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Clarifying and communicating vision and strategy into action. Explanation of Balanced Scorecard of Kaplan and Norton. ('92)

HISTORY OF THE BALANCED SCORECARD 12manage for:

In 1992, an article by Robert Kaplan and David Consultants
Norton entitled "The Balanced Scorecard - MBA Students
Measures that Drive Performance" in the Harvard Professors
Business Review caused a lot of attention for their
method, and led to their business bestseller, "The
Balanced Scorecard: Translating Strategy into
Action", published in 1996. Balanced Scorecard Demo
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The financial performance of an organization is Performance. View the Free Demo.
essential for its success. Even non-profit www.cognos.com/scorecarding
organizations must deal in a sensible way with
funds they receive. However, a pure financial
approach for managing organizations suffers from
two drawbacks:

It is historical. Whilst it tells us what has

happened to the organization, it may not
tell us what is currently happening. Nor it
is a good indicator of future performance.
It is too low. It is common for the current market value of an organization to exceed the market value of its
assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess Supply Chain
value is resulting from intangible assets. This kind of value is not measured by normal financial reporting.
Benchmarking
THE 4 PERSPECTIVES OF THE BALANCED SCORECARD
The Balanced Scorecard method of Kaplan and Norton is a strategic approach, and performance management
system, that enables organizations to translate a company's vision and strategy into implementation, working from Improve Supply
4 perspectives:
Chain & Logistics
1. Financial perspective. with online KPIs and
2. Customer perspective.
3. Business process perspective. Benchmarking
4. Learning and growth perspective.

This allows the monitoring of present performance, but the method also tries to capture information about how well www.BenchmarkingSuccess.com
the organization is positioned to perform in the future.

BENEFITS OF THE BALANCED SCORECARD

Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard:

Focusing the whole organization on the few key things needed to create breakthrough performance.
Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service
initiatives.
Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees
can see what's required at their level to achieve excellent overall performance.

1. THE FINANCIAL PERSPECTIVE

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will
always be a priority, and managers will make sure to provide it. In fact, there is often more than sufficient 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 financial issues leads
to an 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.

2. THE CUSTOMER PERSPECTIVE

Recent management philosophy has shown an increasing realization of the importance of customer focus and
customer satisfaction in any company. These are called 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

http://www.12manage.com/methods_balancedscorecard.html 6/10/2008
Balanced Scorecard Page 2 of 5
indicator of future decline. Even though the current financial picture may seem (still) good. In developing metrics Ads by Google
for satisfaction, customers should be analyzed. In terms of kinds of customers, and of the kinds of processes for
which we are providing a product or service to those customer groups.

3. THE BUSINESS PROCESS PERSPECTIVE

This perspective
refers to internal
business
processes.
Measurements
based on this
perspective will
show the
managers how Supply Chain
well their
business is Benchmarking
running, and
whether its
products and
services conform
Improve Supply
to customer Chain & Logistics
requirements.
These metrics with online KPIs and
have to be
carefully Benchmarking
designed by
those that know
these processes www.BenchmarkingSuccess.com
most intimately.
In addition to the
strategic
management
processes, two
kinds of business processes may be identified:

Mission-oriented processes. Many unique problems are encountered in these processes.

Support processes. The support processes are more repetitive in nature, and hence easier to measure
and to benchmark. Generic measurement methods can be used.

4. 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 are the main resource. In the current
climate of rapid technological change, it is becoming necessary for knowledge workers to learn continuously.
Government agencies often find themselves unable to hire new technical workers and at the same time is showing
a decline in training of existing employees. Kaplan and Norton emphasize that 'learning' is something more than
'training'; it also includes things like mentors and tutors within the organization, as well as that ease of
communication among workers that allows them to readily get help on a problem when it is needed. It also
includes technological tools such as an Intranet.

The integration of these four perspectives into a one graphical appealing picture, has made the Balanced
Scorecard method very successful as a management methodology.

OBJECTIVES, MEASURES, TARGETS, AND INITIATIVES

For each perspective of the Balanced Scorecard four things are monitored (scored):

Objectives: major objectives to be achieved, for example, profitable growth.

Measures: the observable parameters that will be used to measure progress toward reaching the
objective. For example, the objective of profitable growth might be measured by growth in net margin.
Targets: the specific target values for the measures, for example, 7% annual decline in manufacturing
disruptions.
Initiatives: projects or programs to be initiated in order to meet the objective.

DOUBLE-LOOP FEEDBACK
In traditional industrial activity, "quality control" and "zero defects" were important words. To shield the customer
from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the
production line. A problem with these approaches - as pointed out by Deming - is that the true causes of defects
could never be identified, and there would always be inefficiencies because products with a defect are rejected.
Deming understood that variation is created at every step in a production process, and the causes of variation
need to be identified and repaired. If this can be done, then there is a way to reduce the defects and improve

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Balanced Scorecard Page 3 of 5
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, and what are the processes with significant problems. Then they can focus their attention on
repairing that subset of processes.

The balanced scorecard method includes feedbacks around internal business process outputs. As in TQM.
Additionally, the Balanced Scorecard provides a feedback for the outcomes of business strategies. This creates a
"double-loop feedback" process in the balanced scorecard.

OUTCOME METRICS
You can't improve what you can't measure. Therefore 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.
Feedback around the measurement methods themselves. Which measurements should be tracked?
Quantitative inputs for forecast methods and for decision support systems.

MANAGEMENT BY FACT
The goal of measuring is to permit managers to see their company more clearly - from many perspectives - and
hence to make wiser long-term decisions. A 1997 booklet on the Baldrige Criteria summarizes 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."

CAUTIONARY NOTE ON USING THE BALANCED SCORECARD

You tend to get what you measure. People will work to achieve the explicit targets which are set. For example,
emphasizing traditional financial measures may encourage short-term thinking. The Core Group Theory by Kleiner
provides further clues on the mechanisms behind this. Kaplan and Norton recognize this, and urge for a more
balanced set of measurements. But still, people will work to achieve their scorecard goals, and may ignore
important things which have no place on their scorecard.

EVOLUTION OF THE BALANCED SCORECARD

In 2002, Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon the intended
method of use within an organization. They describe how the Balanced Scorecard can be used to support three
distinct management activities, the first two being management control and strategic control. They assert that
due to differences in the performance data requirements of these applications, planned use should influence the
type of BSC design adopted. Later that year the same authors reviewed the evolution of the Balanced Scorecard
as shown through the use of Strategy Maps as a strategic management tool, recognizing three distinct
generations of Balanced Scorecard design.

Book: Robert S. Kaplan, David P. Norton - The BSC: Translating Strategy into Action -
Book: Paul R. Niven - BSC Step-by-Step: Maximizing Performance and Maintaining Results -
Book: Paul R. Niven - BSC Step-by-Step for Government and Nonprofit Agencies -

BALANCED SCORECARD FORUM

http://www.12manage.com/methods_balancedscorecard.html 6/10/2008