Balanced Scorecard is a new approach to strategic management that
was developed in the early 1990's by Drs. Robert Kaplan (Harvard
Business School) and David Norton. They named this system the 'balanced
scorecard'. Recognizing some of the weaknesses and vagueness of
previous management approaches, the balanced scorecard approach
provides a clear prescription as to what companies should measure
in order to 'balance' the financial perspective.
scorecard is a management system (not only a measurement system)
that enables organizations to clarify their vision and strategy
and translate them into action. It provides feedback around both
the internal business processes and external outcomes in order to
continuously improve strategic performance and results. When fully
deployed, the balanced scorecard transforms strategic planning from
an academic exercise into the nerve center of an enterprise.
Kaplan and Norton
describe the innovation of the balanced scorecard as follows:
balanced scorecard retains traditional financial measures. But financial
measures tell the story of past events, an adequate story for industrial
age companies for which investments in long-term capabilities and
customer relationships were not critical for success. These financial
measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future
value through investment in customers, suppliers, employees, processes,
technology, and innovation."
scorecard suggests that we view the organization from four perspectives,
and to develop metrics, collect data and analyze it relative to
each of these perspectives:
1. The Financial
2. The Customer Perspective
3. The Business Process Perspective
4. The Learning and Growth Perspective
1. The Financial
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.
2. The Customer
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
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. The Business
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.
to the strategic management process, two kinds of business processes
may be identified: a) mission-oriented processes, and b) support
processes. Mission-oriented processes are the special functions
of government offices, and many unique problems are encountered
in these processes.
4. The Learning
and Growth 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. 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. This is a leading indicator
of 'brain drain' that must be reversed. Metrics can be put into
place to guide managers in focusing training funds where they can
help the 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."
Scorecard and Measurement-Based Management
scorecard methodology builds on some key concepts of previous management
ideas such as Total Quality Management (TQM), including customer-defined
quality, continuous improvement, employee empowerment, and -- primarily
-- measurement-based management and feedback.
industrial activity, "quality control" and "zero
defects" were the watchwords. In order to shield the customer
from receiving poor quality products, aggressive efforts were focused
on inspection and testing at the end of the production line. The
problem with this approach -- as pointed out by Deming -- is that
the true causes of defects could never be identified, and there
would always be inefficiencies due to the rejection of defects.
What Deming saw was that variation is created at every step in a
production process, and the causes of variation need to be identified
and fixed. If this can be done, then there is a way to reduce the
defects and improve 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, what
are the processes with significant problems, and then they can focus
attention on fixing that subset of processes.
scorecard incorporates feedback around internal business process
outputs, as in TQM, but also adds a feedback loop around the outcomes
of business strategies. This creates a "double-loop feedback"
process in the balanced scorecard.
You can't manage
or improve what you can't measure. So 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:
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 as the metrics are tracked
* Feedback around the measurement methods themselves, and which
metrics should be tracked
* Quantitative inputs to forecasting methods and models for decision
The goal of
making measurements is to permit managers to see their company more
clearly -- from many perspectives -- and hence to make wiser long-term
decisions. The Baldrige Criteria (1997) booklet reiterates this
concept of fact-based management:
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."
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."
by Paul Arveson, placed here with permission