WHAT IS A BALANCED SCORECARD?

(This is a copyrighted article; an extract from "Balanced Scorecard Handbook for Practitioners" by Nadeem Kureshi. Please contact the author for permissions at nadeemkureshi@gmail.com)
 
Balanced Scorecard can be described as a Strategic Management system, which uses a set of quantifiable measures to continuously monitor how well an organization is achieving its stated objectives, which in turn come from organization’s strategy. The set of measures communicates to the employees and outside stakeholders the performance drivers through which the organization will achieve its strategy.
 
A small definition, however, is not sufficient to understand the scope of a Strategic Management System. The concept of balanced scorecard can be most easily understood by breaking down the term “balanced scorecard” itself into “balanced” and “scorecard”. Perhaps the more obvious role of the Balanced Scorecard is reflected by the later part, “scorecard”, which implies putting in place, recording and illustrating a small number of KPIs (Key Performance Indicators, a.k.a Measures or Measurements),which allow busy top management to quickly evaluate what is going on in the critical areas of the organization. However, the merit of balanced scorecard as an innovative approach to performance measurement lies in the other half, “balanced”. It is much more than a scoring mechanism.
 
The roots of the term “Balanced” in Balanced Scorecard perhaps lie in the fact that public sector organizations put too much emphasis on meeting the senior management requirements. It is obvious that such over-emphasis can either relegate or sometimes completely neglect many other important perspectives of organizational management, such as development of capacity (to meet stakeholders’ expectations), investing in Human Resource (HR), developing strong organizational values, improvement of processes to ensure effective output and ensuring judicious utilization of taxpayers’ money.
 
In response to such concerns, the idea of balanced scorecard came forth in early 1990s. It has, since then, evolved into an organizational model which looks at the activities of the organization from more than one perspective (such as Stakeholder Satisfaction for the public sector or Profits for private sector). These perspectives are considered fundamental to an organization’s strategy. This core concept of Balanced Scorecard, illustrated in Figure 1, suggests every organization should give equal consideration to both long term and short term performance in meeting Stakeholder’s Expectations, being Financially Effective when meeting those expectations, using smartly designed Internal Processes to meet those expectations thus consuming least amount of human resources, time and other material resources and; building an Organizational Capacity to run those smart processes.
 

Figure 1: Balanced Scorecard Perspectives
 
It is obvious that bringing a balance in perspectives will form a very good-looking strategy. It is one thing to craft a great, seemingly winning strategy but making it actionable by all tiers of workforce is entirely different; and the real challenge. It is estimated that more than 90% of organizations around the world fail to implement their strategy[1]. In the Balanced Scorecard methodology, measurement of progress on strategy is fundamental, along-with optimization of the processes used to achieve the strategy.
 
WHY MEASUREMENT IS IMPORTANT
 
In October 1707, Great Britain lost nearly an entire fleet of ships. There was no war; the admiral, Clowdisley Shovell, simply miscalculated his position in the Atlantic, smashing his flagship into the rocks of the Scilly Isles, off the southwest coast of England. Rest of the fleet following behind, went aground as well; 4 warships and 2,000 lives were lost.
It was obviously embarrassing for a nation proud of its’ naval history. But to be fair to the admiral, though the concept of latitude and longitude had been around since the first century B.C., still no one had then devised an accurate way to measure longitude. Seafarers like Clowdisley Shovell had to estimate their progress either by guessing their average speed or by dropping a log over the side of the boat. Relying on such crude measurements, the admiral can be forgiven his massive misjudgment.
 
What caused the disaster was not the admiral’s ignorance, but his inability to measure something that he already knew to be critically important—in this case longitude.[2]
 
We’ve come a long way since then. Today’s instrumentation ensures that any failure of navigation may be pinned squarely on your shoulders. But obviously, not every aspect of our daily life can be measured through off-the-shelf instruments. With an increasing demand from top management to increase work efficiency, a strong demand of accountability is being generated on part of managers to show results from the resources with which they have been entrusted. To do that, managers have to demonstrate tangible results, and those results are best captured in performance measures.
 
Therefore, Performance Measures or KPIs form the heart of any modern strategic management system. Only through assigning and measuring intelligently designed KPIs for all strategic objectives, we can ensure that those objectives are met.
 
MEASUREMENT AND STRATEGIC MANAGEMENT
 
What differentiates Balanced Scorecard from other strategic management systems is that it translates an organization’s strategy into action through linking a set of performance indicators with every strategic objective. Further, it is ground breaking in the balance provided by the recording of results achieved (lag indicators) and the illustration of drivers of those results (lead indicators).
The process of designing a Balanced Scorecard involves debates about goals, perspectives and KPIs. This is an extremely useful process of testing the strategy and aligning the organization behind the strategic goals. A properly executed Balanced Scorecard process requires every level of the organization to have a clear and agreed understanding of[3]:
  • Why the organization exists – its fundamental goal;
  • What the organization values;
  • The organization’s vision for the future;
  • The critical measures that will make a real difference to the organization’s performance;
  • Who the stakeholders are and how their views can be collected and reflected in the respective quadrants of a Balanced Scorecard; and
  • How the quadrants and measurements link together (causal links) to ensure the organization moves towards its strategic goals and objectives.
 
DOES BALANCED SCORECARD ENTAIL ADDITIONAL WORK?
 
Balanced Scorecard does not bring any additional work. However, it is certainly a new way of looking at our daily work. In fact, a well-designed and executed strategic management system can bring a considerable reduction in the amount of work an average manager is expected to do, through:
 
  • Improved, shorter and less resource consuming processes
  • Reduced or eliminated returns as a consequence of online reporting on well-designed measures (KPIs)
  • Shorter, strategy focused meetings
  • Improved information databases for managers thus enabling quick decision-making.
 
WILL IT WORK?
 
Any internet search will show a plethora of qualitative success stories of Balanced Scorecard implementation in organizations around the world. Similarly, there are several studies which seem to indicate a phenomenal increase in the number of organizations that use this strategic management system over the last decade. In the public sector, many prominent governments, governmental organizaitons and defense forces around the world use this system; often cited examples include Royal Navy, Royal Malaysian Navy and Australian Navy where insightful details of the positive cultural changes brought through this system are available[4].
 
Several scholarly work are available that explore the theoretical aspects of this and other Strategic Management System;  for example Kureshi (2011), Jensen (2002), Wisniewski M, (2001), Rigby DK (2001), Goodman (2002), Brooke (2002), (Frigi 2002), Bichard (1996), Palmer and Parker (2001), Lucas (1995) etc. (See bibliography in the original article for detailed referencing).
 
For readers who are interested in a more quantitative evidence of the popularity or otherwise of the Balanced Scorecard and other management tools, Bain & Company carry out an annual survey to investigate the experience of companies adopting leading management tools. The results of this survey and other useful information are posted on their website[5].
 
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[1]Ref for 90% failure in implementation.
[2]Marcus Buckingham and Curt Coffman, First Break All the Rules (New York: Simon & Schuster, 1999).
 
[3]A Practitioner’s guide to the Balanced Scorecard: The Chartered Institute of Management Accountants Research Foundation.
 
[4]Woodley PhD thesis on BSC in Royal Navy.
[5]http:// www.bain.com.