The Balanced Scorecard: An Extension Of Management By Objectives

Updated: May 25 2002, 05:30am hrs
The Balanced Scorecard approach is an insightful tool that was developed over a long period of research involving twelve companies. The authors of The Balanced Scorecard, Kaplan and Norton observed that due to the involvement of numerable variables in the attainment of corporate goals it was becoming increasingly difficult for management to obtain a perfect balance between the operational and financial factors.

In order to resolve this problem they developed the balanced scorecard approach, which supplemented traditional financial measures with criteria that measured performance from the perspective of customers, internal business processes, and learning and growth. This approach enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.

It provides a framework involving critical indicators or key business factors to balance the long- term and short-term objectives. It links and balances financial and non-financial indicators, tangible and intangible measures, internal and external aspects, performance drivers and outcomes. It also balances the external measures like shareholders, customers and internal measures like critical business processes, innovation, learning, and growth. It considers results from past efforts and the measures that drive future performance.

The Balanced Scorecard is a strategic management system to manage the organisation strategy in the long run. Organisations are using the measurement focus of the Scorecard to accomplish critical management processes such as:

Clarify and translate the vision and strategy: This involves setting both financial and customer objectives where the top management team decides on alternatives to emphasize revenue, market growth, profitability etc. This is critical for both customers and shareholders. Such elements will force solutions for translating the business units mission and strategy into tangible objectives across the organization.

Balanced Scorecards are best defined for strategic business units followed by managers in individual and functional units who develop their own scorecards to ensure that the SBU delivers its objectives. Many foreign and Indian Companies have adopted this comprehensive innovative measurement practice.

Insight from the book Translating Strategy into Action - Balanced Scorecard by Robert S. Kaplan and David P. Norton The Balanced Scorecard is a comprehensive framework that translates the companys strategic objectives into a coherent set of performance measures through four different perspectives: the financial perspective is complemented with a customer perspective, an internal perspective and an innovation and learning perspective. The vision of the companys future is at the core of the building process of the Balanced Scorecard.

The sets of measures developed in each of the perspectives are direct translations of the companys strategic objectives. Therefore, managers now not only have a clear picture of the companys past performance but also the means to evaluate where its stands in term of its strategic objectives, and how well positioned it is to face future challenges.

The mission statement addresses core beliefs and identifies target markets and core products. For example, IBM Corp.s mission statement: We create, develop and manufacture the industrys most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We have two fundamental missions: We strive to lead in the creation, development and manufacture of the most advanced technologies into values for our customers as the worlds largest information services company. Our professionals worldwide provide expertise within specific industries, consulting services, systems integration and solution development and technical support.

The financial perspective measures the financial performance with reference to strategy implementation and execution needed for bottom line improvement. It should also reflect all the other Scorecard perspectives.

The financial perspective should consider measures based on the business lifecycle stagesinitiation, growth, maturity and decline along with the strategic financial themes such as Revenue, Growth and Mix, Productivity improvement, Cost reduction and Asset utilization.

Although the Scorecard approach proves to be an effective tool, certain aspects need to be considered before implementing it. Any policy or approach when initiated in an organisation needs to trickle downwards from the top throughout the organisation which calls for total and sincere dedication on the part of the top management.

The creation of a balanced scorecard involves a considerable amount of time on the part of everyone whose performance will be measured. Defining a corporate strategy can involve a substantial amount of time, but the activity that consumes the maximum time is the selection of appropriate measures for the four perspectives.

This is simply due to the fact that there are a large number of potential goals and targets and even more ways to measure them. Due to the complex number of goals management is likely to disagree about which objectives need to be measured and how they should be measured. This process consumes a great amount of time before consensus is achieved.

The time factor involved in designing a balanced scorecard can be considerable and one of the main factors leading to that is the involvement of a huge numbers of manpower in the organisation. Therefore, it is of utmost importance for employees to participate in this process so that its implementation will be smoother.

Their commitment is important not only in building the balanced scorecard but especially in implementing and using it. Finally, although a balanced scorecard may be well designed, lack of participation and commitment on the part of the staff will make the scorecard ineffective.

Furthermore, some of the measures selected may be objective, such as employee turnover rates, and other measures may be subjective, such as employee morale or quality time spent with customers. The subjective measures, by definition, involve somebodys judgment and, therefore, are more prone to error. Consequently, there is a question whether subjective measures should be used and if so how can hey be made more reliable.

To survive in this cutthroat competition it is crucial for the management to adopt approaches, which will help in the transformation and development of their organisation. The Balanced Scorecard approach, if used appropriately, will prove to be a very important tool at the managers disposal. It helps clarify and gain consensus about the strategy and communicate it throughout the organisation. It also enables organisations to align departmental and personal goals to the overall strategy, identify strategic initiatives and link them to long-term targets and annual budgets.

Finally, it assists in obtaining feedback to perform periodic and systematic reviews.

(Leslie Rebello, Director, L.R. Management Education Institute)