Balanced Scorecard
Furqan Tariq
The balanced scorecard is a new management concept which helps
managers at all levels monitor results in their key areas. An article
by Robert Kaplan and David Norton entitled "The Balanced Scorecard -
Measures that Drive Performance" in the Harvard Business Review in
1992 sparked interest in the method, and led to their business
bestseller, "The Balanced Scorecard: Translating Strategy into
Action", published in 1996.
There's nothing new about using key measurements to take the pulse of
an organization. What's new is that Kaplan and Norton have recommended
broadening the scope of the measures to include four areas:
• financial performance,
• customer knowledge,
• internal business processes,
• learning and growth.
This allows the monitoring of present performance, but also tries to
capture information about how well the organization is positioned to
perform well in the future.
Kaplan and Norton cite the following benefits of using the balanced
scorecard:
• Focusing the whole organization on the few key things needed to
create breakthrough performance.
• Helping to integrate various corporate programs, such as quality, re-
engineering, and customer service initiatives.
• Breaking down strategic measures to local levels so that unit
managers, operators, and employees can see what's required at their
level to roll into excellent performance overall.
Similarity to Hoshin Planning
The balanced scorecard has strong similarities to Hoshin Planning or
hoshin kanri, the organization-wide strategic planning system used
widely in Japanese companies. Both seek breakthrough performance,
alignment, and integrated targets for all levels. The balanced
scorecard suggests which specific areas should be measured for a
balanced picture, but this isn't contradictory to Hoshin Planning. One
thing that the Japanese emphasize is "catchball", the process of give
and take between levels that helps to define strategy in Japanese
companies. The balanced scorecard method seems to be more of a one-way
street -- the executive team creates the strategy, and it cascades
down from there.
One cautionary note
You tend to get what you measure for, since people will work to
achieve the explicit targets which are set. Dr. Deming feared this
effect, noting that people would skew their work to meet particular
incentive pay targets. For example, emphasizing traditional financial
measures tends to encourage short-term thinking - like rigging
shipping schedules to make the monthly sales look good, or
aggressively discounting to meet year-end targets. Kaplan and Norton,
recognizing this, urge a more balanced set of measurements, which is
good. Even so, people will work to achieve their scorecard goals, and
may ignore important things which are not on the scorecard. Or, if the
scorecard is not refreshed often enough, what looked like an important
goal in January may not be very germane in June. Kaplan and Norton
recognize these risks, and they don't pretend that they have said the
final word on scorecards.
Balanced Scorecard
The balanced scorecard forces managers to look at the business from
four important perspectives. It links performance measures by
requiring firms to address four basic questions:
(a) How do customers see us? - Customer perspective
(b) What must we excel at? - Internal perspective
(c) Can we continue to improve and create value? - Innovation &
learning perspective
(d) How do we look to shareholders? - Financial perspective
Balanced Scorecard
The Balanced Scorecard is a management tool to mobilize employees to
fulfill the mission of the organization. It is founded on principles
developed by Robert S. Kaplan and David P. Norton, and published in
their book, The Balanced Scorecard: Translating Strategy into Action.
The scorecard is a method of designing, organizing and communicating
performance measures across multiple perspectives (i.e. customer,
financial, business process and learning and growth), utilizing both
short and long term time horizons. The scorecard conveys the strategic
plan to organization members, and it monitors each perspective
simultaneously so that each perspective continuously supports the
strategic plan.
The scorecard is an analysis technique to translate an organization's
mission statement and overall business strategy into specific,
quantifiable goals and to monitor the organization's performance in
terms of achieving these goals. The Balanced Scorecard is an integral
part of OPX.
Measures
At its simplest, measures are the quantification of an action or
activity. Different measurements occur at different organizational
levels. Some measurements are lagging, and some measurements are
leading: A good scorecard has a balance of both. Both outcomes and
performance drivers should be included in each business unit's
balanced scorecard.
• Outcomes are lagging indicators, and are the final results of all of
an organization's products and services. Examples would be: enhanced
mobility, safe drinking water, and increasing the quantity and quality
of open space.
• Performance drivers, also known as leading indicators or inputs, are
measures that are unique to each organization or business unit.
Performance drivers and inputs measure the employee and unit
activities, which in turn, result in outcomes.
Perspectives of the Balanced Scorecard:
Businesses too frequently use only financial and process measures to
evaluate their performance. The balanced scorecard approach broadens
the measurement of performance by looking at work from multiple
perspectives:
• customer perspective
• financial perspective
• business process perspective
• learning and growth perspective
Best practices of the Balanced Scorecard include:
• Measure performance of all strategic goals
• Maintain a balanced set of measures
• People are held personally accountable for results
• Develop solid baseline data
• Match resources to goals and objectives
Effective measures should be:
• Aligned with enterprise strategy.
• Supported by leadership.
• Clear and understandable.
• A balance of lagging and leading indicators.
• Linked to individuals and/or teams, with organizational goals in-
sight.
• A centerpiece of the management process.
Barriers to successful measurement include:
• Inability to reach consensus on goals or measures.
• Insufficient involvement of end users of the measurement system.
• Routine habits, inflexible processes, cherished systems, and static
culture are all obstacles to successful measurement.
• Fear or unwillingness to change.
• Measuring what is easy or known, rather than identifying what needs
to be measured.
Cause-and-effect relationships:
"Every measure selected for a Balanced Scorecard should be an element
of a chain of cause-and-effect relationships that communicates the
meaning of the business unit's strategy to the organization."
-- The Balanced Scorecard, Kaplan and Norton (p. 149)
Learning more about the Balanced Scorecard
The book, The Balanced Scorecard: Translating Strategy into Action,
by Robert S. Kaplan and David P. Norton is a great starting point to
learn more about perspectives and measures.
Other sources for learning may be found on the internet. Click this
link for more information about on-line learning opportunities.
The customer perspective:
Who is your customer? What services or products do they expect from
you? How do you listen to and learn from your customer? How do you
retain and acquire new customers? How do you meet your customers
needs? How do you measure customer satisfaction and dis-satisfaction?
The financial perspective:
There is a broad range of traditional financial questions that can be
asked. The questions can address short and long-term time horizons.
Depending upon the standards in your industry, return on investment
(ROI), revenue enhancement and growth, risk, and improved
productivity are all reasonable financial measures. The measures from
other scorecard perspectives should be linked in a cause-and-effect
relationship towards achieving the desired financial outcomes.
The business process perspective:
What products or services will your customers value in the future?
What processes best deliver the outcomes desired by the customers?
Looking into the future, what are the new business processes that you
must excel at? What will be valued in the future, and how will
innovation deliver future values?
The learning and growth perspective:
The learning and growth perspective supports the other three
perspectives. Ultimately, if the workforce is not enabled with
knowledge, innovation and advanced skill sets, the workforce will be
unable to build and enhance innovative business processes, that in-
turn will help retain and acquire new customers, and ultimately
achieve financial objectives.
"A core group of three employee-based measures--satisfaction,
productivity and retention--provide outcome measures from investments
in employees, systems and organizational alignment."
-- The Balanced Scorecard, Kaplan and Norton (p. 146)
What is the Balanced Scorecard?
A new approach to stategic management was developed in the early
1990's by Drs. Robert Kaplan (Harvard Business School) and David
Norton (Balanced Scorecard Collaborative). They named this system the
'balanced scorecard'. 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."
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 and Growth Perspective
• The Business Process Perspective
• The Customer Perspective
• The Financial Perspective
________________________________________
The Balanced Scorecard and Measurement-Based Management
The balanced scorecard methodology builds on some key concepts of
previous management ideas such as Total Quality Management (TQM),
including customer-defined quality, continuous improvement, employee
empowerment, and -- primarily -- measurement-based management and
feedback.
Double-Loop Feedback
In traditional industrial activity, "quality control" and "zero
defects" were the watchwords. In order to shield the customer from
receiving poor quality products, aggressive efforts were focused on
inspection and testing at the end of the production line. The problem
with this approach -- as pointed out by Deming -- is that the true
causes of defects could never be identified, and there would always be
inefficiencies due to the rejection of defects. What Deming saw was
that variation is created at every step in a production process, and
the causes of variation need to be identified and fixed. If this can
be done, then there is a way to reduce the defects and improve product
quality indefinitely. To establish such a process, Deming emphasized
that all business processes should be part of a system with feedback
loops. The feedback data should be examined by managers to determine
the causes of variation, what are the processes with significant
problems, and then they can focus attention on fixing that subset of
processes.
The balanced scorecard incorporates feedback around internal business
process outputs, as in TQM, but also adds a feedback loop around the
outcomesof business strategies. This creates a "double-loop feedback"
process in the balanced scorecard.
Outcome Metrics
You can't improve what you can't measure. So metrics must be developed
based on the priorities of the strategic plan, which provides the key
business drivers and criteria for metrics managers most desire to
watch. Processes are then designed to collect information relevant to
these metrics and reduce it to numerical form for storage, display,
and analysis. Decision makers examine the outcomes of various measured
processes and strategies and track the results to guide the company
and provide feedback.
So the value of metrics is in their ability to provide a factual basis
for defining:
• Strategic feedback to show the present status of the organization
from many perspectives for decision makers
• Diagnostic feedback into various processes to guide improvements on
a continuous basis
• Trends in performance over time as the metrics are tracked
• Feedback around the measurement methods themselves, and which
metrics should be tracked
• Quantitative inputs to forecasting methods and models for decision
support systems
Management by Fact
The goal of making measurements is to permit managers to see their
company more clearly -- from many perspectives -- and hence to make
wiser long-term decisions. The Baldrige Criteria (1997) booklet
reiterates this concept of fact-based management:
"Modern businesses depend upon measurement and analysis of
performance. Measurements must derive from the company's strategy and
provide critical data and information about key processes, outputs and
results. Data and information needed for performance measurement and
improvement are of many types, including: customer, product and
service performance, operations, market, competitive comparisons,
supplier, employee-related, and cost and financial. Analysis entails
using data to determine trends, projections, and cause and effect --
that might not be evident without analysis. Data and analysis support
a variety of company purposes, such as planning, reviewing company
performance, improving operations, and comparing company performance
with competitors' or with 'best practices' benchmarks."
"A major consideration in performance improvement involves the
creation and use of performance measures or indicators. Performance
measures or indicators are measurable characteristics of products,
services, processes, and operations the company uses to track and
improve performance. The measures or indicators should be selected to
best represent the factors that lead to improved customer,
operational, and financial performance. A comprehensive set of
measures or indicators tied to customer and/or company performance
requirements represents a clear basis for aligning all activities with
the company's goals. Through the analysis of data from the tracking
processes, the measures or indicators themselves may be evaluated and
changed to better support such goals."
The Balanced Scorecard -- Not Just Another Project
© Paul Arveson 1998
Managers in many government agencies have been reared on project
management. It is the way they think about achieving their mission. In
the Defense Department, project or program management has been the
framework for development of every system costing from ten thousand
dollars to ten billion dollars. There is a long-established tradition
of on-the-job training and experience for young people to learn and be
mentored by experienced project managers. Many guidebooks, manuals,
software programs, and other means have been devised to aid the
project manager.
Project management has been in the management culture for decades, and
the federal government has thousands of project managers who are
routinely capable of amazingly complex achievements. In fact, many
project managers may have never seen or cosidered any other way to get
things done.
Although it is not necessary here to describe project management in
detail, a simple diagram will help to show its general features.
The figure represents a time line or GANTT chart. All projects (or
programs) have a definite start time (green) and a definite stop time
(red) when the final deliverables (products, services, documents,
decisions, etc.) are delivered to the customer. The goal is to meet
customer requirements. The initial stage requires establishment of a
precise budget and a plan of action and milestones (POA&M). The work
is focused on the actual mission of production undertaken for the
customer. It may be broken down into a hierarchy of subtasks, called
an Engineering Schedule Work Breakdown Structure (ESWBS). Status and
review meetings are scheduled at regular intervals throughout the
project. Usually some kind of final report is written as one of the
deliverables. The goal is to reach the end point on time and within
budget, since there are usually other projects that are depending on
input from the deliverables of this project. So project management is
the effort to manage work within a finite, clearly scoped,
hierarchically-structured, linear development process with a definite
beginning and end.
The balanced scorecard management system is not just another project.
It is fundamentally different from project management in several
respects. To illustrate the radical nature of this difference, a
diagram is shown of the BSC performance measurement process, as it
would run when installed in an organization.
The first thing to notice is the topology: the balanced scorecard
management process, derived from Deming's Total Quality Management, is
a continuous cyclical process. It has neither beginning nor end. Its
task is not directly concerned about the mission of the organization,
but rather with internal processes (diagnostic measures) and external
outcomes (strategic measures). The system's control is based on
performance metrics or "metadata" that are tracked continously over
time to look for trends, best and worst practices, and areas for
improvement. It delivers information to managers for guiding their
decisions, but these are self-assessments, not customer requirements
or compliance data.
People trained only in project management may have difficulty in
figuring out how to accomplish the BSC, simply because it is such a
different kind of management paradigm. One of the key practical
difficulties is to figure out how to get the process started in the
first place. If this is not a project, where does one begin? What kind
of plan is appropriate for deployment of the balanced scorecard
system?
If we want to ride a rotating merry-go-round, we had better not
attempt to just hop on. We will probably get hurt -- and won't get on.
The situation is similar with the balanced scorecard. To get on the
merry-go-round, we have to accelerate in the same direction for
awhile, then hop on when our speed equals that of the circular floor.
In other words, there needs to be a ramp-up phase, where everyone
"comes up to speed." This includes training or retraining of project
managers, and probably focused deployment of pilot efforts before
attempting to cover an entire large agency. Sustained, patient
leadership will be needed before the payoff is attained.
Management Approaches
© Paul Arveson 1998
Government agencies cannot live by project management alone. Congress,
in the GPRA, the Executive Branch in the Reinventing Government
initiative, and DoD Secretary Cohen in the Defense Reform Initiative,
are asking us to find ways to increase productivity and efficiency,
while maintaining mission effectiveness. That is where the new
management approaches come in -- they are more applicable than project
management to the kinds of internal improvements that are needed.
The table below summarizes comparisons of three different management
approaches or methodologies. The comparisons are shown for several
different features. It is evident from this comparison that BPI and
the Balanced Scorecard are quite different in most respects from
project management. They have different purposes and meet different
needs.
Project Management Business Process Improvement Balanced Scorecard
Age of Approach Decades Began in DoD 1992 Began in 1990
Prime Customer External Sponsor Internal Director External IG,
Internal Director
Goal Definition Project Requirements, Mission Needs Statement Cost,
cycle time reductions Strategic management system
Focus Technical Mission Business Processes Multiple perspectives
Scope Specialized unit unit to enterprise unit to enterprise
Plans Plan of Action & Milestones Process Improvement Plan Strategic
Plan, Performance Plan
Schedule Work Breakdown Schedule, Action Items Team directed Teams, 26-
month schedule from BSC book
Management Activities Team building, Budgeting, Task Tracking, Reviews
Baseline process analysis, to-be process design, automation Define
metrics, collect data, analyze data, decide on changes
Tools (see links)
Microsoft Project, Primavera TurboBPR, IDEF0 PAR-4, Gentia, intranet +
database
Measures of success Deliverables on time, on budget Cost reductions
minus cost of BPI effort Quantity of data, improved results on many
metrics
In attempting to implement the newer management methodologies in a
traditional project management organization, there are two possible
options:
1. train the managers in the new approaches and techniques;
2. translate the new approaches into familiar project form, and treat
them as conventional projects.
Option 1 is always recommended. The problem with that is that we do
not have the time or money to spend on a lot of training in new
techniques.
Option 2 is something that hasn't been suggested before, to my
knowledge. I don't know if it is feasible, or even if it makes sense.
But if it could be done, it would save a lot of time in deploying the
new initiatives.
Option 2 was actually suggested by the DoD's 1998 Performance Plan, in
which one of the top level mission goals was 'Cost Reduction'. In
other words, the DoD management recognizes that this is in itself
worthy of being a strategic goal on the level of its other missions,
not just an internal efficiency need.
Selecting a Management Approach
© Paul Arveson 1998
One of the reasons why managers are having such difficulty in applying
management methods to government problems is this: there are many
different schools of thought on management approaches, and each of
these schools has its own proponents. Generally, an original proponent
makes his or her name in that particular concept, and becomes an
'expert' and a 'guru' of it. There is little incentive to integrate
this one approach with others.
That job is left to the poor managers who have to figure out how to
apply what theory to their business problems. They have heard
something about MBO, TQM, BPR, ISO-9000, CMM, ABC, BSC, and all the
other buzz words and acronyms of management -- but they have received
precious little guidance as to what to select that best fits their
business needs, and the top-level requirements such as the GPRA.
Usually, however, managers will tend to use the approach with which
they are most familiar, which is probably project management or
program management.
At any point in time, management culture tends to be dominated by one
school of thought. Currently an emerging idea is the 'balanced
scorecard'. The book on this theory by Kaplan and Norton is currently
one of the top 10 best sellers in the field. Management consultants
and writers tend to adopt the theory that is currently in vogue, and
its popularity thus tends to grow rapidly to a peak, until it is
superseded by the next new idea. The schools come and go approximately
every 10 years. A similar phenomenon seems to take place in other
social sciences, such as psychology, sociology, and education.
Thomas Kuhn's book The Structure of Scientific Revolutions analyzed
this phenomenon. Although its conclusions may be taken too far, the
general description of the process seems true enough:
1. A revolutionary new idea comes out of the blue, and champions and
followers arise to promote it.
2. A school of thought and literature arises around the subject.
3. The idea becomes so popular that it becomes part of the
'establishment'. Its view is unquestioned and it dominates the scene
for awhile.
4. Anomalies, counterexamples and new ideas emerge that cause the
original idea to be deeply questioned.
5. A period of conflict between proponents and opponents prevails.
6. One of the new ideas takes over the field, except for a few die-
hards who have little but historical influence.
7. The old idea may not be forgotten, but is absorbed into the new
idea as a 'special case' or a 'useful fiction' that may be helpful in
certain situations. (This appears to be the current status of Freudian
theory within psychotherapy, for example).
Management Flexibility
A manager who only has experience in one approach, such as project
management, may have difficulty in adapting to changing demands. A
manager can be much more effective if he or she is able to select a
management approach that is most appropriate to the desired need or
goal. This adaptability or 'eclectic' flexibility may prove very
useful in the changing government management environment.
There is no good reason why managers must follow the latest school of
management thought. On the other hand, just because an idea is new
does not mean that it should be dismissed. There are reasons why one
particular approach is better than another depending on the strategic
goal or need. The Balanced Scorecard, for instance, appears to be a
very appropriate technique for meeting the urgent management needs of
many Government agencies, such as their need to comply with the
requirements of the GPRA. However, this need should not blind managers
to other, perhaps even more pressing goals of their organization that
may require a different approach.
The following table was developed to aid in selection of a management
approach, depending on the conditions and need of the organization
(strategic goal). The conditions will partly determine the best
option. (The terms are defined here.)
Time Horizon (years) Strategic Goal Change Readiness Technical Level
Risk Tolerance Recommended Option
2-3 GPRA Compliance Moderate High Moderate Balanced Scorecard
3-6 >30% cost reductions, survival High High High BPR
1-3 20% Cost reductions Moderate Moderate Moderate BPI
Long term Continuous improvement Moderate Moderate Low TQM
2-3 Baldrige score elevation Moderate High Low Balanced Scorecard +
ABC
2-5 Strategic alignment Low Moderate Moderate Balanced Scorecard
2-5 Marketing credibility Low Low Moderate ISO-9000, incremental
2-5 Increased capabilities Moderate High Low CMM
Note that not all possible combinations of conditions are included in
the table. If your conditions are beyond the levels indicated here
(e.g. low risk tolerance when 30% cost reductions are needed), then it
is likely that a 'best option' does not exist for your situation. You
may need to gain additional senior management support and tolerance
for risk before conducting strategic activities.
Details about each of these approaches may be found in books and at
web sites listed in the Links.
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