This review discusses the “Balance Scorecard”, an integrated strategic performance management tool (see Figure 1), which was developed by Robert Kaplan and David Norton in 1990. Recently, the Harvard Business Review hailed the Balanced Scorecard as one of the 75 most influential and prolific ideas of the twentieth century (1).
Nowadays, in an era of globalization, customer power, and rapid change, it is imperative for organizations to be flexible to respond rapidly to competition and market changes, and to execute their long-term strategy effectively. The existing antagonistic environment connotes that companies have to devote significant time, energy, human and financial resources to measure their performance in order to achieve their strategic goals. Although it is a common sense that measurement is more crucial than ever, most companies have developed systems for capturing, monitoring, and sharing performance information that prove to be critically flawed. These systems may have been perfectly suited to the nature of any physical assets, but they are incapable of capturing the value that is being created from the mechanisms of today’s modern business organizations. Those mechanisms refer to the intangible assets, such as employee knowledge, customer & supplier relationships, and innovative cultures. Additionally, a company’s differentiating strategy is very important today in the worldwide market scene. Unfortunately, 9 out of 10 organizations fail to implement their strategies (2).
As a result, the Balanced Scorecard (BSC) emerged to provide solutions to the above major issues. According to the author and Balanced Scorecard practitioner Paul Niven, BSC, like most good ideas, is “very simple but not simplistic” (2). He confesses that this tool seems to be of great importance as it emphasizes the value of a variety of factors/dynamics within an organization to achieve tremendous results. However, an organization must possess the infrastructure that is necessary to craft an effective Balanced Scorecard.
Summary: The Balanced Scorecard
The Balanced Scorecard was developed in the early 1990s by Robert Kaplan, an accounting professor at Harvard University, and David Norton, a consultant from the Boston area. Kaplan and Norton’s ideas derived from a research study of a dozen organizations where they explored new methods, other than financials, to measure performance. After extensive analysis, the two men settled on a new idea, which featured performance measures that capture activities from throughout an organization. They labelled this new tool the “Balanced Scorecard” and it was initially summarized in one of the first Harvard Business Review articles, “The Balanced Scorecard – Measures that Drive Performance” (3).
What Is A Balanced Scorecard?
Kaplan and Norton define BSC as “a set of measures that give top managers a fast but comprehensive view of an organization” (4). Generally, the Balance Scorecard can be described as a carefully selected set of quantifiable measures which clarify an organization’s strategy and aligns all of the organization’s resources and energies (e.g. budgets, people, initiatives etc) to achieve this strategy. Kaplan and Norton identified four generic perspectives that cover the main strategic focus areas of a company. They argue that the idea of BSC is to be used as a template for designing objectives and measures in each of these perspectives (see Figure 2). Briefly, the Balanced Scorecard Perspectives are (see Figure 3):
The Financial Perspective, which covers the financial objectives of an organisation and allows managers to track financial success and shareholder value.
The Customer Perspective, which covers the customer objectives such as customer satisfaction, market share goals as well as product and service attributes.
The Internal Process Perspective, that covers internal operational goals and outlines the key processes necessary to deliver the customer objectives.
The Learning and Growth Perspective, that covers the intangible drivers of future success such as human capital, organisational capital and information capital including skills, training, organisational culture, leadership, systems and databases.
Summarising the above, Kaplan & Norton in their book “The Balanced Scorecard: Measures that Drive Performance” (1992), argue that the BSC has emerged as “a proven and effective tool to translate intangible assets into real value, for all of an organization’s operations” (see Figure 4), and to help them implement their differentiating strategies successfully. They claim that the BSC provides a method of balancing the accuracy and the integrity of the analysts’ financial measures with the key drivers of future financial performance. Overall, they regard this tool as three things: communication tool, measurement tool, and strategic management system (see Figure 5).
Advantages of Balanced Scorecard
I shall claim that the advantages that derive from the adoption of the Balanced Scorecard system are transparent and help an organization to focus on its strategic direction.
First, the components of an effective Balanced Scorecard are the organization’s mission, its core values, and its strategy. Subsequently, if the BSC is solid, then the short, medium and long-term visions of the company are managed in a continuous, cohesive manner (3).
Second, the Balanced Scorecard connotes the significance of the intangible assets, allowing organizations to benefit from their astronomical potential. Most significantly, the implementation of BSC gives greater insights to common questions raised in annual employee motivation surveys, such as “How does what I do every day fit into the bigger picture of the company?”. As Gumbus and Lyons (2002) proclaim, the BSC enables employees to understand what they need to do on a daily basis to impact results (5).
Third, considering the four perspectives as a whole, BSC ensures that the senior management has a balanced view of the organization’s performance. In other words, the management’s attention is focused on measures crucial to the successful implementation of the company’s strategy. Following this, “The Nielson Report” (2003) claims that BSC avoids the tendency to engage in the “majoring in the minors” characteristic of many managers (6).
Fourth, Kaplan & Norton (1992) support that a well-designed BSC denotes that there is a direct, crucial relationship between the top-level strategy and the middle management level so that they are both dedicated towards the company’s objectives.
Fifth, for Niven (2006), the implementation of the Balanced Scorecard reporting system implies that a great amount of intelligence is harnessed by unearthing background material (see Figure 7). This is definitely going to assist an organization to remain competitive in the long term, develop competitive advantages and thus create more value for its members (2).
Disadvantages of Balanced Scorecard
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 and are mainly concerned with the numerous pitfalls which can derail the implementation effort.
To begin with, Schneiderman (1999) expresses his concerns over the BSC because it entails that multiple metrics have to be collected and analyzed (7). The main difficulty then is about how the management team is going to prioritize these metrics. In addition, Norreklit (2000) believes that if an organization uses financial measures, to weight metrics, it would be easier because logically managers tend to devote the most resources to the vital source of profit that ensures great shareholder returns (8).
Another criticism, usually from pundits and consultants is that it can be costly to implement a Balanced Scorecard system (9). The task of collecting information on financial transactions and generating reports may be automated. However, there are those who believe that additional funds may be needed in order to put processes, which will measure internal performance and customer satisfaction, in place. This may be partly true, but it tends to end as an oversight. The debate itself may turn to be a moot one, as even The Hackett Group advocates the worldwide appeal of the Balanced Scorecard by publishing a relevant survey in 2002. This shows that of the 2,000 global companies that participated, 96% either implemented or planned to implement the BSC tool (10).
Besides, it may take considerable time and effort from the team to develop a list of the appropriate metrics. Perhaps the greatest disadvantage one can face when trying to implement a balanced scorecard is the reluctance from some employees who do not yet see the “big picture”. Rolling out a balanced scorecard for an entire company requires commitment from management at all levels, particularly at the top of your company’s organizational structure (11). This is due to the fact that BSC may be perceived as an implication that the organizations’ employees have somehow underperformed in the past. In response, Niven (2006) recommends that a brief conference has to be held primarily within an organization, to demonstrate the possibilities that BSC provides for growth and to increase the enthusiasm.
Finally, Praveen Gupta, CEO of Quality Technology Company, in his book “Six Sigma Business Scorecard” argues that “as a generalization, the Balanced Scorecard has been more successful with senior managers than with operations managers” (12). In other words, he claims that Balanced Scorecard starts with the strategies and goals of senior managers only, and does not reach downward to provide direction for managers and employees engaged with the lower-level process improvement. Instead he believes in a merged version of Six Sigma and BSC as a management system for achieving long and short term business success (see Table 1). Gupta also references Bob Galvin, former CEO of Motorola, to endorse his beliefs.
Balanced Scorecard Implementation & Possible Extensions
According to a survey from Bain, by 2004 about 57% of global companies were working with the Balanced Scorecard as indicated in Figure 6 (13). In order these companies to implement a BSC system, a thorough plan needs to be developed with several phases (see Figure 8). A complete list of Balanced Scorecard adopters is provided by the Balanced Scorecard Institute (14). The Balanced Scorecard extension is already in place and it is used to provide Web-browser based tools for organizations to securely collect, manage and disseminate strategies via their Website or intranet. The Balanced Scorecard extension is flexible so that it can be the tool to enact change. A recent survey (15), found that roughly 1/3 of organisations use office software to report their Balanced Scorecard, 1/3 use 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.
I strongly believe that the idea of the Balanced Scorecard is a great way to assess the overall image of an organization. It is simple but extremely powerful if implemented well. Apart from that, it offers some useful generic performance measurements that apply to particularly all organizations, small or large. As long as one uses the key ideas of the BSC to (a) create a unique strategy and visualise it in a cause-and-effect map, (b) align the organisation and its processes to the objectives identified in the strategic map, (c) design meaningful key performance indicators and (d) use them to facilitate learning and improved decision making, he will end up with a powerful tool that should lead to better performance. The most fascinating fact for me is that the process of implementing BSC requires everyone within an organization to get involved in order for it to be successful.
Exhibit: Tables & Figures
Balanced Scorecard implementation using key performance indicators and business metrics
Figure : The Balanced Scorecard system provides managers and executives performance feedback on each of the organization’s key business processes using precise performance metrics (16).
Figure : Traditional Balanced Scorecard Template (17).
Balance Scorecards – Aligning Strategy and Perspectives Balanced scorecard dimensions and perspectives
Figure : Balance Scorecards – Aligning Strategy and Perspectives (18).
Figure : Increasing Value of Intangible Assets in Organizations (2).
Figure : What Is The Balanced Scorecard? (3)
Figure : Adoption of Balanced Scorecard (in %) from companies (13).
Figure : Using the Balanced Scorecard to Find Background Information (2).
Table : Praveen Gupta’s Processes Perspective (12).
Gupta proposes that companies rely on seven, including:
Management and Improvement
Purchasing and Supplier Management
Sales and Distribution
Employees and Innovation
Service and Growth
Figure : Balanced Scorecard Implementation Timeline (2).