Balanced Score Card : Strategy Implementation Tools -1

Origins of the balanced scorecard

At the beginning of the 20th century, French enterprises began using the “Tableau de Bord,” or “Dashboard” in English. The Tableau de Bord was created in recognition that financial measures alone do not provide enough information for executives to monitor enterprise health. In 1987, Art Schneiderman of Analog Devices, created the Analog Devices Balanced Scorecard. In 1989, Ray Stata, Analog Devices’ CEO, described the company’s five-year scorecard in the Sloan Management Review.

In 1990, Mr. Schneiderman was involved in an unrelated research study headed by Robert Kaplan who worked with Nolan, Norton, & Co., a management consulting firm. During the effort, Mr. Schneiderman described Analog Devices’ work on performance measurement to other participants. In the early 1990s, several papers were published on the design of a balanced scorecard with the Kaplan and Norton paper garnering the most success.

The business performance management framework was laid out in a 1992 paper published in the Harvard Business Review by Robert S. Kaplan and David P. Norton, who are widely credited with having developed the balanced scorecard system. A key premise of the balanced scorecard approach is that the financial accounting metrics like return on investment and earnings per share, can give misleading signals for continuous improvement and innovation -- activities today's competitive environment demands.  Companies traditionally follow such measures to monitor their strategic goals are insufficient to keep companies on track. Financial results shed light on what has happened in the past, not on where the businessis or should be headed. The balanced scorecard system aims to provide a more comprehensive view to stakeholders by complementing financial measures with additional metrics that gauge performance in areas such as customer satisfaction and product innovation.

As a result of additional articles and their 1996 book, The Balanced Scorecard: Translating Strategy Into Action, Kaplan and Norton are widely seen as the concept’s creators.

Balanced Scorecard

A balanced scorecard (BSC) is a performance metric companies used to identify and improve various internal functions and their resulting external outcomes. A balanced scorecard is a strategy performance management tool – a well structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. The balanced scorecard is a management system aimed at translating an organization's strategic goals into a set of organizational performance objectives that, in turn, are measured, monitored and changed if necessary to ensure that an organization's strategic goals are met

A balanced scoreboard is an analysis technique that translates an organization’s mission statement and business strategy into specific, measurable goals, and monitors the organization’s performance in regards to achieving these goals.

The balanced scorecard approach examines performance from four perspectives.

·         Financial analysis, which includes measures such as operating income, profitability and return on investment.

·         Customer analysis, which looks at investment in customer service and retention.

·         Internal analysis, which looks at how internal business processes are linked to strategic goals.

·         The learning and growth perspective assesses employee satisfaction and retention, as well as information system.

Kaplan and Norton cited two mainadvantages to the four-pronged balanced scorecard approach.

1.      First, the scorecard brings together disparate elements of a company's competitive agenda in a single report.

2.      Second, by having all important operational metrics together, managers are forced to consider whether one improvement has been achieved at the expense of another.

The BSC framework is based on the balance between leading and lagging indicators, which can respectively be thought of as the drivers and outcomes of your company goals. When used in the Balanced Scorecard framework, these key performance indicators (KPI) tell you whether or not you’re accomplishing your goals and whether you’re on the right track to accomplish future goals.

Kaplan and Norton stressed that the balanced scorecard is not a template to be applied to businesses in general or even industrywide. Businesses must devise customized scorecards to fit their different market situations, product strategies and competitive pressures.

Neither should the balanced scorecard approach be viewed strictly as a performance measurement system. Rather, it is a strategic management system that will "clarify, simplify and then operationalize the vision at the top of the organization," Kaplan and Norton wrote. How a company's mission statement and vision are operationalized to create value is up to the employees.

"The measures are designed to pull people toward the overall vision," Kaplan and Nolan wrote. "Senior managers may know what the end result should be, but they cannot tell employees exactly how to achieve that result, if only because the conditions in which employees operate are constantly changing."

Criticisms

In the mid-1990s, the scorecard was modified to strengthen the link between performance measures and strategic objectives using a "strategy map."

In the late 1990s, the design approach was again tweaked to include the vision or destination statement -- a statement of what "strategic success" or the "strategic end state" would look like.

Criticism of the balanced scorecard method includes charges that Kaplan and Norton failed to cite earlier research on this method and complaints about technical flaws in its methods and designs.

Others have noted that the four perspectives do not reflect important aspects of nonprofit organizations and government agencies -- for example, social dimensions, human resource elements and political issues.

The balance scorecard is used as a strategic planning and a management technique. This is widely used in many organizations, regardless of their scale, to align the organization's performance to its vision and objectives.

The scorecard is also used as a tool, which improves the communication and feedback process between the employees and management and to monitor performance of the organizational objectives.

As the name depicts, the balanced scorecard concept was developed not only to evaluate the financial performance of a business organization, but also to address customer concerns, business process optimization, and enhancement of learning tools and mechanisms.

Each area (perspective) represents a different aspect of the business organization in order to operate at optimal capacity.

·        Financial Perspective - This consists of costs or measurement involved, in terms of rate of return on capital (ROI) employed and operating income of the organization.

·        Customer Perspective - Measures the level of customer satisfaction, customer retention and market share held by the organization.

·        Business Process Perspective - This consists of measures such as cost and quality related to the business processes.

·        Learning and Growth Perspective - Consists of measures such as employee satisfaction, employee retention and knowledge management.

The four perspectives are interrelated. Therefore, they do not function independently. In real-world situations, organizations need one or more perspectives combined together to achieve its business objective

A traditional balanced scorecard examines the initiatives of a company from four different perspectives: Financial, Learning & Growth, Business Processes, and Customer. These activities are noted in the appropriate buckets with stated measures, targets, and objectives for data collection and analyzing. The activities then can be evaluated and assessed properly.

For example, Customer Perspective isneeded to determine the Financial Perspective, which in turn can be used to improve the Learning and Growth Perspective.

Balanced Scorecard in the 21^st century:

What you measure is what you get. Senior executives understand that their organization’s measurement system strongly affects the behavior of managers and employees. Executives also understand that traditional financial accounting measures like return-on-investment and earnings-per-share can give misleading signals for continuous improvement and innovation—activities today’s competitive environment demands. The traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today. The balanced scorecard is a strategic planning and performance management framework used by business, government, and non-profits to align day-to-day activities with enterprise vision, mission, and values. The balanced scorecard tracks financial and non-financial measures to determine the degree to which the enterprise is performing as desired and when corrective action is necessary.

The balanced scorecard is a widely used management tool, particularly in the U.S., the UK, Northern Europe, and Japan. Enterprises that are comfortable with the rigor required derive significant benefits from it. However, the balanced scorecard requires a great deal of effort to implement and use effectively. Enterprises must have the necessary resources and discipline to make the balanced scorecard successful.

The original balanced scorecard was designed to help for-profit companies. As the balanced scorecard became more widely accepted, it was adapted for government and non-profits. Since neither have profit, the financial perspective is usually retitled “Stewardship” to reflect the need to manage funding and staff judiciously. The customer perspective is frequently renamed “Beneficiaries” or “Recipients” by non-profits that provide their services for no or very low cost. “Stakeholder” is viewed as more descriptive than customer by some government agencies.

The initial balanced scorecard described the four perspectives but gave little guidance regarding how to identify meaningful measures or how to link measures to strategy. Kaplan and Norton’s The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, published in 2001, introduced the strategy map to show the specific activities required to achieve enterprise goals. The strategy map is a visual, one-page representation of the interrelationships among the activities across the four balanced scorecard perspectives. Associated with each activity in the strategy map are supporting metrics.

Balanced Scorecard: An Experience of ICICI Bank (source: their website)

Key challenges

Rapid growth in employee base – fresh and lateral recruits – Building knowledge and skill base – Ensuring adequate focus on multiple perspectives

Growth, profitability, service levels, building talent

Ensuring consistent implementation of strategy across the organisation – Aligning organisational, business-level and individual goals – Incentivising achievement of the goals set

We were seeking a strategic framework that would enable this…

Earlier performance management framework was primarily focused on financial aspect – Other perspectives covered qualitatively – “Input” rather than “output” based: focus on “work done” rather than “goals achieved”.  I did not meet the need for additional perspectives – Retail strategy required service focus – Wholesale banking required focus on transaction capabilities and quality of credit origination

Balanced scorecard at ICICI Bank – Stage I

Re-defined and expanded financial perspective – Growth, market share, profitability and credit costs

Introduced customer perspective: concept of service levels as an area of performance evaluation – Customer satisfaction scores

Introduced process perspective: focus on building a process orientation in the organisation

Learning perspective: focus on re-skilling for existing employees and speed-to-job for new recruits

Balanced scorecard at ICICI Bank - Stage II

Further development and detailing of customer service and process perspectives

Specific measures of performance introduced

– Branch service quality scores

– Turnaround time (TAT) benchmarks

– Good order index for client bankers

 – 5S achievement

 Focused measures served as enablers for meeting financial goals

Balanced scorecard at ICICI Bank - Stage III

Learning and development perspective – So far focused primarily on business skills – Commenced activity on building leadership pool

Reducing the number of scorecard templates – Already reduced from 750 to 230 in two years – Planned reduction to about 150

New challenges – Scorecards for operations in new geographies outside India

Lessons from ICICI Bank experience

Performance measures should be output rather than input based – People should be assessed on goals not on transactions – Removes ambiguity from performance management

• Scorecard need not be balanced for individuals but for business unit as a whole – All perspectives may not apply to all people

• Need for scorecard templates – Ensures consistency – Number of templates should be rationalised based on number of different job descriptions

 

Banks, like other business organisations, are operating in an increasingly complex environment • In this competitive paradigm, optimally directing all resources towards organisational goals in a focused manner is the key to access

 – Having a strategy is not good enough

 – The strategy must be

• Articulated

• Understood

• Executed

• The balanced scorecard is a tool that helps communicate strategy and goals across the organization

•          The balanced scorecard at ICICI Bank has helped achieve:

– Rapid business growth

– Strategic consistency despite growing scale and diversity

– Systematic and objective performance evaluation

 • The balanced scorecard can help to build a platform for sustained future growth and value creation