Posted by Hindol Datta
The Balanced Scorecard Model (BSC) was introduced by Kaplan & Norton in their book “The Balanced Scorecard” (1996). It is one of the more widely used management tools in large organizations.
One of the major strengths of the BSC model is how the key categories in the BSC model links to corporate missions and objectives. The key categories which are referred to as “perspectives” illustrated in the BSC model are:
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate 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.
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
Internal 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 necessarily something that can be developed by outside consultants. My personal opinion on this matter is that the internal business process perspective is too important and that internal owners or/and teams take ownership of understanding the process.
Learning and 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, the engagement of the workers, the potential of cross-training that would create pockets of bench strength and switch hitters, and other employee specific programs 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.”
This perspective was appended to the above four by Bain and Company. It refers to the vitality of the organization and its culture to provide the appropriate framework to encourage innovation. Organizations have to innovate. Innovation is becoming the key distinctive element in great organizations, and high levels of innovation or innovative thinking are talent magnets.
Taking the perspectives a step further, Kaplan and Cooper instituted measures and targets associated with each of those targets. The measures are geared around what the objective is associated with each of the perspectives rather than a singular granule item. Thus, if the objective is to increase customer retention, an appropriate metric or set of metrics is around how to measure the objective and track success to it than defining a customer.
One of the underlying presumptions in this model is to ensure that the key elements around which objectives are defined are done so at a fairly detailed level and to the extent possible – defined so much so that an item does not have polymorphous connotations. In other words, there is and can be only a single source of truth associated with the key element. That preserves the integrity of the model prior to its application that would lead to the element branching out into a plethora of objectives associated with the element.
Objectives, Measures, Targets and Initiatives
Within each of the Balance Scorecard financial, customer, internal process, learning perspectives and innovation perspectives, the firm must define the following:
Strategic Objectives – what the strategy is to achieve in that perspective
Measures – how progress for that particular objective will be measured
Targets – the target value sought for each measure
Initiatives – what will be done to facilitate the reaching of the target?
As in models and analytics, the information that the model spouts could be rife with a cascade of metrics. Metrics are important but too many metrics associated with the perspectives may diffuse the ultimate end that the perspectives represent.
Hence, one has to exercise restraint and rigor in defining a few key metrics that are most relevant and roll up to corporate objectives. As an example, outlined below are examples of metrics associated with the perspectives:
Financial performance (revenues, earnings, return on capital, cash flow);
Customer value performance (market share, customer satisfaction measures, customer loyalty);
Internal business process performance (productivity rates, quality measures, timeliness);
Employee performance (morale, knowledge, turnover, use of best demonstrated practices);
Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index);
To construct and implement a Balanced Scorecard, managers should:
- Articulate the business’s vision and strategy;
- Identify the performance categories that best link the business’s vision and strategy to its results (e.g., financial performance, operations, innovation, and employee performance);
- Establish objectives that support the business’s vision and strategy;
- Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets;
- Ensure company wide acceptance of the measures;
- Create appropriate budgeting, tracking, communication, and reward systems;
- Collect and analyze performance data and compare actual results with desired performance;
- Take action to close unfavorable gaps.
The link above contains a number of templates and examples that you may find helpful.
I have discussed organization architecture and employee engagement in our previous blogs. The BSC is a tool to encourage engagement while ensuring a tight architecture to further organizational goals. You may forget that as an employee, you occupy an important place in the ecosystem; the forgetting does not speak to your disenchantment toward the job, neither to your disinclination toward the uber-goals of the organization. The forgetting really speaks to potentially a lack of credible leadership that has not taken the appropriate efforts to engage the organization by pushing this structure that forces transparency. The BSC is one such articulate model that could be used, even at its crudest form factor, to get employees informed and engaged.
Posted in Business Process, Employee Engagement, Employee retention, Financial Metrics, Financial Process, Innovation, Leadership, Learning Organization, Learning Process, Management Models, Organization Architecture, Recognition, Risk Management, Social Dynamics, Talent Management
Tags: bain and company, balanced scorecard, business process, communication channel, employee engagement, employee recognition, extrinsic motivation, financial process, innovation, intrinsic motivation, learning organization, management tools, mass psychology, model, organization architecture, rewads, risk management, social systems, strategy, talent management, value, value management