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The Balanced Scorecard Concept


The Balanced Scorecard

"The Balanced Scorecard (BSC) concept was created by Drs. Robert S. Kaplan and David P. Norton in 1992, and has been implemented in thousands of corporations, organizations, and government agencies worldwide. The Balanced Scorecard allows organizations to implement strategy rapidly and effectively by integrating the measurement system with the management system. Based on the simple premise that ďmeasurement motivatesĒ, the Balanced Scorecard has been integral to the success of organizations throughout the world."

"The Balanced Scorecard Hall of Fame includes such notable organizations as CIGNA P&C, National Reconnaissance Office, Wells Fargo Bank, Mobil USM&R, Hilton Hotels, City of Charlotte, UPS, all of who have achieved breakthrough results through the Balanced Scorecard. The BSC has been the subject of four articles in the Harvard Business Review; two best-selling business books that have been translated into 19 languages and numerous case studies and public conferences. The editors of Harvard Business Review identified the BSC as one of the most significant ideas of the past 75 years."

Initial key link for the BSC.
http://balancedscorecard.org/Home/tabid/495/Default.aspx
The Balanced Scorecard Institute Web Site. Visiting this site a MUST first step in leaning the concept. Then search Google for Balanced Scorecard.

Download Free Excelģ  BSC Templates

      
It is suggested that installation of this concept be performed by a professional trained in its complexities and implementation. 
 

 

Expanded Explanation of The Balanced Scorecard Concept

 

What Is A Balanced Scorecard?
Today, organizations are competing in dynamic, complex environments. An accurate understanding of
their objectives and the methods for quickly achieving those objectives is vital.

The Balanced Scorecard is a revolutionary tool that motivates staff to make the organizationís
vision happen. It does more than just measure performance. It is a management system that focuses
the efforts of people, throughout the organization, toward achieving strategic objectives. It
gives feedback on current performance and targets future performance.

Putting it another way, The Balanced Scorecard converts an organizationís vision and strategy
into a comprehensive set of performance and action measures that provides the basis for a
strategic measurement and management system.

Measures are used in four broad areas - financial performance, customers, internal business
processes, and learning and growth. These align individual, departmental, and organizational
goals and identify entirely new processes for meeting customer and shareholder objectives.

The Balanced Scorecard can also be used to test, gain feedback on, and update the organizationís
strategy. It goes beyond short term management of the bottom line to providing a management
system for long term investment in customers, employees, new product development and systems.

Background
Companies are in the midst of a revolutionary transformation. The last decades have seen the
emergence of the information era. This environment for both manufacturing and service
organizations requires new capabilities for competitive success. The ability of an organization
to mobilize and exploit its intangible or invisible assets has become far more decisive than
investing and managing physical, tangible assets. For example, intangible assets allow
organizations to quickly introduce innovative products and services desired by targeted customer
segments.

Today's business environment requires a better understanding of customers and their needs,
streamlined internal business processes and highly skilled staff who are expert in problem
solving. In order to achieve this organizations have attempted to transform themselves by turning
to a variety of improvement initiatives such as total quality management, activity based costing
and process re-engineering.

The traditional means of measuring results has been through financial reporting using an
accounting model developed centuries ago. Unfortunately this model does not incorporate the
valuation of a companyís intangible and intellectual assets, such as high-quality products and
services, motivated and skilled employees, responsive and robust internal processes, and
satisfied and loyal customers. Yet these assets are more critical to the long term future of the
organization than traditional physical and tangible assets.

The Balanced Scorecard (BSC) complements financial measures of past performance with measures of
the drivers of future performance. While many companies already have performance measurement
systems that incorporate financial and non financial measures they are often only used for
control and feedback of short term operations at a corporate level. The BSC emphasizes that
financial and non financial measures must be part of the information system for employees at all
levels of the organization. Also it is balanced between objective easily quantified outcome
measures and subjective, somewhat judgmental, performance drivers of the outcome measures.

In addition it provides a strategic management system to accomplish critical management
processes:

Clarify and gain consensus about vision and strategy
Communicate strategic objectives, performance measures and drivers at all levels
Link strategic objectives to targets and annual budgets
Identify and launch strategic initiatives
Enhance periodic systematic strategic reviews
Obtain feedback to learn about and improve strategy

The BSC fills the void that exists in most management systems - the lack of a systematic process
to implement and obtain feedback about the organizationís strategy. The organization can become
aligned and focused by using the BSC to implement the long term strategy. This way the BSC forms
the basis for managing information age organizations.

What's New?
The Balanced Scorecard retains financial measurement as a critical summary of managerial and
business performance, but it highlights a more general and integrated set of measurements that
link current customer, internal process, employee, and system performance to long term financial
success.

Many companies have mission statements or visions. Often these are translated into strategies.
However, often that is where it ends and the strategies are never fully implemented. The BSC
provides executives with a comprehensive framework that translates an organizationís vision and
strategy into an integrated set of performance and action measures, cascaded down through the
organization. By articulating the outcomes the organization desires and the drivers of those
outcomes, the energies, abilities and specific knowledge of people throughout the organization
are aligned with achieving long term goals.

The BSC retains the use of financial measures such as operating income, return on capital
employed, economic value-added etc.

In the customer perspective, customer and market segments in which the business unit will compete
are identified. Core outcome measures include customer satisfaction, customer retention, new
customer acquisition, customer profitability, and market share in targeted segments. Drivers that
represent those factors critical for customers to switch to or remain loyal to their suppliers
should also be included.

In the internal business process perspective executives must identify the critical internal
processes in which the organization must excel to:

Improve the drivers that will attract and retain customers in targeted market segments
Satisfy shareholder expectations of excellent financial returns

This perspective highlights two fundamental differences between traditional and the BSC
approaches to performance measurement. Traditional approaches attempt to monitor and improve
existing business processes. The BSC approach, however, will usually identify entirely new
processes at which an organization must excel to meet customer and financial objectives. The
second difference is to incorporate innovation processes. Often these may result in the
development of new products or services.

The learning and growth perspective of the BSC identifies the infrastructure that the
organization must build to create long term growth and improvement. The financial, customer and
internal process objectives of the BSC will often reveal gaps between the existing capabilities
of people, systems and procedures and what will be required to achieve them. To close these gaps,
organizations will have to invest in reskilling employees, enhancing information technology and
systems, and aligning organizational procedures and routines.

Employee based measures include generic outcome measures - employee satisfaction, retention,
training and skills - and the drivers of these, such as detailed, business specific indexes of
the particular skills required for the new competitive environment.

The BSC is more than a set of key performance indicators or critical success factors. There must
be a chain of cause and effect between the various objectives and measures through all four
perspectives. The following example, while a bit of a mouthful demonstrates how this can be
achieved. Training and improving skills of operating staff ( a learning and growth perspective
objective) could lead to a reduction in cycle times (an internal process perspective objective)
that may lead to improved customer satisfaction and loyalty through shorter delivery times, and
hence greater sales revenue, (an objective of the customer perspective) leading to an increase in
return on capital employed ( an outcome measure in the financial perspective).

Typically this cause and effect chain would be derived by starting with the financial perspective
outcome measures and then working down through the perspective layers identifying appropriate
performance drivers and measures on the way. Outcome measures need performance (or "action")
drivers to indicate how the outcomes are to be achieved. Performance drivers need outcome
measures to determine if they are having the impact that was originally expected. A BSC should
have an appropriate mix of outcomes (lagging indicators) and performance drivers (leading
indicators) of the business unitís strategy. This should also be a balanced mix across the four
perspectives. For example, operational improvements (internal process perspective) such as
improved quality and reduced cycle times will not necessarily lead to improved financial measures
unless they are linked by a cause and effect chain through the customer perspective to these
measures.

If improved operational performance fails to improve financial performance this indicates that
the chain of cause and effect has not been established correctly and the organizationís strategy
implementation plans need to be revised.

In summary, the BSC translates vision and strategy into objectives and measures across a balanced
set of perspectives. The BSC includes measures of desired outcomes as well as processes that will
drive the desired outcomes for the future.

The Business Unit
The BSC is best defined for strategic business units that conduct activities through the full
value chain from innovation, operations, marketing, distribution through to selling and service.
Typically this unit will have its own products and production facilities, customers, marketing
and distribution channels, and of course its own well defined strategy.

Once a BSC has been established for this business unit it then becomes the basis for departments
and functional units within the business unit. Managers within these departments and functional
units can then create their own scorecards that will be consistent with the business units
scorecard and strategy. In this way the BSC is cascaded down through the organization.

Setting Up A Balanced Scorecard
The first task is to translate the organizations strategy into objectives and measures for each
of the four perspectives. These should be specific to the organizations strategy. However there
are some measures that often show up in scorecards, such as:

Perspective Measure
Financial Return on investment and economic value added
Customer Satisfaction, retention, market, and account share
Internal Quality, response time, cost, and new product introductions
Learning & Growth Employee satisfaction and information system availability
 


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