and market focus, information and analysis, human resource focus, process focus, and business results) capture the criticalorganization/management functions identified in the early literature, albeit in slightly different groupings. There was growing recognition that focusing on generic functions could mask the fact that there were, indeed, differing views and aspects of organizational effectiveness. Different functions and different attributes within each of the functions needed to be emphasized as organizations faced different internal and external challenges. Quinn and Rohrbaugh (1983) noted that different conceptualizations of organizational effectiveness were associated with four common organizational perspectives, which they categorized as: 1. the human relations model 2. The open systems model 3. The rational goal model (closed systems perspective) 4. The internal process model (closed system perspective). Using multivariate analysis, they found three value dimensions that underlay these different and seemingly conflicting conceptualizations of organizational effectiveness: 6. Balanced Scorecard and Organizational Effectiveness One of the recent trends in management today is the balanced scorecard. Though empirical research and many success stories show that strategic measurement can work wonders, there are also many cases where scorecards simply did not work. The most balanced perspective is that these tools work well, when they are well implemented and can have strong impact on Organizational Effectiveness A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the 'Balanced

11 Scorecard'.Recognizing some of the weaknesses and vagueness of previous management approaches, thebalanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. A balanced scorecard is a central list of numbers, which show each key part of an organization's success, such as financials, people, operations, suppliers,customers, and support systems. The numbers should measure not just important outcomes, but also the factors, which influence, or drive, those outcomes. 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. The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives: The Learning and Growth Perspective The Business Process Perspective The Customer Perspective The Financial Perspective The basic philosophy of the balanced scorecard is that people will focus on what you measure. Thus, the balanced scorecard does its magic by focusing the organization on the issues which the leadership team decides are key to its success. It does this more through the process of implementing the scorecard than through the actual paper or numbers - so a human solution is the key. Simply buying expensive software won't provide the full benefit. There are other benefits - stronger communication - through the cascading and measurement tracking processes, warning of strengths and opportunities ahead (from watching key indicators), less "information overload" from focusing only on the most important measures and greater alignment from agreement on key objectives. Feedback (Kaplan and Norton)

12 In the area of setting and monitoring targets for senior management teams, Kaplan and Norton suggested that what was needed to measure performance was a structured methodology for continually linking an organisation s Vision, Strategies & Objectives with a set of predefined, quantifiable measurements. In a means-end chain the performance of each team and each individual member needs to accumulate into the goal achievement for the organisation. It is only by covering what Kaplan and Norton call the balanced scorecard that teams can ensure that they are stretched in all the key areas. Such a notion helps a team cover the right breadth and depth, plus it enables them to regularly check progress thereby strengthening the link between planned versus actual performance, and team member expectations of performance. High Energy Teams Dick McCann in his research has uncovered a powerful development process or sequence for teams to go through that effectively will stretch them because it energises them. In practice the sequence can be varied to fit a series of modular team development workshops. Where to focus the team s development can also be diagnosed via the Strategic Team Development Profile. The key idea is that a team should ask fundamental questions about itself. By asking these questions and agreeing answers to them the team will develop a stretched position. This model focuses on the questions like Who are we? Where are we now? Where are we going? How will we get there? What is expected of us? What support do we need? How effective are we? What recognition do we get? The processes that ensure all eight questions are integrated and coordinated are known as Linking. Team members and particularly the team leader need to be effective at a whole range of Linking Skills. This model can be highly effective to attain Organiational Effectiveness, if adopted with the underlying principle of Balanced Scorecard (Feedback Loop)

13 7.Summary In this module we have learnt that Balanced Scorecard can be used to measure organisation s effectiveness. It can be used to measure individual s performance or strategic performance of an organization. There are several challenges that one faces in implementing the balance scorecard viz. poorly defined metrics and no formal review structure & too much focus on the internal structure. 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.