Balanced Scorecard 

Basics
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 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.

Kaplan and Norton describe the innovation of the balanced scorecard as

follows:

"The balanced scorecard retains traditional financial measures. But

financial measures tell the story of past events, an adequate story for
industrial age companies for which investments in long-term capabilities
and customer relationships were not critical for success. These financial
measures are inadequate, however, 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."

Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a
Strategic Management System,” Harvard Business Review (January-February 1996): 76.

Perspectives
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 & 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. 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; what the Baldrige criteria call "high performance
work systems."

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.

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.

Strategy Mapping
Strategy maps are communication tools used to tell a story of how value
is created for the organization.  They show a logical, step-by-step
connection between strategic objectives (shown as ovals on the map) in
the form of a cause-and-effect chain.  Generally speaking, improving
performance in the objectives found in the Learning & Growth
perspective (the bottom row) enables the organization to improve its
Internal Process perspective Objectives (the next row up), which in turn
enables the organization to create desirable results in the Customer and
Financial perspectives (the top two rows).

Balanced Scorecard Software

The balanced scorecard is not a piece of software.  Unfortunately, many
people believe that implementing software amounts to implementing a
balanced scorecard. Once a scorecard has been developed and
implemented, however, performance management software can be used
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. The Balanced Scorecard Institute formally recommends
theQuickScore Performance Information SystemTM developed by Spider
Strategies and co-marketed by the Institute.
More about Software >>

Balanced scorecard
From Wikipedia, the free encyclopedia

The balanced scorecard (BSC) is a strategic performance management tool - a semi-

standard structured report supported by proven design methods and automation tools that
can be used by managers to keep track of the execution of activities by staff within their
control and monitor the consequences arising from these actions[1]. It is perhaps the best
known of several such frameworks (for example, it is the most widely adopted performance
management framework reported in the annual survey of management tools undertaken
by Bain & Company, and has been widely adopted in English speaking western countries
and Scandinavia in the early 1990s. Since 2000, use of Balanced Scorecard, its derivatives
(e.g. performance prism), and other similar tools (e.g. Results Based Management) have
become common in the Middle East, Asia and Spanish-speaking countries also[citation needed].
 Contents

 [hide]

1 Characteristics
2 History
3 Design
o 3.1 Original design method
o 3.2 Improved design methods
o 3.3 Popularity
o 3.4 Variants, alternatives and
criticisms
4 Criticism
5 The four perspectives
6 Measures
7 Software tools
8 See also
9 References
10 Sources

[edit]Characteristics

The core characteristic of the Balanced Scorecard and its derivatives is the presentation of a
mixture of financial and non-financial measures each compared to a 'target' value within a
single concise report. The report is not meant to be a replacement for traditional financial or
operational reports but a succinct summary that captures the information most relevant to
those reading it. It is the method by which this 'most relevant' information is determined (i.e.
the design processes used to select the content) that most differentiates the various versions
of the tool in circulation.

The first versions of Balanced Scorecard asserted that relevance should derive from the
corporate strategy, and proposed design methods that focused on choosing measures and
targets associated with the main activities required to implement the strategy. As the initial
audience for this were the readers of the Harvard Business Review, the proposal was
translated into a form that made sense to a typical reader of that journal - one relevant to a
mid-sized US business. Accordingly, initial designs were encouraged to measure three
categories of non-financial measure in addition to financial outputs - those of "Customer,"
"Internal Business Processes" and "Learning and Growth." Clearly these categories were not
so relevant to non-profits or units within complex organisations (which might have high
degrees of internal specialisation), and much of the early literature on Balanced Scorecard
focused on suggestions of alternative 'perspectives' that might have more relevance to these
groups.

Modern Balanced Scorecard thinking has evolved considerably since the initial ideas
proposed in the late 1980s and early 1990s, and the modern performance management
tools including Balanced Scorecard are significantly improved - being more flexible (to suit a
wider range of organisational types) and more effective (as design methods have evolved to
make them easier to design, and use).

[edit]History

The first balanced scorecard was created by Art Schneiderman (an independent consultant
on the management of processes) in 1987 at Analog Devices, a mid-sized semi-conductor
company[2]. Art Schniederman participated in an unrelated research study in 1990 led by
Dr. Robert S. Kaplan in conjunction with US management consultancy Nolan-Norton, and
during this study described his work on Balanced Scorecard. Subsequently, Kaplan
and David P. Norton included anonymous details of this use of balanced scorecard in their
1992 article on Balanced Scorecard[3]. Kaplan & Norton's article wasn't the only paper on the
topic published in early 1992[4]. But the 1992 Kaplan & Norton paper was a popular success,
and was quickly followed by a second in 1993[5]. In 1996, they published the book The
Balanced Scorecard.[6] These articles and the first book spread knowledge of the concept of
Balanced Scorecard widely, but perhaps wrongly have led to Kaplan & Norton being seen as
the creators of the Balanced Scorecard concept.

While the "balanced scorecard" concept and terminology was coined by Art Schneiderman,
the roots of performance management as an activity run deep in management literature and
practice. Management historians such as Alfred Chandler suggest the origins of
performance management can be seen in the emergence of the complex organisation - most
notably during the 19th Century in the USA[7]. More recent influences may include the
pioneering work of General Electric on performance measurement reporting in the 1950s
and the work of French process engineers (who created thetableau de bord – literally, a
"dashboard" of performance measures) in the early part of the 20th century. The tool also
draws strongly on the ideas of the 'resource based view of the firm'[8] proposed byEdith
Penrose. However it should be noted that none of these influences is explicitly linked to
original descriptions of Balanced Scorecard by Schneiderman, Maisel, or Kaplan & Norton.

Kaplan & Norton's first book, The Balanced Scorecard, remains their most popular. The
book reflects the earliest incarnations of Balanced Scorecard - effectively restating the
concept as described in the 2nd Harvard Business Review article. Their second book, The
Strategy Focused Organization, echoed work by others (particularly in Scandinavia[9]) on the
value of visually documenting the links between measures by proposing the "Strategic
Linkage Model" or strategy map. Since then Balanced Scorecard books have become more
common - in early 2010 Amazon was listing several hundred titles in English which had
Balanced Scorecard in the title.

[edit]Design

Design of a Balanced Scorecard ultimately is about the identification of a small number of

financial and non-financial measures and attaching targets to them, so that when they are
reviewed it is possible to determine whether current performance 'meets expectations'. The
idea behind this is that by alerting managers to areas where performance deviates from
expectations, they can be encouraged to focus their attention on these areas, and hopefully
as a result trigger improved performance within the part of the organisation they lead.

The original thinking behind Balanced Scorecard was for it to be focused on information
relating to the implementation of a strategy, and perhaps unsurprisingly over time there has
been a blurring of the boundaries between conventional strategic planning and control
activities and those required to design a Balanced Scorecard. This is illustrated well by the
four steps required to design a Balanced Scorecard included in Kaplan & Norton's writing on
the subject in the late 1990s, where they assert four steps as being part of the Balanced
Scorecard design process:

1. Translating the vision into operational goals;

2. Communicating the vision and link it to individual performance;
3. Business planning; index setting
4. Feedback and learning, and adjusting the strategy accordingly.

These steps go far beyond the simple task of identifying a small number of financial and
non-financial measures, but illustrate the requirement for whatever design process is used to
fit within broader thinking about how the resulting Balanced Scorecard will integrate with the
wider business management process. This is also illustrated by books and articles referring
to balanced scorecards confusing the design process elements and the balanced scorecard
itself. In particular, it is common for people to refer to a “strategic linkage model” or “strategy
map” as being a balanced scorecard.

Although it helps focus managers' attention on strategic issues and the management of the
implementation of strategy, it is important to remember that the balanced scorecard itself has
no role in the formation of strategy. In fact, balanced scorecards can comfortably co-exist
with strategic planning systems and other tools.

[edit]Original design method

The earliest Balanced Scorecards comprised simple tables broken into four sections -
typically these "perspectives" were labeled "Financial", "Customer", "Internal Business
Processes", and "Learning and Growth". Designing the Balanced Scorecard required
selecting five or six good measures for each perspective.

Many authors have since suggested alternative headings for these perspectives, and also
suggested using either additional or fewer perspectives. These suggestions were notably
triggered by a recognition that different but equivalent headings would yield alternative sets
of measures. The major design challenge faced with this type of Balanced Scorecard is
justifying the choice of measures made. "Of all the measures you could have chosen, why
did you choose these?" This common question is hard to answer using this type of design
process. If users are not confident that the measures within the Balanced Scorecard are well
chosen, they will have less confidence in the information it provides. Although less common,
these early-style Balanced Scorecards are still designed and used today.

In short, early-style Balanced Scorecards are hard to design in a way that builds confidence
that they are well designed. Because of this, many are abandoned soon after completion.

[edit]Improved design methods

In the mid 1990s, an improved design method emerged. In the new method, measures are
selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or
"strategy map". With this modified approach, the strategic objectives are distributed across
the four measurement perspectives, so as to "connect the dots" to form a visual presentation
of strategy and measures.

To develop a strategy map, managers select a few strategic objectives within each of the
perspectives, and then define the cause-effect chain among these objectives by drawing
links between them. A balanced scorecard of strategic performance measures is then
derived directly from the strategic objectives. This type of approach provides greater
contextual justification for the measures chosen, and is generally easier for managers to
work through. This style of Balanced Scorecard has been commonly used since 1996 or so:
it is significantly different in approach to the methods originally proposed, and so can be
thought of as representing the "2nd Generation" of design approach adopted for Balanced
Scorecard since its introduction.

Several design issues still remain with this enhanced approach to Balanced Scorecard
design, but it has been much more successful than the design approach it superseded.

In the late 1990s, the design approach had evolved yet again. One problem with the "2nd
generation" design approach described above was that the plotting of causal links amongst
twenty or so medium-term strategic goals was still a relatively abstract activity. In practice it
ignored the fact that opportunities to intervene, to influence strategic goals are, and need to
be anchored in the "now;" in current and real management activity. Secondly, the need to
"roll forward" and test the impact of these goals necessitated the creation of an additional
design instrument; the Vision or Destination Statement. This device was a statement of what
"strategic success," or the "strategic end-state" looked like. It was quickly realized, that if a
Destination Statement was created at the beginning of the design process then it was much
easier to select strategic Activity and Outcome objectives to respond to it. Measures and
targets could then be selected to track the achievement of these objectives. Design methods
that incorporate a "Destination Statement" or equivalent (e.g. the Results Based
Management method proposed by the UN in 2002) represent a tangibly different design
approach to those that went before, and have been proposed as representing a "3rd
Generation" design method for Balanced Scorecard.

Design methods for Balanced Scorecard continue to evolve and adapt to reflect the
deficiencies in the currently used methods, and the particular needs of communities of
interest (e.g. NGO's and Government Departments have found the 3rd Generation methods
embedded in Results Based Management more useful than 1st or 2nd Generation design
methods).

[edit]Popularity
In 1997, Kurtzman found that 64 percent of the companies questioned were measuring
performance from a number of perspectives in a similar way to the Balanced Scorecard.

Balanced Scorecards have been implemented by government agencies, military units,

business units and corporations as a whole, non-profit organisations, and schools.

Many examples of Balanced Scorecards can be found via Web searches. However,
adapting one organisation's Balanced Scorecard to another is generally not advised by
theorists, who believe that much of the benefit of the Balanced Scorecard comes from the
design process itself. Indeed, it could be argued that many failures in the early days of
Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards
were often designed remotely by consultants. Managers did not trust, and so failed to
engage with and use these measure suites created by people lacking knowledge of the
organisation and management responsibility.

[edit]Variants, alternatives and criticisms

Since the Balanced Scorecard was popularized in the early 1990s, a large number of
alternatives to the original 'four box' Balanced Scorecard promoted by Kaplan & Norton in
their various articles and books have emerged. Most have very limited application, and are
typically proposed either by academics as vehicles for promoting other agendas (such as
green issues),[10] or consultants as an attempt at differentiation to promote sales of books
and / or consultancy.[11]

Many of the variations proposed are broadly similar, and a research paper published in
2002[12] attempted to identify a pattern in these variations - noting three distinct types of
variation. The variations appeared to be part of an evolution of the Balanced Scorecard
concept, and so the paper refers to these distinct types as "Generations". Broadly, the
original 'measures in boxes' type design (as proposed by Kaplan & Norton) constitutes the
1st Generation Balanced Scorecard design; Balanced Scorecard designs that include a
'strategy map' or 'strategic linkage model' (e.g. the Performance Prism, later Kaplan &
Norton designs,[13] the Performance Driver model of Olve & Wetter[14]) constitute the 2nd
Generation of Balanced Scorecard design; and designs that augment the strategy map /
strategic linkage model with a separate document describing the long-term outcomes sought
from the strategy (the "Destination Statement" idea) comprise the 3rd Generation Balanced
Scorecard design. Examples of the 3rd Generation Balanced Scorecard design include
the Third Generation Balanced Scorecard itself, and the performance management elements
of the UN's Results Based Management model.

[edit]Criticism

The Balanced Scorecard has always attracted criticism from a variety of sources. Most has
come from the academic community, who dislike the empirical nature of the framework:
Kaplan & Norton notoriously failed to include any citation of prior art in their initial papers on
the topic. Some of this criticism focuses on technical flaws in the methods and design of the
original Balanced Scorecard proposed by Kaplan & Norton,[15] and has over time driven the
evolution of the device through its various Generations. Other academics have simply
focused on the lack of citation support.[16] But a general weakness of this type of criticism is
that it typically uses the 1st Generation Balanced Scorecard as its object: many of the flaws
identified are addressed in other works published since the original Kaplan & Norton works
in the early 1990s.

Another criticism, usually from pundits and consultants, is that the balanced scorecard does
not provide a bottom line score or a unified view with clear recommendations: it is simply a
list of metrics.[17] These critics usually include in their criticism suggestions about how the
'unanswered' question postulated could be answered. Typically however, the unanswered
question relates to things outside the scope of Balanced Scorecard itself (such as
developing strategies).[18]

There are a few empirical studies linking the use of Balanced Scorecards to better decision
making or improved financial performance of companies, but some work has been done in
these areas. However broadcast surveys of usage have difficulties in this respect, due to the
wide variations in definition of 'what a Balanced Scorecard is' noted above (making it hard to
work out in a survey if you are comparing like with like). Single organization case studies
suffer from the 'lack of a control' issue common to any study of organizational change - you
don't know what the organization would have achieved if the change had not been made, so
it is difficult to attribute changes observed over time to a single intervention (such as
introducing a Balanced Scorecard). However, such studies as have been done have typically
found Balanced Scorecard to be useful[19]

[edit]The four perspectives

The 1st Generation design method proposed by Kaplan & Norton was based on the use of
three non-financial topic areas as prompts to aid the identification of non-financial measures
in addition to one looking at Financial. The four "perspectives" proposed were[20]:

 Financial: encourages the identification of a few relevant high-level financial

measures. In particular, designers were encouraged to choose measures that helped
inform the answer to the question "How do we look to shareholders?"
 Customer: encourages the identification of measures that answer the question "How
do customers see us?"
 Internal Business Processes: encourages the identification of measures that
answer the question "What must we excel at?"
 Learning and Growth: encourages the identification of measures that answer the
question "Can we continue to improve and create value?".

These 'prompt questions' illustrate that Kaplan & Norton were thinking about the needs of
small to medium sized commercial organizations in the USA (the target demographic for the
Harvard Business Review) when choosing these topic areas. They are not very helpful to
other kinds of organizations, and much of what has been written on Balanced Scorecard
since has, in one way or another, focused on the identification of alternative headings more
suited to a broader range of organizations.

[edit]Measures

The Balanced Scorecard is ultimately about choosing measures and targets. The various
design methods proposed are intended to help in the identification of these measures and
targets, usually by a process of abstraction that narrows the search space for a measure
(e.g. find a measure to inform about a particular 'objective' within the Customer perspective,
rather than simply finding a measure for 'Customer'). Although lists of general and industry-
specific measure definitions can be found in the case studies and methodological articles
and books presented in the references section. In general measure catalogues and
suggestions from books are only helpful 'after the event' - in the same way that a Dictionary
can help you confirm the spelling (and usage) of a word, but only once you have decided to
use it proficiently.
[edit]Software tools
It is important to recognise that the balanced scorecard by definition is not a complex thing -
typically no more than about 20 measures spread across a mix of financial and non-financial
topics, and easily reported manually (on paper, or using simple Office software).

The processes of collecting, reporting, and distributing Balanced Scorecard information can
be labour intensive and prone to procedural problems (for example, getting all relevant
people to return the information required by the required date). The simplest mechanism to
use is to delegate these activities to an individual, and many Balanced Scorecards are
reported via ad-hoc methods based around email, phone calls and office software.

In more complex organisations, where there are multiple Balanced Scorecards to report
and/or a need for co-ordination of results between Balanced Scorecards (for example, if one
level of Balanced Scorecard reports relies on information collected and reported at a lower
level) the use of individual Balanced Scorecard reporters is problematic. Where these
conditions apply, organisations use Balanced Scorecard reporting software to automate the
production and distribution of these reports.

A recent survey[21], found that roughly 1/3 of organisations use office software to report their
Balanced Scorecard, 1/3 use bespoke software developed specifically for their own use, and
1/3 use one of the many commercial packages available.

There are currently over 100 vendors of software suitable for Balanced Scorecard reporting
(i.e. supporting data collection, reporting and analysis)[22].

[edit]See also