The central idea behind a balance scorecard-type measurement system is that if the organisation tracks the right set of leading indicators and gives them proper importance weightings, then profits will inevitably follow. Empirical evidence, particularly focused on customer satisfaction, appears to support the premise that some non financial measures are significantly associated with future financial performance and contain additional information not reflected in past financial measures. [2]
The balance scorecard fosters a balance among different strategic measures in an effort to achieve goal congruence, thus encouraging employees to act in the organisation's best interest. It is a tool that helps the company's focus, improves communication, sets organisational objectives, and provides feedback on strategy.
Every measure on a balance scorecard addresses an aspect of a company's strategy. In creating the balance scorecard, executives must choose a mix of measurements that
Accurately reflect the critical factors that will determine the success of the company's strategy
Show the relationships among the individual measures in a cause-and-effect manner, indicating how nonfinancial measures affect long-term financial results;
Provide a broad-based view of the current status of the company
Enterprise, Board, and Executive Scorecards:
Board Balanced Scorecard:
Defines the strategic contributions of the board
A tool to manage the performance of the board and its committees
Clarifies the strategic information required by the board
Board Balance Scorecard
Enterprise Scorecard
Executive Scorecard
Executive Balanced Scorecard:
Describes the strategic contributions of an executive
A tool assess and reward the performance of executives
A key information input to the board
Enterprise Balanced Scorecard:
Describes the enterprise strategy, measures, and targets
A tool to manage the performance of the enterprise
A key information input to the board
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Research Analysis:
Research continues to show that most companies tend to make decisions primarily on financial monitors of performance. Boards, financiers and investors place overwhelming reliance on financial indicators such as profit turnover, cash flow and return on capital. Managers tend to support the view that non financial performance information should only be used internally.
Benefits and drawbacks of the balance scorecard:
The main benefits are:
It can help stakeholders in evaluating the organisation if measures are communicated externally.
It avoids management reliance on short-term or incomplete financial measures
It can ensure that divisions develop success measures for their division that are related to the overall corporate goals of the organisation.
By identifying the non financial measures, managers may be able to identify problems earlier. For example, managers may be measuring customer satisfaction directly as part of the balance scorecard. If this canges, steps can be taken to improve it again before customer leave and it starts to impact on the company's finances.
Drawbacks are:
The criticism of the balance scorecard is that management are asked to meet so many different objectives (some of which might be conflicting) that they lose all perspective. There is a risk that maximisation of shareholder wealth might be forgotten.
It often involves a substantial shift in corporate culture in order to implement it.
It does not provide a single overall view of performance. Measures like ROCE are popular because they conveniently summarise 'how things are going' into on convenient measure.
Measures may give conflicting signals and confuse management. For instance, if customer satisfaction is falling along with one of the financial indicators, which should management sacrifice?
There is no clear relation between the balance scorecard and shareholder analysis.
Strategy mapping-implementing the balance scorecard more effectively:
Strategy mapping was developed by Kaplan and Norton as an extension to the balance scorecard and to make implementation of the scorecard more successful.
The steps involved are: [4]
At the head of the strategy map is the overriding objective of the organisation which describes how it creates value. This is then connected to the organisation's other objectives, categorised in terms of the four perspectives of the balance scorecard, showing the cause-and-effect relationships between them.
The strategy map helps organisations to clarify, describe tna communicate the strategy and objectives, both within the organisation and to external stakeholders, by presenting the key relationships between the overall objective and the supporting strategy and objectives in on diagram
Problems:
Organisations have often found it difficult to translate the corporate vision into behaviour and actions which achieve the key corporate objectives.
In practice many employees do not understand the organisation's strategy, and systems such as performance management and budgeting are not linked to the strategy.
Critical Analysis of BSC within different type of organisations:
The Balance Scorecard can be used to measure the performance of an organisation. Traditionally performance was measure only in financial terms, but it is now recognised that financial measures alone are not enough, hence the development of the Balance Scorecard. There are different variations of the Balance Scorecard that may be used since it facilitates internal performance measurement and thus is designed by each organisation to meet their requirements, however most Balance Scorecards contain four perspectives: financial, customer, internal business process and innovation & learning perspectives. Each of these segments represents a different viewpoint on operation of the organisation. Each of these contributes to the success of the organisation; in fact many argue that success in the first three of these perspectives leads to financial success. The Balance Scorecard develops strategies into operations.
The use of Balance Scorecard is a departure from company's previous practices if they did not have any systematic way of relating its operations to its vision or of measuring performance.
Analysis on Library Business:
In order to understand Balance Scorecard and the performance measures we take an example of a library which is in a small town with a population of 40,000 people live within a fifteen mile radius of the town.
Its customer would want to know that they can borrow the latest books and DVDs from the library so as part of Customer Perspective a measure that could help to monitor the library's success in this area would be the number of new items that had been added to the library within a specified time period.
The library would also need to measure its own efficiency of operations, particularly as it relies on government funding and donations. As part of the Internal Business Perspective the library can measure its speed in obtaining new titles. Recognising demand, identifying source, negotiating a price and placing an order all take time. The smaller the amount of time take the better will be customer perception and the better value for money for the library.
The above both perspectives can bring the efficiency and customer satisfaction for a normal library.
Evaluation of Balance Scorecard:
Balance Scorecard demonstrates that the achievement of financial objectives is often the result of achieving other non-financial targets which lead to the financial targets being achieved. For example, if customers are happy with the products and service being provided then this will often result in increased sales which improve profits and therefore financial objectives are achieved.
Thus by measuring non-financial performance and taking action when targets are not achieved, the result will be improved financial performance. This is because the cause of financial performance has been reviewed, whereas financial performance indicators alone do not identify the causes of performance, simply the effect of it.
BSC Analysis on Airline Business:
The number of take-offs that are on time is a measure of the efficiency of the airline in preparing the aircraft for a flight. Aircraft do not earn revenue while they are standing on the tarmac. This is a measure of efficiency of internal processes (Internal Business Perspective).
The number of new routes operated by the airline is a measure of the innovation of the airline to develop new services for its customers. The greater the number of routes the more customer choice, which also increases the number of customers that would consider airline for their flights (innovation & learning perspective)
Air line could use the number of missed calls due to all of the telephone operator being busy. Customers will expect a speedy answer when they telephone and undue may result in the customer ringing off before the call is answered. The negative impression gained by the customer may result in current and future business being lost. (Customer perspective)
BSC Analysis on Service Business:
The main concepts of the Balance Scorecard are that an organisation's performance should not be measured on the basis of its financial results alone. Other key performance indicators are relevant to an organisation's success.
The Balance Scorecard typically identifies four quadrants of performance indicator that would be suitable for most organisations, though each organisation is free to determine the performance indicators that are most relevant to its own needs.
Many people could use the balance scorecard to measure its success in other areas of its business. It is important for service businesses such as colleges to understand the wants of its customers and thus measures connected with the customer perspective are important. The college may discover that particular types of courses are demanded by their customers and this may lead the college to develop new courses which can be measured using the innovation and learning perspective.
The college can also look at how it operates its processes both in relation to its staff and its customers. Improvements in these processes could be used to improve the financial results, perhaps, because costs saving can be made.
BSC Analysis on Insurance Company:
The insurance company could measure the time it takes for its staff to answer the telephone at call centre department. This is a measure of the effectiveness of its internal business processes. The longer it takes to answer the call the more likely is it that potential customers will be lost because they do not want to wait. If waiting time is significant, the customer may also deter others from making such call thus losing insurance company even more business.
The above example can be applied to most of the today's businesses because most of the businesses offer the customer service facilities such as call centres.
Link between BSC & TQM (Total Quality Management):
Total quality management (TQM) practices have been implemented by firms interested in enhancing their survival prospects by including quality and continuous improvement into their strategic priorities.
Using financial and non-financial measures, the balanced scorecard (BSC) approach appraises four dimensions of firm performance: customers, financial (or shareholders), learning and growth, and internal business processes.
TQM does not consider employee satisfaction in its search for continuous improvement, but the BSC does consider employee satisfaction. Therefore, by adopting a BSC a firm that has adopted TQM will overcome this oversight which will in turn increase employee satisfaction and subsequently firm performance.
The below table shows the link between these two approaches [5] :
Key TQM-Related
Activities
TQM-Related
Performance Metrics
BSC Dimension
Executive commitment and management competence
Employee opinion survey
Employee satisfaction
New techniques introduction compare with competitors
Learning and growth
Internal business process
Customer relationships
Customer-satisfaction survey
Customer acquisition rate
Customer retention (or loyalty rate)
% of the industry market share
Number of customer complaints
Warranty repair cost
Customer
Financial (or shareholders)
Supplier relationships
Supplier-satisfaction survey
Supplier retention rate
Internal business processes
Benchmarking
Labour efficiency compared with competitors
Rework/scrap rate
Cost of Quality (% of sale)
Return on investment
Market share
Internal business processes
Financial (or shareholders)
Employee training
Employee-satisfaction survey
Employee capabilities
Spending levels in dollars for employee development and training
Learning and growth
Open, less bureaucratic culture and employee empowerment
Customer-satisfaction survey
Employee-satisfaction survey
The degree of decentralisation in corporate governance
Customer
Learning and growth
Monitoring quality programs (zero-defects culture)
Incidence of product defects
Material and labour efficiency variances
Percent shipments returned due to poor quality
Warranty repair cost
Internal business processes
Customer
Internal business process improvement and manufacturing innovation
Investment in high technology
Introduction of new management (e.g. JIT)
Sales growth
Internal business process
Financial (or shareholders)
Survey:
Following interviews with senior corporate managers in 15 of Sweden's largest multinational companies, 8 were found to adopt CBSC. However, CBSC had little impact on control at the corporate level. Corporate control was financially focused in all the companies: mainly financial measures were important, standards were only set for financial measures and rewards were largely based on financial performance measures. Top management's need for simplicity and comparability internally, and capital market pressures motivated the financial focus.
Full-size image (43 K) [6]
