Balanced Scorecard

The balanced scorecard is a new management concept which helps managers at all levels monitor results in their key areas. An article by Robert Kaplan and David Norton entitled "The Balanced corecard ! "easures that Drive #er$ormance" in the %arvard Business Review in &''( sparked interest in the method) and led to their business bestseller) "The Balanced corecard* Translating trategy into Action") published in &''+. There,s nothing new about using key measurements to take the pulse o$ an organi-ation. .hat,s new is that Kaplan and Norton have recommended broadening the scope o$ the measures to include $our areas* $inancial per$ormance) customer knowledge) internal business processes) learning and growth. This allows the monitoring o$ present per$ormance) but also tries to capture in$ormation about how well the organi-ation is positioned to per$orm well in the $uture. Kaplan and Norton cite the $ollowing bene$its o$ using the balanced scorecard* /ocusing the whole organi-ation on the $ew key things needed to create breakthrough per$ormance. %elping to integrate various corporate programs) such as 0uality) re!engineering) and customer service initiatives. Breaking down strategic measures to local levels so that unit managers) operators) and employees can see what,s re0uired at their level to roll into e1cellent per$ormance overall. Similarity to Hoshin Planning The balanced scorecard has strong similarities to %oshin #lanning or hoshin kanri) the organi-ation!wide strategic planning system used widely in 2apanese companies. Both seek breakthrough per$ormance) alignment) and integrated targets $or all levels. The balanced scorecard suggests which speci$ic areas should be measured $or a balanced picture) but this isn,t contradictory to %oshin #lanning. 3ne thing that the 2apanese emphasi-e is "catchball") the process o$ give and take between levels that helps to de$ine strategy in 2apanese companies. The balanced scorecard method seems to be more o$ a one!way street !! the e1ecutive team creates the strategy) and it cascades down $rom there. One cautionary note 4ou tend to get what you measure $or) since people will work to achieve the e1plicit targets which are set. Dr. Deming $eared this e$$ect) noting that people would skew their work to meet particular incentive pay targets. /or e1ample) emphasi-ing traditional $inancial measures tends to encourage short!term thinking ! like rigging shipping schedules to make the monthly sales look good) or aggressively discounting to meet year!end targets. Kaplan and Norton) recogni-ing this) urge a more balanced set o$ measurements) which is good. 5ven so) people will work to achieve their scorecard goals) and may ignore important things which are not on the scorecard. 3r) i$ the scorecard is not re$reshed o$ten enough) what looked like an important goal in 2anuary

may not be very germane in 2une. Kaplan and Norton recogni-e these risks) and they don,t pretend that they have said the $inal word on scorecards.

Balanced Scorecard

The balanced scorecard $orces managers to look at the business $rom $our important perspectives. 6t links per$ormance measures by re0uiring $irms to address $our basic 0uestions* 7a8 %ow do customers see us9 ! :ustomer perspective 7b8 .hat must we e1cel at9 ! 6nternal perspective 7c8 :an we continue to improve and create value9 ! 6nnovation ; learning perspective 7d8 %ow do we look to shareholders9 ! /inancial perspective

Balanced Scorecard
The Balanced corecard is a management tool to mobili-e employees to $ul$ill the mission o$ the organi-ation. 6t is $ounded on principles developed by Robert . Kaplan and David #. Norton) and published in their book) The Balanced

corecard* Translating trategy into Action. The scorecard is a method o$ designing) organi-ing and communicating per$ormance measures across multiple perspectives 7i.e. customer) $inancial) business process and learning and growth8) utili-ing both short and long term time hori-ons. The scorecard conveys the strategic plan to organi-ation members) and it monitors each perspective simultaneously so that each perspective continuously supports the strategic plan. The scorecard is an analysis techni0ue to translate an organi-ation,s mission statement and overall business strategy into speci$ic) 0uanti$iable goals and to monitor the organi-ation,s per$ormance in terms o$ achieving these goals. The Balanced corecard is an integral part o$ 3#<.

Measures
At its simplest) measures are the 0uanti$ication o$ an action or activity. Di$$erent measurements occur at di$$erent organi-ational levels. ome measurements are lagging) and some measurements are leading* A good scorecard has a balance o$ both. Both outcomes and per$ormance drivers should be included in each business unit,s balanced scorecard.

Outcomes are lagging indicators) and are the $inal results o$ all o$ an organi-ation,s products and services. 51amples would be* enhanced mobility) sa$e drinking water) and increasing the 0uantity and 0uality o$ open space. Performance drivers ) also known as leading indicators or inputs) are measures that are uni0ue to each organi-ation or business unit. #er$ormance drivers and inputs measure the employee and unit activities) which in turn) result in outcomes.

Perspectives of the Balanced Scorecard:

Businesses too $re0uently use only $inancial and process measures to evaluate their per$ormance. The balanced scorecard approach broadens the measurement o$ per$ormance by looking at work $rom multiple perspectives*

customer perspective $inancial perspective business process perspective learning and growth perspective "easure per$ormance o$ all strategic goals

Best practices of the Balanced Scorecard include:

"aintain a balanced set o$ measures #eople are held personally accountable $or results Develop solid baseline data "atch resources to goals and ob=ectives Aligned with enterprise strategy. upported by leadership. :lear and understandable. A balance o$ lagging and leading indicators. >inked to individuals and?or teams) with organi-ational goals in!sight. A centerpiece o$ the management process. 6nability to reach consensus on goals or measures. 6nsu$$icient involvement o$ end users o$ the measurement system. Routine habits) in$le1ible processes) cherished systems) and static culture are all obstacles to success$ul measurement. /ear or unwillingness to change. "easuring what is easy or known) rather than identi$ying what needs to be measured.

Effective measures should be:

Barriers to successful measurement include:

Cause-and-effect relationships:
"5very measure selected $or a Balanced corecard should be an element o$ a chain o$ cause!and!e$$ect relationships that communicates the meaning o$ the business unit,s strategy to the organi-ation."
-- The Balanced Scorecard, Kaplan and Norton (p. 149)

Learning more about the Balanced Scorecard

The book) The Balanced corecard* Translating trategy into Action) by Robert . Kaplan and David #. Norton is a great starting point to learn more about perspectives and measures. 3ther sources $or learning may be $ound on the internet. :lick this link $or more

in$ormation about on!line learning opportunities.

The customer perspective:

.ho is your customer9 .hat services or products do they e1pect $rom you9 %ow do you listen to and learn $rom your customer9 %ow do you retain and ac0uire new customers9 %ow do you meet your customers needs9 %ow do you measure customer satis$action and dis!satis$action9

The financial perspective:

There is a broad range o$ traditional $inancial 0uestions that can be asked. The 0uestions can address short and long!term time hori-ons. Depending upon the standards in your industry) return on investment 7R368) revenue enhancement and growth) risk) and improved productivity are all reasonable $inancial measures. The measures $rom other scorecard perspectives should be linked in a cause!and!e$$ect relationship towards achieving the desired $inancial outcomes.

The business process perspective:

.hat products or services will your customers value in the $uture9 .hat processes best deliver the outcomes desired by the customers9 >ooking into the $uture) what are the new business processes that you must e1cel at9 .hat will be valued in the $uture) and how will innovation deliver $uture values9

The learning and growth perspective:

The learning and growth perspective supports the other three perspectives. @ltimately) i$ the work$orce is not enabled with knowledge) innovation and advanced skill sets) the work$orce will be unable to build and enhance innovative business processes) that in!turn will help retain and ac0uire new customers) and ultimately achieve $inancial ob=ectives. "A core group o$ three employee!based measures!!satis$action) productivity and retention!!provide outcome measures $rom investments in employees) systems and organi-ational alignment." -- The Balanced Scorecard, Kaplan and Norton (p. 146)

What is the Balanced Scorecard?

A new approach to stategic management was developed in the early &''A,s by Drs. Robert Kaplan 7%arvard Business chool8 and David Norton 7Balanced corecard :ollaborative8. They named this system the ,balanced scorecard,. Recogni-ing some o$ the weaknesses and vagueness o$ previous management approaches) the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ,balance, the $inancial perspective. The balanced scorecard is a management system 7not only a measurement system8 that enables organi-ations to clari$y their vision and strategy and translate them into action. 6t provides $eedback around both the internal business processes and e1ternal outcomes in order to continuously improve strategic per$ormance and results. .hen $ully deployed) the balanced scorecard trans$orms strategic planning $rom an academic e1ercise into the nerve center o$ an enterprise. Kaplan and Norton describe the innovation o$ the balanced scorecard as $ollows* "The balanced scorecard retains traditional $inancial measures. But $inancial measures tell the story o$ past events) an ade0uate story $or industrial age companies $or which investments in long!term capabilities and customer relationships were not critical $or success. These $inancial measures are inade0uate) however) $or guiding and evaluating the =ourney that in$ormation age companies must make to create $uture value through investment in customers) suppliers) employees) processes) technology) and innovation." The balanced scorecard suggests that we view the organi-ation $rom $our perspectives) and to develop metrics) collect data and analy-e it relative to each o$ these perspectives* The Learning and rowth Perspective The Business Process Perspective The Customer Perspective The !inancial Perspective

The Balanced Scorecard and Measurement-Based Management

The balanced scorecard methodology builds on some key concepts o$ previous management ideas such as Total Buality "anagement 7TB"8) including customer!de$ined 0uality) continuous improvement) employee empowerment) and !! primarily !! measurement!based management and $eedback.

Double-Loop Feedback
6n traditional industrial activity) "0uality control" and "-ero de$ects" were the watchwords. 6n order to shield the customer $rom receiving poor 0uality products) aggressive e$$orts were $ocused on inspection and testing at the end o$ the production line. The problem with this approach !! as pointed out by Deming !! is that the true causes o$ de$ects could never be identi$ied) and there would always be ine$$iciencies due to the re=ection o$ de$ects. .hat Deming saw was that variation is created at every step in a production process) and the causes o$ variation need to be identi$ied and $i1ed. 6$ this can be done) then there is a way to reduce the de$ects and improve product 0uality inde$initely. To establish such a process) Deming emphasi-ed that all business processes should be part o$ a system with $eedback loops. The $eedback data should be e1amined by managers to determine the causes o$ variation) what are the processes with signi$icant problems) and then they can $ocus attention on $i1ing that subset o$ processes.

The balanced scorecard incorporates $eedback around internal business process outputs) as in TB") but also adds a $eedback loop around the outcomeso$ business strategies. This creates a "double!loop $eedback" process in the balanced scorecard.

Outcome Metrics
4ou can,t improve what you can,t measure. o metrics must be developed based on the priorities o$ the strategic plan) which provides the key business drivers and criteria $or metrics managers most desire to watch. #rocesses are then designed to collect in$ormation relevant to these metrics and reduce it to numerical $orm $or storage) display) and analysis. Decision makers e1amine the outcomes o$ various measured processes and strategies and track the results to guide the company and provide $eedback. o the value o$ metrics is in their ability to provide a $actual basis $or de$ining*
Strategic feedback to show the present status of the organization from many perspectives for decision makers Diagnostic feedback into various processes to guide improvements on a continuous basis Trends in performance over time as the metrics are tracked Feedback around the measurement methods themselves, and which metrics should be tracked Quantitative inputs to forecasting methods and models for decision support systems

Management by Fact
The goal o$ making measurements is to permit managers to see their company more clearly !! $rom many perspectives !! and hence to make wiser long!term decisions. The Baldrige :riteria 7&''C8 booklet reiterates this concept o$ $act!based management* ""odern businesses depend upon measurement and analysis o$ per$ormance. "easurements must derive $rom the company,s strategy and provide critical data and in$ormation about key processes) outputs and results. Data and in$ormation needed $or per$ormance measurement and improvement are o$ many types) including* customer) product and service per$ormance) operations) market) competitive comparisons) supplier) employee!related) and cost and $inancial. Analysis entails using data to determine trends) pro=ections) and cause and e$$ect !! that might not be evident without analysis. Data and analysis support a variety o$ company purposes) such as planning) reviewing company per$ormance) improving operations) and comparing company per$ormance with competitors, or with ,best practices, benchmarks." "A ma=or consideration in per$ormance improvement involves the creation and use o$ per$ormance measures or indicators. #er$ormance measures or indicators are measurable characteristics o$ products) services) processes) and operations the company uses to track and improve per$ormance. The measures or indicators should be selected to best represent the $actors that lead to improved customer) operational) and $inancial per$ormance. A comprehensive set o$ measures or

indicators tied to customer and?or company per$ormance re0uirements represents a clear basis $or aligning all activities with the company,s goals. Through the analysis o$ data $rom the tracking processes) the measures or indicators themselves may be evaluated and changed to better support such goals."

The Balanced Scorecard -- Not Just Another Project

aul !rveson "##$

"anagers in many government agencies have been reared on pro=ect management. 6t is the way they think about achieving their mission. 6n the De$ense Department) pro=ect or program management has been the $ramework $or development o$ every system costing $rom ten thousand dollars to ten billion dollars. There is a long!established tradition o$ on!the!=ob training and e1perience $or young people to learn and be mentored by e1perienced pro=ect managers. "any guidebooks) manuals) so$tware programs) and other means have been devised to aid the pro=ect manager. #ro=ect management has been in the management culture $or decades) and the $ederal government has thousands o$ pro=ect managers who are routinely capable o$ ama-ingly comple1 achievements. 6n $act) many pro=ect managers may have never seen or cosidered any other way to get things done. Although it is not necessary here to describe pro=ect management in detail) a simple diagram will help to show its general $eatures.

The $igure represents a time line or DANTT chart. All pro=ects 7or programs8 have a de$inite start time 7green8 and a de$inite stop time 7red8 when the $inal deliverables 7products) services) documents) decisions) etc.8 are delivered to the customer. The goal is to meet customer re0uirements. The initial stage re0uires establishment o$ a precise budget and a plan o$ action

and milestones 7#3A;"8. The work is $ocused on the actual mission o$ production undertaken $or the customer. 6t may be broken down into a hierarchy o$ subtasks) called an 5ngineering chedule .ork Breakdown tructure 75 .B 8. tatus and review meetings are scheduled at regular intervals throughout the pro=ect. @sually some kind o$ $inal report is written as one o$ the deliverables. The goal is to reach the end point on time and within budget) since there are usually other pro=ects that are depending on input $rom the deliverables o$ this pro=ect. o pro=ect management is the e$$ort to manage work within a $inite) clearly scoped) hierarchically! structured) linear development process with a de$inite beginning and end. The balanced scorecard management system is not just another project. 6t is $undamentally di$$erent $rom pro=ect management in several respects. To illustrate the radical nature o$ this di$$erence) a diagram is shown o$ the B : per$ormance measurement process) as it would run when installed in an organi-ation.

The $irst thing to notice is the topology* the balanced scorecard management process) derived $rom Deming,s Total Buality "anagement) is a continuous cyclical process. 6t has neither beginning nor end. 6ts task is not directly concerned about the mission o$ the organi-ation) but rather with internal processes 7diagnostic measures8 and e1ternal outcomes 7strategic measures8. The system,s control is based on per$ormance metrics or "metadata" that are tracked continously over time to look $or trends) best and worst practices) and areas $or improvement. 6t delivers in$ormation to managers $or guiding their decisions) but these are sel$! assessments) not customer re0uirements or compliance data. #eople trained only in pro=ect management may have di$$iculty in $iguring out how to accomplish the B :) simply because it is such a di$$erent kind o$ management paradigm. 3ne o$ the key practical di$$iculties is to $igure out how to get the process started in the $irst place. 6$ this is not a pro=ect) where does one begin9 .hat kind o$ plan is appropriate $or deployment o$ the balanced scorecard system9 6$ we want to ride a rotating merry!go!round) we had better not attempt to =ust hop on. .e will probably get hurt !! and won,t get on. The situation is similar with the balanced scorecard. To get on the merry!go!round) we have to accelerate in the same direction $or awhile) then hop on when our speed e0uals that o$ the circular $loor. 6n other words) there needs to be a ramp-up phase) where everyone "comes up to speed." This includes training or retraining o$ pro=ect managers) and probably $ocused deployment o$ pilot e orts be$ore attempting to cover an entire large agency. ustained) patient leadership will be needed be$ore the payo$$ is attained.

Management A

roaches
aul !rveson "##$

Dovernment agencies cannot live by pro=ect management alone. :ongress) in the D#RA) the 51ecutive Branch in the Reinventing Dovernment initiative) and DoD ecretary :ohen in the De$ense Re$orm 6nitiative) are asking us to $ind ways to increase productivity and e$$iciency) while maintaining mission e$$ectiveness. That is where the new management approaches come in !! they are more applicable than pro=ect management to the kinds o$ internal improvements that are needed. The table below summari-es comparisons o$ three di$$erent management approaches or methodologies. The comparisons are shown $or several di$$erent $eatures. 6t is evident $rom this comparison that B#6 and the Balanced corecard are 0uite di$$erent in most respects $rom pro=ect management. They have di$$erent purposes and meet di$$erent needs. Project Management Age of A roach Prime "ustomer Business Process !m rovement Began in DoD &''( Balanced Scorecard

Decades

Began in &''A 51ternal 6D) 6nternal Director trategic management system "ultiple perspectives unit to enterprise trategic #lan) #er$ormance #lan Teams) (+!month schedule $rom B : book

51ternal ponsor

6nternal Director

#ro=ect Re0uirements) #oal $efinition "ission Needs tatement %ocus Sco e Plans Technical "ission peciali-ed unit #lan o$ Action ; "ilestones .ork Breakdown chedule) Action 6tems Team building) Budgeting) Task Tracking) Reviews "icroso$t #ro=ect) #rimavera

:ost) cycle time reductions

Business #rocesses unit to enterprise #rocess 6mprovement #lan

Schedule

Team directed

Management Activities Tools &see lin's(

Baseline process analysis) De$ine metrics) collect data) to!be process design) analy-e data) decide on automation changes TurboB#R) 6D5/A #AR!E) Dentia) intranet F database

Measures of Deliverables on time) on :ost reductions minus cost Buantity o$ data) improved success budget o$ B#6 e$$ort results on many metrics 6n attempting to implement the newer management methodologies in a traditional pro=ect management organi-ation) there are two possible options*
"% train the managers in the new approaches and techni&ues' (% translate the new approaches into familiar pro)ect form, and treat them as conventional pro)ects%

3ption & is always recommended. The problem with that is that we do not have the time or money to spend on a lot o$ training in new techni0ues. 3ption ( is something that hasn,t been suggested be$ore) to my knowledge. 6 don,t know i$ it is $easible) or even i$ it makes sense. But i$ it could be done) it would save a lot o$ time in deploying the new initiatives. 3ption ( was actually suggested by the DoD,s &''G #er$ormance #lan) in which one o$ the top level mission goals was ,:ost Reduction,. 6n other words) the DoD management recogni-es that this is in itsel$ worthy o$ being a strategic goal on the level o$ its other missions) not =ust an internal e$$iciency need.

Selecting a Management A

roach
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3ne o$ the reasons why managers are having such di$$iculty in applying management methods to government problems is this* there are many di$$erent schools o$ thought on management approaches) and each o$ these schools has its own proponents. Denerally) an original proponent makes his or her name in that particular concept) and becomes an ,e1pert, and a ,guru, o$ it. There is little incentive to integrate this one approach with others. That =ob is le$t to the poor managers who have to $igure out how to apply what theory to their business problems. They have heard something about "B3) TB") B#R) 6 3!'AAA) :"") AB:) B :) and all the other bu-- words and acronyms o$ management !! but they have received precious little guidance as to what to select that best $its their business needs) and the top!level re0uirements such as the D#RA. @sually) however) managers will tend to use the approach with which they are most $amiliar) which is probably pro=ect management or program management. At any point in time) management culture tends to be dominated by one school o$ thought. :urrently an emerging idea is the ,balanced scorecard,. The book on this theory by Kaplan and Norton is currently one o$ the top &A best sellers in the $ield. "anagement consultants and writers tend to adopt the theory that is currently in vogue) and its popularity thus tends to grow rapidly to a peak) until it is superseded by the ne1t new idea. The schools come and go appro1imately every &A years. A similar phenomenon seems to take place in other social sciences) such as psychology) sociology) and education. Thomas Kuhn,s book The Structure o Scienti ic !e"olutions analy-ed this phenomenon. Although its conclusions may be taken too $ar) the general description o$ the process seems true enough*

"% ! revolutionary new idea comes out of the blue, and champions and followers arise to promote it% (% ! school of thought and literature arises around the sub)ect% *% The idea becomes so popular that it becomes part of the +establishment+% ,ts view is un&uestioned and it dominates the scene for awhile% -% !nomalies, countere.amples and new ideas emerge that cause the original idea to be deeply &uestioned% /% ! period of conflict between proponents and opponents prevails% 0% 1ne of the new ideas takes over the field, e.cept for a few die2hards who have little but historical influence% 3% The old idea may not be forgotten, but is absorbed into the new idea as a +special case+ or a +useful fiction+ that may be helpful in certain situations% 4This appears to be the current status of Freudian theory within psychotherapy, for e.ample5%

Management %le)i*ility A manager who only has e1perience in one approach) such as pro=ect management) may have di$$iculty in adapting to changing demands. A manager can be much more e$$ective i$ he or she is able to select a management approach that is most appropriate to the desired need or goal. This adaptability or ,eclectic, $le1ibility may prove very use$ul in the changing government management environment. There is no good reason why managers must $ollow the latest school o$ management thought. 3n the other hand) =ust because an idea is new does not mean that it should be dismissed. There are reasons why one particular approach is better than another depending on the strategic goal or need. The Balanced corecard) $or instance) appears to be a very appropriate techni0ue $or meeting the urgent management needs o$ many Dovernment agencies) such as their need to comply with the re0uirements o$ the D#RA. %owever) this need should not blind managers to other) perhaps even more pressing goals o$ their organi-ation that may re0uire a di$$erent approach. The $ollowing table was developed to aid in selection o$ a management approach) depending on the conditions and need o$ the organi-ation 7strategic goal8. The conditions will partly determine the best option. 7The terms are de$ined here.8 Time Hori+on &years( (!H H!+ "hange ,eadiness Technical -evel %igh %igh ,is' Tolerance "oderate %igh ,ecommended O tion Balanced corecard B#R

Strategic #oal

D#RA :ompliance "oderate IHAJ cost %igh reductions) survival (AJ :ost reductions :ontinuous improvement "oderate

&!H

"oderate

"oderate

B#6

>ong term

"oderate

"oderate

>ow

TB"

(!H (!K (!K

Baldrige score elevation

"oderate

%igh "oderate >ow

>ow "oderate "oderate

Balanced corecard F AB: Balanced corecard 6 3!'AAA) incremental

trategic alignment >ow "arketing credibility >ow

(!K

6ncreased "oderate %igh >ow :"" capabilities Note that not all possible combinations o$ conditions are included in the table. 6$ your conditions are beyond the levels indicated here 7e.g. low risk tolerance when HAJ cost reductions are needed8) then it is likely that a ,best option, does not e1ist $or your situation. 4ou may need to gain additional senior management support and tolerance $or risk be$ore conducting strategic activities. Details about each o$ these approaches may be $ound in books and at web sites listed in the >inks. .hat is H, Scorecard/com0 %R corecard.com is an online) 0uestionnaire!based survey instrument which e1amines the internal workings o$ an organisation and identi$ies blockages to growth. Developed by the :entre $or 3rganisational 6nnovation #ty >td) and based on the Balanced corecard) it measures employee attitudes to the three key areas o$ organisational e$$ectiveness L strategic intent) business processes and culture?behaviour. %R corecard.com has been designed to give you timely) accurate in$ormation to help you manage the growth o$ your business. 6ts delivery through a secure) password protected web site means that data collection and analysis is simple and $ast. 5mployees can complete %R corecard.comMs con$idential survey anywhere where they can access the internet L $rom their desks) at their home or even in an internet ca$N. The con$idential) anonymous nature o$ the survey means employees $eel they can answer truth$ully) which gives you power$ul data about the health o$ your organisation.