The Balance Scorecard

INTRODUCTION
The Balanced Scorecard (BSC) is a strategic performance management tool - a semistandard structured report, supported by proven design methods and automation tools, 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. It is perhaps the best known of several such frameworks (it is the most widely adopted performance management framework reported in the annual survey of management tools undertaken by Bain & Company, and has been widely adopted in English-speaking western countries and Scandinavia in the early 1990s). Since 2000, use of the Balanced Scorecard, its derivatives (e.g., Performance Prism), and other similar tools (e.g., Results Based Management) has also become common in the Middle East, Asia and Spanish-speaking countries.
The characteristic of the Balanced Scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional financial or operational reports but a succinct summary that captures the information most relevant to those reading it. It is the method by which this 'most relevant' information is determined (i.e. the design processes used to select the content) that most differentiates the various versions of the tool in circulation. As a model of performance, the Balanced Scorecard is effective in that "it articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities.
The Balance Scorecard

NEED FOR BALANCED SCORECARD Accountants communicate with financial statements. Engineers communicate with as-built drawings. Architects communicate with physical models. It seems that almost every profession has some means of communicating clearly to the end user. However, for people engaged in strategic planning there has been an on-going dilemma. The finished product, the strategic plan, has not communicated and reached the end user. Sure strategic plans are nice to look at, full of bar charts, nice covers, well written, and professionally prepared; but they simply have not impacted the people who must execute the strategic plan. The end result has been poor execution of the strategic plan throughout the entire organization. And the sad fact of the matter is that execution of the strategic plan is everybodys business, not just upper level management. Upper level management creates the strategy, but execution takes place from the bottom up.
There are four barriers to strategic implementation:

Vision Barrier No one in the organization understands the strategies of the organization. People Barrier Most people have objectives that are not linked to the strategy of the organization. Resource Barrier Time, energy, and money are not allocated to those things that are critical to the organization. For example, budgets are not linked to strategy, resulting in wasted resources. Management Barrier Management spends too little time on strategy and too much time on short-term tactical decision-making. Only 5% of the workforce understands their company strategy. Only 25% of managers have incentives linked to strategy. 60% of organizations dont link budgets to strategy. 86% of executive teams spend less than one hour per month discussing strategy
Therefore, we need a new way of communicating strategy to the end-user. Enter the Balanced Scorecard. At long last, strategic planners now have a crisp and clear way of communicating strategy. With balanced scorecards, strategy reaches everyone in a language that makes sense.
STRATEGIC MANAGEMENT
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When strategy is expressed in terms of measurements and targets, the employee can relate to what must happen. This leads to much better execution of strategy. One should think of the Balanced Scorecard as a management system, not just another performance measurement program. And since strategy is at the center of value-creation for the organization, the Balanced Scorecard has become a critical management system for any organization. In 1997, Harvard Business Review called the Balanced Scorecard one of the most significant business developments of the previous 75 years. Balanced Scorecards tell you the knowledge, skills and systems that your employees will need (learning and growth) to innovate and build the right strategic capabilities and efficiencies (internal processes) that deliver specific value to the market (customer) which will eventually lead to higher shareholder value (financial).
Terminology
Cause Effect Relationship: The natural flow of business performance from a lower level to an upper level within or between perspectives. For example, training employees on customer relations leads to better customer service which in turn leads to improved financial results. One side is the leader or driver, producing an end result or effect on the other side.
Goal: An overall achievement that is considered critical to the future success of the organization Goals express where the organization wants to be.
Measurement: A way of monitoring and tracking the progress of strategic objectives. Measurements can be leading indicators of performance (leads to an end result) or lagging indicators (the end results).
Objective: What specifically must be done to execute the strategy; i.e. what is critical to the future success of our strategy? What the organization must do to reach its goals.
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Perspectives: Four or five different views of what drives the organization. Perspectives provide a framework for measurement. The four most common perspectives are: Financial (final outcomes), Customer, Internal Processes, and Learning & Growth.
Programs: Major initiatives or projects that must be undertaken in order to meet one or more strategic objectives.
Strategic Area: A major strategic thrust for the organization, such as maximizing shareholder value or improving the efficiency of operations. Strategic areas define the scope for building the balanced scorecard system.
Strategic Grid: A logical framework for organizing a collection of strategic objectives over four or more perspectives. Everything is linked to capture a cause and effect relationship. Strategic grids are the foundation for building the Balanced Scorecard.
Strategic Model: The combination of all strategic objectives over a strategic grid, well connected and complete, providing one single model or structure for managing the strategic area.
Strategy: An expression of what the organization must do to get from one reference point to another reference point. Strategy is often expressed in terms of a mission statement, vision, goals, and objectives. Strategy is usually developed at the top levels of the organization, but executed by lower levels within the organization.
Target: An expected level of performance or improvement required in the future. Templates: Visual tools for assisting people with building a balanced scorecard, typically used for capturing and comparing data within the four components of the Balanced Scorecard: Strategic Grids, Measurements, Targets, and Programs.
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Vision: An overall statement of how the organization wants to be perceived over the long-term (3 to 5 years).
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BALANCED SCORECARD - THE PROCESS
1. Strategic Foundation When designing a balanced scorecard, we always start by asking: What is your strategy? Once we understand the strategy, we can build a new framework for describing the strategy, which we call a strategy map. Elongating this quote, we can further deduce it to the more technical term of Strategic Alignment. a crystal clear and sharp strategic plan for feeding our balanced scorecard. A clear strategy requires two things: Specific objectives that tell people what to do and a set of targets for communicating what is expected.The second key ingredients for a clear strategy are targets. Targets put teeth into a strategy by imposing criteria that the organization must achieve. Once you have defined a clear strategy (objectives and targets), then you must rally the organization around it. 2. Strategic Area The organization should a selected area for achieving strategic success; otherwise the organization may find itself trying to do too many things. The strategic thrust of the organization needs to be confined to a few major areas. The strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees. Additionally, each strategic area will flow across all four perspectives of the Balanced Scorecard: Financial, Customer, Internal Processes, and Learning and Growth. 3. Strategic Grid To develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard. We look into some main aspects of a strategic Grid Operational Efficiency Value for customers through competitive pricing, superior quality, on-time delivery or diverse product lines.
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Customer Relationships Value for customers through personal service, building trust, brand loyalty, providing customized solutions, and other one-to-one relationships. Innovative Products & Services Inventing new products and features, fast delivery of products and services, forming partnerships to expand product lines, and other product leadership initiatives. Different strategies that can fit with our current strategic grid: Competencies Skills and knowledge of the work force. Technologies Applications and systems for execution of internal processes. Change Culture Organizational alignment, employee motivation, executive leadership, communication, and other qualities of empowering the organization. 4. Measurement Basic Guidelines for Measurements are:
Linked: Measurements communicate what is strategically important by linking back to your strategic objectives. Repeatable: Measurements are continuous over time, allowing comparisons. Leading: Measurements can be used for establishing targets, leading to future performance. Accountable: Measurements are reliable, verifiable, and accurate. Available: Measurements can be derived when they are needed.
Moving onto Result Categories; Internal Process Perspective can be broken down into three result categories:
Pre Delivery Results => Innovative Processes that meet customer needs,
provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced.
Delivery Results => Operations that produce and deliver products and
services to customers. Example of Leading Indicator => Delivery Response Time to Customer.
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Post Delivery Results => Value added services provided to customers once
products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint. 5. Targets: Measurement alone is not good enough. We must drive behavioral changes within the organization if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organization in meeting its strategic objectives. Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. Your strategic goals can also give you clues as to what your targets should be. 6. Programs: The final design step is to close the loop and put specific programs in place to make everything happen. This is perhaps the fun part in the entire process. How do we actually hit these targets and meet our strategic objectives? What major initiatives must the organization undertake to make all of this happen? Programs are the major projects that facilitate execution of everything downstream within the scorecard. Some typical examples of programs include quality improvement programs, marketing initiatives, enterprise resource planning, customer relations management, and supply chain management. Programs usually have certain characteristics: Sponsored by upper level management Utilizes designated leaders and cross-functional teams Consists of deliverables, milestones, and a timeline Requires resources (people, facilities, allocated budget, etc.)
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Once programs have been established and sold to various stakeholders, they tend to add some degree of strategic value or impact. However, getting a major program initially launched can be difficult due to funding, apprehension, politics, and other obstacles. If existing programs
lose funding, then you need to work back through your scorecard, adjusting your targets and making sure everything still fits. One of the critical steps in selecting programs is to plot programs against all strategic objectives and assess the strategic impact. This can be extremely important since executive management will routinely demand cost reductions. You dont want to cut programs with the biggest strategic impact. This would undercut your ability in meeting strategic objectives. Programs with little or no strategic impact should get lowest priority within the organization. Once we have designed the Balanced Scorecard, we need to implement it throughout the entire organization. This requires careful planning and coordination with all parts of the organization. We should have learned several lessons from our first stage scorecard: How to organize and kick off the process How to coordinate and gain consensus How to identify the benefits and difficulties associated with the Balanced Scorecard An understanding of project deliverables Also, we should have knowledge about what factors influence implementation of the Balanced Scorecard, such as: Time required to develop a balanced scorecard Availability of data and resources for building the Balanced Scorecard Degree of support from upper level management
The deployment phase will involve reviewing and aligning the first scorecard with other parts of the business (divisions, operating units, departments, etc.). We want to integrate the Corporate or Business Unit Scorecard into lower level scorecards. As we move the scorecard forward, a more formal collection and reporting system should emerge for the Balanced Scorecard. Once we get more and more scorecards working, we will begin to explore the possibility of linking compensation to the measurements within the Balanced Scorecard.
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Since strategizing takes place at the upper level of the organization, one place to start building the Balanced Scorecard is at the corporate level. Once again, we can go back to our four to five rule: Build your scorecard at the upper layer of the organization, corporate; work your way down to the second layer, operating; then work your way down to shared service departments; next work your way down to the lowest levels such as department, teams, and individuals. By following this process, we ensure alignment. However, most organizations elect to build their first scorecard at the strategic business unit level (such as operating units or divisions within the business). The reason is simple. You want to build a balanced scorecard that covers the entire value chain; i.e. customers, production, sales, innovation, and all elements that go into making a complete scorecard. Also, by letting other business units start the process, you may get stronger buy in to the Balanced Scorecard. For example, if executive management pushes the scorecard down to divisions, the divisions may see the scorecard as just another phony management program. By letting each division review the scorecard first and report back to executive management, the organization is better positioned for full-scale deployment of the Balanced Scorecard.
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THE BALANCED SCORECARD FRAMEWORK
The BSC Method of Kaplan and Norton is a strategic approach performance management system that enables organizations to translate a companys vision and strategy into implementation, working from the 4 perspectives: 1. Financial Perspective 2. Customer Perspective 3. Business Process Perspective 4. Learning and Growth Perspective
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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 do whatever necessary to provide it. In fact, often there is more than enough 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 financials leads to the "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)
1)
Customer Perspective: Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are 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 indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.
3) Business Process Perspective: This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. 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 -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the
STRATEGIC MANAGEMENT Page 12
most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is 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; what the Baldrige criteria call "high performance work systems." An example of Constructing the Sorecard is given below:
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KEY BENEFITS OF USING BALANCED SCORECARDS

Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include: Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally.
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Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. Better Organisational Alignment well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.
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CASE STUDY: SAATCHI & SAATCHI WORLDWIDE
Headquartered in New York City, and with annual billings topping $US 7 billion, Saatchi & Saatchi is one of the worlds leading creating organizations. The corporation has more than 7,000 employees in 84 countries. Services range from communication and marketing strategy, advertising scripts for production, consumer research and forecasting, among others. Its impressive client list includes household names such as Carlsberg, General Mills, Lexus, Procter & Gamble, Sony Ericsson and Visa International. The organization positions itself not as an advertising agency, but as an ideas company. Since 1997, the Balanced Scorecard has been central to implementing the purpose, or vision, of Saatchi & Saatchi. In this case study we focus mainly on the early years of scorecard usage in the corporation, and what was one of the truly great balanced scorecard success stories. A Classic Burning Platform In September 2000, the Paris, France, Headquartered Publicis Groupe SA purchased Saatchi & Saatchi for close on $2.5 billion. Equating to about 4.5 times Saatchi & Saatchis then net worth, the purchase price is remarkable in that just three years earlier the corporation was teetering on the brink of bankruptcy. Experiencing a classic burning platform due to over-extension through acquisition throughout the 1980s, coupled with severe financial pressures in the recession of the early 1990s, turnaround started with the appointment of a new senior management team in the mid-1990s. Bob Seelert became chairman and he appointed Kevin Roberts as CEO Worldwide, and Bill Cochrane as CFO Worldwide. They still hold these positions and were, as a team, catalytic for the scorecard implementation that was to follow. Setting Stretch Targets First though was the requirement for significant organizational restructuring and cost reduction. A key trigger for this was the December 1997 de-merger of Saatchi & Saatchi from Cordiant Communications. With Saatchi & Saatchi now on its own, the senior team
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presented to its stakeholders a detailed strategic blueprint for recovery, which included the following three very ambitious targets with a timeframe of three years. 1. Growing the revenue base better than the market 2. Converting 30% of that incremental revenue to operation profit 3. Doubling its earnings per share These goals were to support the new vision: To be revered as the hothouse for worldclanging creating ideas that transform our clients businesses, brands and reputations. The corporation had an ambitious vision and even more ambitious stretch targets. But the trick would be to deliver on its goals, which would require a rapid implementation of its new strategy. And given the high failure rates of strategy implementation, coupled with the corporations precarious financial position, this would not be without a significant risk of failure. Choosing the Balanced Scorecard After spending about three months on the road during late 1997 visiting the majority of the organizations 45+ globally dispersed agencies, Kevin Roberts realized that although great work was being done, each location was essentially working on its own agenda. Simply put, there was no commonality of purpose or cohesion of identity not surprising as the organization had grown through acquisition. Roberts therefore realized that he required a management tool that would help communicate and make operational the new vision in a commonly understood process and language. A Balanced Scorecard Steering Committee to lead the scorecard program was appointed, comprising three representatives from Renaissance and three from Saatchi & Saatchi Paul Melter and colleagues from client services and strategic planning. The committee had to report to the executive management team on a weekly basis. Creating the Strategy Map
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The corporate level CompaSS was built in a three month period from September to November 1998. The corporate Strategy Map that was used until 2003 is shown in Figure 1. Note that despite the pressure that the organization was under at the time it first created the scorecard, and the complexities of managing a global organization, the Strategy Map is remarkably simple, comprising just 12 strategic objectives. The simplicity was purposeful, says Melter: A Strategy Map should show the critical few objectives that will make the difference in delivering to the strategy. And these should be strategic objectives, not operational. Too many Strategy Maps include both.
RASCIs From the steering committee evolved a process of setting out RASCIs an acronym for Responsible, Approval, Support, Consult and Inform. They identified a theme owner for each perspective (therefore responsible for that perspective). For Finance it was Bill Cochrane, for

Client it was a Senior Executive/Regional Director from Asia. For Product and Process it was another Senior Executive/Regional Director from Australia, and for People and Culture, it was another Senior Executive/Regional Director from China. These Rs then worked with the steering committee to choose objectives that would eventually be essential links in the Strategy Map. Having just one A and just one R for each perspective was vital for taking out any bottlenecks and ensuring the process moved rapidly. From here, further Rs, typically CEOs from agencies around the global network, were assigned responsibility for detailing how specific objectives would be achieved, such as identifying the key measures. These Rs also worked closely with the steering committee in delivering to this task. Global Rollout With the Corporate level CompaSS in place, the next process step was global rollout to the 45+ business units. Keeping with the goal of commonality of purpose and the desire to keep the scorecard simple and focused, devolved Strategy Maps are essentially the same as at the corporate level. Importantly, the corporate map defined the performance conversations with the regions. Responsibility for performance within each unit ultimately lied with the local CEOs as Melter explains: Without having the unconditional, unequivocal backing of the senior executive team this will fail. All of the 45+ unit-based CEOs have mentors among the senior executive team and if theres a feeling that the CompaSS doesnt have to be done this month, or if they believe that there is something more important then it will fade. But our three executive leaders make it clear to all the local unit CEOs that it is a great tool and this is the way we manage the business. Facilitating the Scorecard Process The management of each unit does receive proper training and ongoing support in how to work with the scorecard. Paul Melter is the full-time CompaSS director and is supported by two fulltime staff. One is involved in managing and developing the scorecard software system and the other is involved in quality control. Melter also has the support of over 40
part-time scorecard champions in the units who are responsible for collecting and collating their own CompaSS and forwarding theses to the centre. As an important learning, Melter is convinced that in a global organization, responsibility for the scorecard has to be a full time vocation. The job isnt over when CompaSS is up and running. You get into managing the scorecard as an ongoing program, and using the scorecard with the aim of building a strategy-focused organization. The scorecard therefore impacts planning, communication, people and culture, budgeting and feedback, as examples. It focuses the discussions of every management meeting. In short, the scorecard is an essential tool in the way they manage their global organization. It is the means for setting priorities and allocating resources.
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CONCLUSION Despite the undoubted success, there have been challenges along the way. One has been the complexity of reporting the scorecard results from the business units back up to the corporate level in a meaningful fashion. Scorecard results are delivered quarterly, and expressed through the traffic-light reporting system of green (ahead of target), yellow (meeting target) and red (off target). When green, executives are expected to share best practices for use elsewhere in the organization (thus strengthening the one team, one dream people and culture objective). When managers were reporting green for people, process and customer but red for financial it highlighted a strategic disconnect that needs to be addressed. Identifying such disconnects is, one of the strengths of the scorecard system. This was achieved by predefining the financial measures based on conditional formatting. Therefore making them either red or green there was rarely ever a yellow status.
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BIBLOGRAPHY
Websites
http://www.balancedscorecard.org/bscresources/examplessuccessstories/tabid/57/defa ult.aspx http://www.netmba.com/accounting/mgmt/balanced-scorecard http://www.symphonytech.com/articles/bscard.htm http://managementhelp.org/org_perf/bal_card.htm http://www.valuebasedmanagement.net/methods_balancedscorecard.html http://www.citehr.com/37492-balance-score-card-case-study.html http://www.business-intelligence.co.uk/reports/strat_bsc/casestudies.asp http://www.epmreview.com/Resources/Case-Studies/Saatchi-Saatchi-Worldwide.html www.verslobanga.lt/lt/zb.download/3f1a601f9edd1/BCS_Saatchi.pdf http://www.brainmass.com/homework-help/business/accounting-business-analysisfinancial-reporting/266949
Books
Cost and Management Accounting by Ravi Kishore, Taxmann Publications, 4th Edition. Cost Management: A Strategic Emphasis by Edward Blocher, Kung H. Chen, W. Thomas Lin, Mcgraw-Hill Professional, 3rd Edition. Succeeding with the Balanced Scorecard by James Creelman, Naresh Makhijani, Wiley India Edition, 2006.
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The Balance Scorecard

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INTRODUCTION