INTRODUCTION: Balanced Scorecard
Companies today are in the midst of a revolutionary transformation as Industrial age competition is shifting to Information age competition. The cut-throat competition that businesses faced in the last two decades has made them to look for improvement initiatives like Total Quality Management, Just-in-Time (JIT) systems; Activity based cost management, Employee empowerment and Business process Re-engineering. Though these initiatives resulted in enhanced shareholder value, their structure was disjointed and focused on the short-term survival and growth. These programs were centered on achieving breakthrough performance merely by monitoring and controlling financial measures of past performance. This collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has led to a new blend the balanced scorecard.
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It was originated by Dr. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more ‘balanced’ view of organizational performance. The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950’s and the work of French process engineers (who created the Tableau de Bord – literally, a “dashboard” of performance measures) in the early part of the 20th century.
The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the “marching orders” for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.
This new approach to strategic management was first detailed in a series of articles and books by Robert S. Kaplan and David P. Norton. 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. The balanced 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.
In a nutshell, the need to link financial and non-financial measures of performance and identifying key performance measures led to the emergence of “Balanced Score Card” approach developed by Norton and Kaplan (1992) in the US. The Balanced score card is defined as “an approach to the provision of information to management to assist strategic policy formulation and achievement. It emphasized the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased fashion”.
Kaplan and Norton identified four perspectives representing the important facets of the organization. These were:
Financial perspective (how do we look to shareholders?)
Customer perspective (how the customers see us?)
Internal business perspective (what we excel at?)
Innovation & Learning perspective (can we continue to improve and create value?)
The idea behind the four perspectives represents a balanced view of any organization and by creating measures under each of these headings all the important areas of business would be covered. It is important to note that the balanced score card itself is just a frame work and it doesn’t say what the specific measures should be. It is a matter for people within the organization to decide upon. The set of measures for each organization or even sections with the organization will be different. Much of the success of scorecard depends on how the measures are agreed, the way they are implemented and how they are acted upon. So the process of designing a score card is as important as the score card itself.
Facts about Balanced Scorecard
More than 50 percent of large enterprises use some type of a balanced scorecard according to study by Cranfield University
According to Balanced Scorecard Collaborative
95% of typical workforce does not understand its organizations’ strategy
90% of organizations fail to execute their strategies successfully
86% of executive teams spend less than one hour per month discussing strategy
70% of organizations do not link middle management incentives to strategy
60% of organizations do not link strategy to budgeting
According to Balanced Scorecard Forum
80% of organizations using balanced scorecard reported improvements in operating performance
66% of these organizations reported an increase in profits
According to Bain & Co
About 70 percent of organizations had at least partially implemented a balanced scorecard by 2006.
50 percent of Fortune 1,000 companies are using the balanced scorecard
According to Microsoft Business Intelligence Conference
30% of companies think that the most important to their company today is performance management
WHY DOES A BUSINESS NEED A BALANCED SCORECARD (BSC)?
Any successful business or organization in this world rests upon multiple pillars; out of that following four are the most important and critical.
People (Learning and Innovation and Growth)
The balanced scorecard is a way of Measuring organizational, business unit or department success;
Balancing long and short term actions;
Financial Perspective: How well do we mange our resources?
Customer Perspective: How do customers see us?
Internal Operations: Are we productive and effective?
Employees and Learning Perspective: How do our employees feel?
A way of tying strategy to measures of action
What Does Balanced Mean?
Each indicator or category on a Balanced Scorecard has its own weight-that is, a number which shows its relative importance. These weights tell you which goals, indicators, and tasks are most important or most valuable to the company. You will also take these weights into account when you calculate the total performance of your Balanced Scorecard.
The Need for the scorecard
Measurement matters: If you can’t measure it, you can’t manage it. An organization’s measurement system strongly affects the behavior of people both inside and outside the organization. The ultimate aim of any measurement system should be to motivate all managers and employees to implement successfully the business unit’s strategy and improve performance. Those companies that can translate their strategy into measurement system will be able to execute their strategy because they communicate their objectives and their targets. The communication makes managers and employees focus on the critical drivers enabling them to align investments, initiatives and actions accomplishing strategic goals.
Historically, the measurement system for any business has been financial. Accounting was considered to be the language of business .Innovations in measuring the financial performance of the industrial age companies played a vital role in their successful growth. And financial innovations, such as the Return on Investment (ROI) metric, and operating and cash budgets, were critical to the success of these corporations.
However, an over emphasis on achieving and maintaining short-term financial results can cause companies to over invest in short-term fixes and to under invest in long-term value creation, particularly in the intangible and intellectual assets that generate future growth. The pressure for short-term financial performance often causes companies to reduce the resources spent on new product development, process improvements, human resource development, Information technology, databases and systems as well as customer and market development. In short, these organizations use the financial and non-financial performance only for tactical feedback and control of short-term operations. Use of scorecard helps the management to get a holistic picture of overall business scenario covering both financial as well as non-financial measures.
Linking Strategy with Performance Measures
The essential thrust of the balanced scorecard is based on the fundamental proposition that within organizations what gets measured gets done however; organizations do not always get what they measure. If measurement, by itself, had that much impact on human behaviour, then anyone that had weighing scales would never get fat.
An appropriate measurement system is one that energizes employees in the context of what the organization is trying to do. Thus, the logical starting point for the development of any performance measurement system for an organization must be a clear statement of mission, objectives and resultant strategy. An organization’s mission is its basic function in society and is the reason why the organization exists. Related to this are the objectives to be achieved and they represent a precise statement of purpose for a specific period. Basically a strategy is a shared understanding about how the organization’s mission is to be achieved in a competitive environment. Strategic thinking will focus on customers and competitors as well as internal capabilities and resources. It will include reference to the firm’s competitiveness, quality of output and levels of customer service. In turn, specified performance measures allow all employees understand what the strategy is and how their performance is linked to that overall strategy. The relationship between Mission, Objectives, Strategy and Performance Measures is depicted in the Figure 1. All the measures are interlinked with each other and hence, should not be looked at in isolation.
There are following reasons why organizations should, and often do, measure their performance:
To align mission, strategy, values and behaviour
To improve the important parameter
To numerically define the meaning of success
To measure the success
WHO SHOULD BE INVOLVED?
Looking at the pyramid of the management systems, building and rolling out of BSC should be a top down approach. Whole of the senior management team needs to be involved because we are measuring the business as a whole. The balanced scorecard puts the strategy in the centre and not the control. Thus, by leaving someone out we not only lose their input, but we also lose the commitment and support from that part of the business. If the senior management is not involved the initiative will be perceived as being unimportant.
For the BSC to be effective in facilitating the execution of strategy, it needs to be cascaded throughout the organization. Cascading requires the participation of managers at all levels of the organization to translate the strategy and articulate the relevance of strategic objectives to each department, team and individual. Cascading can and should result in the alignment (or connectivity) of the corporate, departmental, and individual levels of the organization. It is important to remember that strategy is communicated from top to bottom (executives to frontline employees) and that execution begins with the individual.
How to Begin:
To create the right environment for success following are the steps which one needs to follow.
Obtain Clarity and consensus about vision and strategy
Define scope along with roles and responsibility
Communicate and educate the organization
Set Strategic targets
Align program and investments
Build feedback systems
MEASURING BUSINESS STRATEGY
Companies using the BALANCED SCORECARD as the cornerstone of a new strategic management system have two tasks: First, they must build the scorecard, and second they must use the scorecard.
The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the ‘change’ element within the organization. This tool is a comprehensive framework which considers the following perspectives and tries to get answers to the following questions –
1. Financial Perspective – How do we look at shareholders?
2. Customer Perspective – How should we appear to our customers?
3. Internal Business Processes Perspective – What must we excel at?
4. Learning and Growth Perspective – Can we continue to improve and create value?
The aim of the Balanced Scorecard is to direct, help manage and change in support of the longer-term strategy in order to manage performance.
Generic measures that any organization’s scorecards, has are following:
Return on Investment, Economic Value Added
Satisfaction, Retention, market and account share
Quality, Response time, Cost and Introduction of New products /services
Learning and Growth
Employee satisfaction and Information system availability
Hence, from the above lines we can say that this tool has considered not only the financial results to be important but also those factors which actually drive an organization towards future successes as mentioned earlier. The tool has given stress on the other areas which are required to ‘balance’ the financial perspective in order to get a total view about the organizational performance and improve the same. The framework tries to bring a balance and linkage between the parameters.
The Financial Perspective
Balanced scorecard encourages business units link their financial objectives to corporate strategy. Financial objectives represent the long term goal of the organization: to provide superior returns based on the capital invested in the unit. Balanced scorecard can make the financial objectives explicit and customize financial objectives to business units in different stages of their growth and life cycle. Linkage to financial objectives recognize that the long-run goal for the business is to generate financial returns to investors, and all the strategies, programs and initiatives should enable the business unit to achieve its financial objectives. 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.
To link financial objectives to business unit strategy at various stages from aggressive market growth to consolidation to liquidation can be considered, however, for simplification following stages are considered:
A compilation of these stages is summarized in the table below.
Measuring Strategic Financial Themes
Strategic Financial Themes
Revenue and Growth Mix
Cost Reduction/Productivity Improvement
Sales growth rate by segment, percentage revenue from new product, services and customers
Investment (Percentage of sales) R&D (Percentage of sales)
Share of targeted customers and accounts
Percentage revenues from new applications
Customer and product line profitability
Cost versus competitors’ cost reduction rates
Indirect expenses (Percentage of sales)
Working capital ratios (Cash to Cash cycle)
ROCE by key asset categories
Asset utilization rates
Customer and product line profitability
Percentage unprofitable customers
Unit costs (per unit of output, per transaction)
The Customer Perspective
Many companies today have a corporate mission that focuses on the customer. “To be number one in delivering value to customers” is a typical mission statement. How a company performs from its customers perspective has become, therefore, a priority for top management. Customers concerns tend to fall into four categories: Time, Quality, performance and service, and Cost. 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.
To put the balance scorecard to work, companies should articulate goals for time, quality, performance and services and then translate these goals into specific measures.
Customer Perspective – core measures are
Proportion of business in a given market
Rate at which business units attracts/wins new customers or business
Rate at which business a unit retains or ongoing relationship.
Assesses the satisfaction level of customers along specific performance criteria
Net profit to customer
The Internal Business Process Perspective
Customer-based measures are very important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. After all, excellent customer performance derives from processes, decisions and actions occurring throughout an organization.
Hence internal business processes are very important and critical for any organization. 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.
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In addition 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 core functions the organization which has a direct link with the objective of the organization and many unique problems are encountered in these processes. The support processes are more repetitive in nature and hence easier to measure and benchmark using generic metrics.
Internal business process value chain mainly covers three principles:
Innovation – Identify the need and create product/service offering
Operation – Build the product/service and Deliver them
Post-sale Service – Service the customer
The Learning & Growth Perspective
A company’s ability to innovate, improve and learn ties directly to the company’s value. That is only through launching new products/services, add/create more value to customers and improve operating efficiencies.
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. Many agencies often find themselves unable to hire new technical workers, and at the same time there is 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.
Study has shown that there are three principle categories for the learning and growth perspective:
Information system capabilities
Motivation, empowerment and alignment
The learning and growth measurement framework
The Four Perspectives: Cause and Effect Relationship
The four perspectives as mentioned above are highly interlinked. There is a logical connection between them. The explanation is as follows: If an organization focuses on the learning and the growth aspect, it is definitely going to lead to better business processes. This in turn would be followed by increased customer value by producing better products which ultimately gives rise to improved financial performance.
A strategy is a set of hypotheses about cause and effect. The chain of cause-and- effect should pervade all four perspectives of the Balanced Scorecard therefore a properly constructed Balanced Score Card should tell the story of the company’s strategy.
FEATURES OF A GOOD BALANCED SCORE CARD:
It tells the story of a company’s strategy, articulating a sequence of cause and effect relationships.
It helps to communicate the strategy to all members of the organization by translating the strategy into coherent and linked set of understandable and measurable operation targets.
A balanced score card emphasizes non-financial measures as a part of program to achieve future financial performance
The balanced score card limits the number of measures identifying only the most critical areas. The purpose in to focus manager’s attention on measures that most affect the implementation of strategy.
The balanced score card highlights less than optimal trade offs that managers may make when they fail to consider operational and financial measures together.
Feasibility study for Implementation of BSC at vertical level
Larsen & Toubro Limited (L&T) is a US$ 9.8 Billion, technology-driven engineering and construction conglomerate and one of the largest companies in Indian private sector, with additional interests in manufacturing, services and information technology.
L&T Integrated Engineering Services is a Strategic Business Unit of Larsen & Toubro Limited, dedicated to providing design and engineering solutions to various industries such as Automobile, Aerospace, Construction & Off Highway, Machinery, Medical Devices, Industrial Products, Marine, Consumer Electronics, Minerals & Metals, Consumer Packaged Goods, Pharmaceuticals, Oil & Gas as well as other Process Industries.
L&T IES’ end-to-end services involve product design, analysis, prototyping & testing, embedded system design, production engineering, plant engineering, buildings & factories design, asset information management & sourcing support using cutting-edge CAD / CAM / CAE technology.
With a pedigree of engineering and manufacturing excellence of Larsen & Toubro Group that spans seven decades, strong expertise with cutting-edge technologies and state-of-the-art infrastructure, L&T IES has successfully partnered with leading organizations across the globe to meet their business objectives. A vibrant workforce of multi-skilled engineering professionals operates from our seven development centres in India and twenty offices worldwide to help our customers accomplish the most challenging & time-critical technical and business objectives.
IES – Vertical structure
To be in Top 3 engineering service provider in India
“To provide engineering solutions using cutting edge PLM technologies to help our customers achieve their objectives of innovation, cost reduction and faster time-to-market.”
Corporate Objective –
Revenue USD 200 Mn in 3 years.
I am part of Truck and Off-Highway vertical. Hence, This project is carried out for Truck and Off highway vertical.
At vertical level soon after the change in management in year 2009, we did a deep dive in various areas of business and we found following results.
Scenario – Before 1 year.
Loss making accounts
PBIT out of control.
Lack of coordination between Marketing and Delivery teams.
Lack of Role clarityRole DefinitionKPI at various levels.
Identity crisis at Middle Management level (T1/T2). Technical vs. Business leaders.
Career paths not defined.
Junior staff does not have many role models in Technical leaders. Leaders with good communication+ Soft skills are seen getting recognized.
No clear definition of success of projects.
This has motivated us to find out the reasons as well as suggest possible solutions to improve the situations. Our new vertical head is a very engaged leader who has guided this entire project of seeing feasibility of using Balanced scorecard to analyse the situation and improve by pressing the right buttons.
Building a Balanced scorecard
In our vertical we took following steps to build balanced scorecard.
Building a core team
Representative from Top Management
Team of 10 Account Managers
Team of 10 Project Manager
Team of 20 Team Leader and Members
Specify strategic objectives
Choose strategic measures
Develop implementation plan
Define KPIs for each perspective
Linking of the KPIs with Roles
Measurement Definition – Each perspective
Measurement – Summary
Lag Lead Comparison
Review & Feedback
The team was lead by vertical head while defining the strategic objectives. Hence, we had a direction as well commitment from the top management.
We are developing the systems which is based on KPI, as based on various discussion it has been observed from the voice of the team that for an individual, KPI could be defined as effective measurement indicators, which present one of the activities of the company, and this is also important the strategic goal’s achievement.
During review meetings of the building the scorecard we discussed several KPIs considering perspectives of BSC. Some these are listed in the table below.
While deciding appropriate KPIs at different level, we also did brain storming on Lagging and leading indicators. Most of financial KPIs are actually lagging indicators. Hence, managers are not able to receive up to date information from lagging indicators. That is why they are not able to monitor these processes directly. Lagging indicators present the performance of the overall system’s work and there are lots of factors that influence on them. These metrics show the results and effects of management actions that already have been applied.
Leading KPIs are the metrics that refer to the current and future effects. Oppositely to lagging indicators, leading ones are linked with manager’s decisions directly. After a decision is taken, it could be resulted in changing the performance of activity, that leading indicator show.
Lagging indicators are needed to be used as a tool to manage the company’s future which is actually one of the most important goals of building the Balanced Scorecard for our vertical.
Cause and effect relations between KPIs
Since it is very important to have cause and effect relationship between KPIs, While building a map of KPIs for the departments and the individuals per their roles and responsibility it was aimed to prevent the KPIs to be mixed up and present conflicting information.
We worked on the logic of preventing the map of KPIs to be overloaded by the quantity of measures needs to be understood by top management.
We made sure that function relations between indicators exist and can be presented in a way of mathematical formulas.
While distributing the KPIs to different roles, We also worked on the linkage of the KPIs and role, to define them clearly at the same to see a direct relation of an individual’s performance to the objective of the organization.
Balanced Scorecard at Vertical Level
Objectives and Measurement
KPI at Vertical Level
Measurement at Account Level
Measurement at Project Level
ADVANTAGES OF BSC
The balanced scorecard tool is being used by several organizations throughout the world because of certain advantages it has been able to deliver as below:
It translates vision and strategy into action.
It defines the srategic linkages to integrate performance across organizations.
It communicates the objectives and measures to a business unit.
It aligns the strategic initiatives in order to attain the long-term goals.
It aligns everyone within an organization so that all employees understand how they support the strategy.
It provides a basis for compensation for performance.
The scorecard provides a feedback to the senior management if the strategy is working.
Focusing the whole organization on the few key things needed to create breakthrough performance.
Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service initiatives.
Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees can see what’s required at their level to achieve excellent overall performance.
LIMITATIONS OF BSC
It is not easy to implement this tool because it involves a lot of subjectivity.
The tool is much more complex compared to the other tools
The measures that need to be taken are contingent upon the kind of environment, industry and the business the organization is in.
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