Balance Scorecard

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Introduction
In 1992, Robert S. Kaplan and David Norton introduced the balanced scorecard, a concept for measuring a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. The key new element is focusing not only on financial outcomes but also on the human issues that drive those outcomes, so that organizations focus on the future and act in their long-term best interest. The strategic management system forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, process, and employee perspectives. Measures are often indicators of future performance.
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Process
Implementing the scorecard typically includes four processes:
Translating the vision into operational goals; Communicate the vision and link it to individual performance; Business planning; Feedback and learning and adjusting the strategy accordingly.

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Components
Balanced Scorecard is simply a concise report featuring a set of measures that relate to the performance of an organization. By associating each measure with one or more expected values (targets), managers of the organization can be alerted when organizational performance is failing to meet their expectations. The Balanced Scorecards comprised simple tables broken into four sections - typically these 'perspectives' were labeled "Financial", "Customer", "Internal Business Processes", and "Learning & Growth". Designing the Balanced Scorecard simply required picking five or six good measures for each perspective. In the new method, selection of measures was based on a set of 'strategic objectives' plotted on a 'strategic linkage model' or 'strategy map'. Since the late 1990s, various improved versions of Balanced Scorecard design methods have emerged - examples being The Performance Prism, Results Based Management and Third Generation Balanced Scorecard for example.
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Key Performance Indicators

According to each perspective of the balanced scorecard there are a number of KPIs. Financial
Cash Flow ROI Financial Result Return on capital employed Return on equity

Customer
Delivery Performance to Customer - by Date Delivery Performance to Customer - by Quantity

Internal Business Processes

Number of Activities Opportunity Success Rate

Learning & Growth

Investment Rate Illness rate

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Perspectives
Kaplan and Norton do not explicitly define what a perspective means, but they list the four main perspectives that an organization (whether profit or non profit) must have: Financial perspective: In profit organizations, this involves the shareholders, while in non profit organizations, it involves those subsidizing or financing the organization. Customer perspective: The customer perspective is concerned with:
Customer selection Customer acquisition Customer retention Customer growth Operations management processes Customer management processes Innovation processes Social and regulatory processes.

Internal (business) process perspective: Involves:

Learning and growth perspective: This involves developing the human, information and organizational capital. Some important facts about the perspectives and their ordering:
The perspectives are arranged in descending order of measurability, urgency, tangency and visibility. The organization's mission, vision, core values, and main goals are in terms of the higher perspectives. Thursday, July 26, 2007 TTT The detailed strategies are in terms of lower perspectives.

Mission and Vision

The mission of an organization is a concise, internally focused statement of the reason for the organization's existence, the basic purpose towards which its activities are directed, and the values guiding its employees' activities. The mission is linked with some core values. It also describes how to compete and deliver value to customers. The vision of an organization is a concise statement describing the organization's middle to long term goals. It is external, market oriented, and should express in a colorful and visionary manner how the organization wants to be perceived by the world. The main differences between mission and vision are: The mission is internally focused, while the vision is externally focused The mission is in the very long term, while the vision is middle to long term A strategy means selecting a set of activities in which an organization will excel to create a sustained difference in the market place. The strategy map is akin to a macro view of the strategies followed by the organization. TTT Thursday, July 26, 2007 6

Customer perspective
Kaplan and Norton discuss an important notion, the value proposition. The concept is based on earlier work done by the influential economist and business theorist, Michael Porter. The value proposition is the mix of commodity, quality, price, service and warranty that the organization offers to its customers. The value proposition is aimed at targeting certain customers, that is, it has certain target segments. Kaplan and Norton talk of four broad classes of value propositions: Best buy or Low total cost: Affordable prices, reliable quality, quick service. For instance, Southwestern Airlines, a much touted case in business studies, adopted a best buy strategy. Product leadership and innovation: The cutting edge products or industry leaders. Companies like Ericsson, Motorola offer such a value proposition. Customer complete solutions: Tailor made for the customer's individual needs and preferences. IBM offers customer complete solutions. Lock in: The concept was introduced by Michael Porter. The organization tries to get a large TTT number of buyers in a position Thursday, July 26, 2007 7 where they are left with practically no alternative but to buy their

Internal process perspective

A crucial fact brought out by Kaplan and Norton is that the nature of the value proposition determines the kind of internal processes on which to focus more. The approximate correspondence between the primary value proposition and the primary internal process perspective is as follows: Best buy corresponds to the operations management perspective Customer complete solutions corresponds to the customer management perspective Product leadership and innovations corresponds to the innovations perspective Operations management processes Customer management processes Innovation Processes Regulatory and social processes There are four dimensions to regulatory and social processes:
Environment: Issues such as energy and resource consumption, and emissions into the air, water and soil Safety and health: Safety hazards to employees Employment practices: Diversity of employees Community investment:
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Learning and growth perspective

Though the intangible assets of an organization are the most powerful means by which to effect permanent change in the organization, the idea of strategy maps is to plan in a top down way -- start with the needs of the higher perspectives and work downwards to figure out what is needed at the level of the human, organization and information capital. Human capital
Kaplan and Norton outline the following multi step strategy for improving human capital: Identify the strategic job families Develop the competency profile Assess the human capital readiness Formulate a plan for improving the human capital

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Learning and growth perspective

Information capital There are three areas of information capital application:
Transaction processing applications: This involves the day to day, repetitive tasks. Analytic applications: This involves statistical analysis used to understand and improve Transformation applications: This involves change in the nature of business

Organization capital
Organization has the following four elements: Culture: This describes the perception across the company of its goals, mission, and policies. Leadership and accountability Alignment: Linking rewards to performance Teamwork: A system of global knowledge management .
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References
Douglas W. Hubbard "How to Measure Anything: Finding the Value of Intangibles in Business" John Wily & Sons, 2007. ISBN 978-0470110126 Cobbold, I. and Lawrie, G. (2002a). The Development of the Balanced Scorecard as a Strategic Management Tool. Performance Measurement Association 2002 Cobbold, I and Lawrie, G (2002b). Classification of Balanced Scorecards based on their effectiveness as strategic control or management control tools. Performance Measurement Association 2002. Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review Jan Feb pp71-80. Kaplan R S and Norton D P (1993) "Putting the Balanced Scorecard to Work", Harvard Business Review Sep Oct pp2-16. Kaplan R S and Norton D P (1996) "Using the balanced scorecard as a strategic management system", Harvard Business Review Jan Feb pp75-85. Kaplan R S and Norton D P (1996) Balanced Scorecard: Translating Strategy into Action Harvard Business School Press Kurtzman J (1997) "Is your company off course? Now you can find out why", Fortune Feb 17 pp128- 30 Niven, Paul R. (2006) "Balanced Scorecard. Step-by-step. Maximizing Performance and Maintaining Results".

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