Introduction of Balance Scorecard

Balanced scorecard is a management system that enables organizations to translate the vision and strategy into action. This system provides feedback on internal business processes and external outcomes to continually improve organizational performance and results. Robert Kaplan and David Norton created the balanced scorecard approach in the early 1990s. Most traditional management systems focus on the financial performance of an organization. According to those who support the balanced scorecard, the financial approach is unbalanced and has major limitations: 1. Financial data typically reflect an organizations past performance. Therefore, they may not accurately represent the current state of the organization or what is likely to happen to the organization in the future. 2. It is not uncommon for the current market value of an organization to exceed the market value of its assets. There are financial ratios that reflect the value of a companys assets relative to its market value. The difference between the market value of an organization and the current market value of the organizations assets is often referred to as intangible assets. Traditional financial measures do not cover these intangible assets. The main purpose of this article is to analyses the Balanced Scorecard method theory and practice. The article seeks to analyses the origins of the Balanced Scorecard method, evaluate this method in private and public sectors, and to analyses the strategy mapping process.

Origins of the Balance Scorecard Method The Balanced Scorecard was developed by Robert Kaplan and David Norton (1992). In 1990, Kaplan and Norton led a research study of a lot of companies with the purpose of exploring the new methods of performance measurement. The importance of the study was a growing belief that financial measures of performance were ineffective for the modern business enterprise. Representatives of the study companies, along with Kaplan and Norton, were convinced that reliance on financial measures of performance had an affect on their ability to create value. The group discussed a number of possible alternatives but settled on the idea of a scorecard, featuring performance measures capturing activities from throughout the organizationcustomer issues, internal business processes, employee activities, and of course shareholder concerns. Kaplan and

Norton introduced the new tool the Balanced Scorecard and later summarized the concept in the first of three Harvard Business Review articles, The Balanced ScorecardMeasures That Drive Performance. The Balanced Scorecard has been translated and effectively implemented in both the nonprofit and public sectors. Success stories are beginning to accumulate and studies suggest the Balanced Scorecard is of great benefit to both these organization types. What is a Balanced Scorecard? The Balanced Scorecard can be understood as a management system, which is structured according to the logic of the management circle (plan-do-checkact). The Balanced Scorecard resembles a typical management fashion. For instance, Van den Heuvel & Broekman wrote that a self-respecting organization apparently can no longer do without the Balanced Scorecard Kaplan and Norton position the Balanced Scorecard as a tool for organisations to manage the demands of relevant stakeholders and to translate strategies into action (from strategy to action). Possible stakeholders that are strategically relevant could be shareholders, customers or employees. Their demands are integrated into core management of companies within a financial, customer or learning or process perspective (see Figure 1 below). So, the frame of the Balanced Scorecard consists of four perspectives (see Figure 1). Each perspective consists of relevant strategic goals, indicators and measures to achieve them. One should emphasize the fact that the concept remains open for integrating further relevant stakeholders or perspectives, e.g. an environmental perspective (Kaplan and Norton 1997, pp. 33). When conceiving the BSC, Kaplan and Norton, maintained that companies lack sophisticated tools for the management of intangible or qualitative assets (e.g. customer satisfaction, processes quality, infrastructures, know-how). Intangible assets, however, seem vital in order to stay competitive in the future. So, the Balanced Scorecard provides enablers that focus on the achievement of strategic goals in the future (leading indicators) as well as results (lagging indicators) to depict the effectiveness and efficiency of measures in the past. Strategies can be usually interpreted as a set of hypotheses of causes and effects. So within a BSC the relevant goals and corresponding indicators are linked to each other revealing this structure of causal relationships. Such relationships are both relevant within each perspective and also between them. Objectives of the learning perspective, for instance, serve as enablers for the achievement of goals of the other overarching perspectives (e.g. customers, finance).

The BSC was originally created primarily as a measurement system and as an answer to a criticism concerning the unilateral measurement of the performance ability of a company. It was organized through four different perspectives:

The financial perspective: to succeed financially, how should we appear to our shareholders? Examples of this perspective include financial ratios and various cash flow measures. The customer perspective: to achieve our vision, how should we appear to our customers? Examples of this perspective includethe amount of time spent on customer calls and customer survey data. The internal perspective: to satisfy our shareholders and customers, what business processes must we excel at? The internal business processes that are often classified as mission oriented and support oriented. Examples of this perspective include the length of time spent prospecting and the amount of rework required. The learning perspective: to achieve our vision, how will we sustain our ability to change and improve? Includes employee training and organizational attitudes related to both employee and organizational improvement. Examples of this perspective include the amount of revenue that comes from new ideas and measures of the types and length of time spent training staff. The Balanced Scorecard method of Kaplan and Norton is a strategic approach and performance management system that organizations use to translate vision and strategy into practice, working from four critical success factors: Critical success factors Financial Customer Operating income & cash flow. Customer satisfaction --As a vertical market example, some health care facilities measure readmission rate definition which is the number of patients Examples of performance measures

who experience unplanned readmissions to a hospital after a previous hospital stay. Business process Learning and growth (innovation) Benefits of the Balanced Scorecard system:

Productivity and speed. Employee training hours and number of new patents or new products.

Tracking progress toward achievement of strategic goals. Implementing strategy by drawing managers' attention to relevant, critical success factors, and rewarding employees for the right things!

Providing a framework firms can use to achieve a desired organizational change in strategy by drawing from trend analysis exposed through BI tools.

The Balanced Scorecard Methodology Leading organizations agree on the need for a structured methodology for using performance measurement information to help set agreed-upon performance goals, allocate and prioritize resources, inform managers to either confirm or change current policy or program direction to meet those goals, and report on the success in meeting those goals. To this end, in 1993 the Procurement Executives Association (PEA) created the Performance Measurement Action Team (PMAT). Their task was to assess the state of the acquisition system, to identify a structured methodology to measure and improve acquisition performance, and to develop strategies for measuring the health of agency acquisition systems. The PMAT found that organizations were using top-down management reviews to determine compliance with established process-oriented criteria and to certify the adequacy of the acquisition system. This method was found to lack a focus on the outcomes of the processes used and was largely ineffective in obtaining dramatic and sustained improvements in the quality of the operations.

The PMAT did extensive research and made site visits to leaders in performance measurement and management in an attempt to identify an assessment methodology appropriate for federal organizations. The model chosen was developed by Drs. David Norton and Robert Kaplanthe Balanced Scorecard (BSC) model. As modified by the PMAT, the measurement model identified critical success factors for acquisition systems, and developed performance measures within the four perspectives discussed below. Agencies which implemented the PMAT model utilized generic survey instruments and statistics obtained from the Federal Procurement Data System and other available data systems to determine the overall health of the system and how effectively it met its performance goals. The work done by the PMAT has formed the foundation for the BSC methodology presented in this Guide. The lessons learned, and the best practices and strategies resulting from the PMAT experience were used to create an expanded and enhanced BSC model. The PEA believes this revised methodology to be the best for deploying an organizations strategic direction, communicating its expectations, and measuring its progress towards agreed-to objectives. Additionally, a 1998 study by the Gartner Group found that at least 40% of Fortune 1000 companies will implement a new management philosophy the Balanced Scorecardby the year 2000. The BSC presented in this Guidebook is a conceptual framework for translating an organizations vision into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth. Some indicators are maintained to measure an organizations progress toward achieving its vision; other indicators are maintained to measure the long term drivers of success. Through the balanced scorecard, an organization monitors both its current performance (finance, customer satisfaction, and business process results) and its efforts to improve processes, motivate and educate employees, and enhance information systemsits ability to learn and improve.

What is Balance Scorecard Technique The balanced scorecard (BSC) is a strategy performance management tool - a semi-standard structured report, supported by 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). A performance metric used in strategic management to identify and improve various internal functions and their resulting external outcomes. The balanced scorecard attempts to measure and provide feedback to organizations in order to assist in implementing strategies and objectives. Characteristic 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. The balanced scorecard also gives light to the company's vision and mission. These two elements must always be referred to when preparing a balance scorecard. 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 first versions of balanced scorecard asserted that relevance should derive from the corporate strategy, and proposed design methods that focused on choosing measures and targets associated with the main activities required to implement the strategy. As the initial audience for this were the readers of the Harvard Business Review, the proposal was translated into a form that made sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly,

initial designs were encouraged to measure three categories of non-financial measure in addition to financial outputs - those of "customer," "internal business processes" and "learning and growth." Clearly these categories were not so relevant to non-profits or units within complex organizations (which might have high degrees of internal specialization), and much of the early literature on balanced scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups. Modern balanced scorecard thinking has evolved considerably since the initial ideas proposed in the late 1980s and early 1990s, and the modern performance management tools including Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of organizational types) and more effective (as design methods have evolved to make them easier to design, and use).

How BST help in organization The scorecard has been used successfully by organizations (public, private and not-for-profit) to realize and integrate the strategic contribution of all relevant organizational value drivers for two key reasons: First, it helps to ensure consistency and alignment between the non-financial and the financial measures, (this helps to facilitate the alignment of the measures and strategy). Second, it helps to identify and measure the specific value drivers that underpin performance. This allows managers to test their hypotheses on what is driving organizational outcomes. The balanced scorecard to link strategy to resources and then to performance measures, and offers guidance on the strategy mapping process to ensure robust cause-and-effect linkage. New approaches to bridging the gap between strategy and the balanced scorecard such as valuecreation mapping and the value dynamics framework are profiled. To help organizations scorecard design, the report includes: Case-study based observations and practical advice from two organizations that have implemented a balanced scorecard approach. In addition to the balanced scorecard, many organizations use a range of tools and techniques to improve performance. It is important to integrate these with the scorecard approach and we

recommend therefore that this report be read in conjunction with resources on other management accounting techniques such as value-based management, activity-based costing, quality management and business process re-engineering.