The Factors Affecting the Successful Implementation of a Balance Scorecard - Essay Example

Table of Contents INTRODUCTION: 2 BALANCED SCORECARD: 3 LITERATURE REVIEW: 5 CAUSE-AND-EFFECT RELATIONSHIP: 6 CRITICAL REVIEW: 7 FACTORS AFFECTING THE SUCCESSFUL IMPLEMENTATION OF A BALANCE SCORECARD: 9 CONCLUSION: 11 REFERENCES: 12 INTRODUCTION: In the business arena, one of the most demanding challenges that executives encounters, is the proper execution of strategy. In difficult situations, such as cutting off the workforce, scaling back plans and ideas, and rescheduling capital investments, make it even more challenging to stay aligned with the course. These initiatives are to be taken without weakening the strategies. The Balance Scorecard is not only a performance measurement tool, but also it is one of the best frameworks that helps in the execution of strategies effectively. This concept was developed in 1992 by David P. Norton and Robert S. Kaplan (Punniyamoorthy & Murali, 2008). Balance Scorecard helps in implementing the organizational strategies in terms of actionable plan and make it a thorough continual process by providing a comprehensive road map of how to effectively carry out strategy, including the alignment and mobilization of the management team and other employees (Punniyamoorthy & Murali, 2008). According to Harvard Business Review, the Balance Scorecard is one of the most influential management ideas of the past 75 years (Palladium, n.d.). Today, many large, medium-sized and even small organizations use the Balance Scorecard as a performance measurement system, but usually small and medium-size companies fail to successfully implement that. This happens generally due to the gap between their strategies and vision. This paper is based on the concept of Balance Scorecard. The essay starts with the introduction, followed by a thorough understanding of the Balance Scorecard, with the significant reviews of the applicable literature, including factors that obstructs the successful execution of a Balance Scorecard. BALANCED SCORECARD: The Balance Scorecard is a tool that helps the organizations to create a link between its strategy and actions, encourages the individuals to involve in organizational planning, focuses on the critical phases of the business and take action instantly when change is required (Atkinson, 2006). It is a multidimensional tool that can be used in management, strategic and measurement systems. With its multidimensional tactics, the Balanced Scorecard integrates the performance measurement of both financial and management aspects (Punniyamoorthy & Murali, 2008). It measures the performance by focusing on four major perspectives, which includes financial stability, customer base, business operations, and learning and development. This tool gives the meaningful interpretations of the interconnections between the business processes (Kaplan & Norton,1996). With this Balanced Scorecard tool, one can easily illustrate an obvious cause and effect relationship between actions and reactions. For instance, introducing the new CRM program will affect the overall financial performance or implementing new processes will have an impact on product development activities (Palladium, n.d.). This tool analyzes the in-depth effects with a clarity that no other management tool can offer. The following road map has described that how BSC created a link between strategy and Balance Scorecard: (Liang and Wang, 2006) In this process, effective implementation of strategy is important as BSC mainly deals with organizational strategy (Molleman, 2007). Kaplan and Norton (1996) described a four-step process cycle to use the BSC as a management system in 1996, which is as follows: Translate and spell out the vision and organization’s strategy into detailed strategic goals. Link and communicate the strategic goals with the actions. Implementation Plan and set the targets. Monitor the reactions and feedbacks of implemented strategies. (Liang and Wang, 2006) As Balance Scorecard is the dynamic tool, it must be revised on the standard basis, whenever the management changes the organizational strategy. This process of renewing the BSC helps in preventing the company to neglect the major factors of performance, which can affect the strategic objectives of an organization (Norreklit, 2000). LITERATURE REVIEW: The Balanced Scorecard is not only a measuring device that measures the performance and allow the company to interpret its vision and strategy into a tangible set of strategic goals. But, this performance management tool also integrates the financial measures with different key performance indicators of internal and external business processes, customer outlooks, development and growth of the organization, learning and improvement in the processes (Kaplan, 2010). As described by Kaplan and Norton (1996), the continuous modification of the balanced scorecard is a critical process. This is because the balanced scorecard preserves conventional financial measures; however, the financial measures depict the events occurred in the past, focusing on the cases of companies from industrial age where the long-term investments and customer relationships were not considered as the critical success factors. Such financial measures are not enough to guide and assess the performance of the companies from the information age. Today, companies must not only rely upon financial measures, but also consider non-financial measures by investing in suppliers, clients, human resources, methods and procedures, innovation, and technology in order to the create future worth (Nørreklit, 2003). CAUSE-AND-EFFECT RELATIONSHIP: Here, the concept of strategies suggested by Michael Porter is used in the Balance Scorecard. However, porter argued that in order to formulate the competitive strategies, a company relates itself to its competitive forces existing in the industry (Norreklit, 2000). The Balance scorecard creates the link between a company’s vision and its strategies and form strategic goals in four various areas: the financial, customer service, internal business operations and learning and development perspective (Norreklit, 2000). A strategy actually reflects the assumptions of causes and effects. The performance measurement system should create the links and make the associations (hypotheses) among goals (and actions to be taken) in the different aspects expressed, in order that the goals can be endorsed and managed. And all the four areas of BSC must be encompassed in the series of causes and effects (Nørreklit, 2003). CRITICAL REVIEW: BSC is one of the most powerful performance management tool that is beneficial in the decision making process for the management. But, the greatest challenge lies in the quantification of benefits. Hence, the paper critically discusses the relevant literature of the Balanced Scorecard (Nørreklit, 2003). As BSC provides an approach to translate the vision and strategy into strategic goals, this approach helps to support the business processes with its strategy to achieve the organizational objectives. The BSC evaluates performance of the company on the basis of four perspectives framework which confines the measures to be taken. This method forces the system to neglect the information overload that causes to endure other PMS and hence managers can spend more time in making decisions rather than spending time on analyzing overloaded information (Nørreklit, 2003). However the approach verifies the improvement in communication process throughout the organization and encourages dynamic evaluation, formulation and implementation of strategies, as reported by Drury (Liang and Wang, 2006). With the effective communication process, managers can easily convey messages to every individual in the organization. Consequently, employees can work more efficiently towards goals as they completely understand the objectives of the organization through meaningful communication (Atkinson, 2006). The four perspective approach has facilitated the managers to link the most important factors together so as to improve the performance of perspective fairly without affecting the performance of other perspectives (Atkinson, 2006). Managers will evaluate the issue reasonably, if progress in one perspective causes the damage in other perspectives. Moreover, this gathered information will be presented to all the levels of an organization, which will involve the contributions of senior managers and help the organization to obtain the best possible results. Though there are many benefits of adopting BSC, but researchers have found many critical issues when implementing this tool (Atkinson, 2006). According to Norreklit, the cause-and-effect relationship is extremely vague and lack a hypothetical foundation or experimental support. This approach creates issues as researcher argued that being profitable of some factors was a serious issue, especially if it did not follow the concepts logically (Norreklit, 2000). The relationship between financial and non-financial performance is a logical relationship. So, Kaplan and Norton’s framework is a hierarchical top-down model that cannot be easily applied in dynamic organization (Kaplan & Norton, 1996). But, by regulating the control methods, one can solve the problem. Whereas, on the other hand, other researchers reported the relationship between non-financial and financial indicators. In many cases, financial performance positively affects the customer satisfaction or sometimes non-financial factors improve the company’s productivity by satisfying their customers through effective manufacturing strategy (Norreklit, 2003). If it is taken as a tool for effective communication, BSC provides an opportunity to better exchange and convey ideas about business processes which leads to increase productivity and significance of intangibles (Punniyamoorthy & Murali, 2008). Hence, it is of great significance when used in the organizations where strategies are formed by mutual discussion of employees and managers (Atkinson, 2006). One of the researchers, Atkinson criticized that the BSC does not involve the comprehensive value chain. It does not focus on the role of the workforce, suppliers or the society within the organization (Atkinson et al., 2001). These factors are most important in order to compete nowadays, but the four perspective framework does not include that as well as it focuses on top-down performance measurement. In response, Kaplan and Norton argued that the framework is only a proposition which can be adjusted to meet each company’s requirements (Liang and Wang, 2006). The use of non-financial measures lead it to several problems, as this system id new to non-financial measurements, so will take time to establish (Punniyamoorthy & Murali, 2008). However, financial measures can be used effectively in this system by constantly updating the BSC, no matter it demands huge amount of time and resources (Atkinson, 2006). According to James Norrie and Derek opinion, by using the BSC, company can make the complex operating strategies more simple and understandable and help in achieving operating targets more efficiently (Punniyamoorthy & Murali, 2008). Hence, it is termed as the important value-adding element to improve the organization’s project management practices. With this respect, a project BSC is an even more effective approach which adds more reliability to the project and simply the process to achieve project-based goals (Punniyamoorthy & Murali, 2008). The interesting research has concluded that several companies use the BSC like a new information method and some use as a strategic management process, developing goals and assessing performance against those goals and some companies separate the four perspectives while classifying the critical success factors and evaluations. But the further study is required to know the economic benefits that a company can gain when applying the BSC (Atkinson, H., 2006). FACTORS AFFECTING THE SUCCESSFUL IMPLEMENTATION OF A BALANCE SCORECARD: When implementing the BSC into the system, there emerges the number of obstacles that affect the successful implementation of balance scorecard (Molleman, 2007). Here are some listed below: Less measures per perspective: As discussed above, a well balanced scorecard must consist of a proper blend of outcomes (lagging) and performance indicators (leading) of the organization’s strategy. Hence, when company uses only two or three measures in all perspectives, it fails to maintain the balance between financial and non-financial indicators (Molleman, 2007). A company must assure the balance between these two indicators to implement BSC (Punniyamoorthy & Murali, 2008). Adopting many indicators: If an organization adopts too many indicators together, it loses the focus and cannot maintain the connection between indicators (Molleman, 2007). Use the appropriate indicators which are most important and reflect the strategy effectively (Punniyamoorthy & Murali, 2008). Measures have no connection with the strategy: If the organization applies all the KPIs into all four perspectives without evaluating the crucial measures that are actually linked to the strategy, in that case organization strategy cannot be translated into objectives and ultimately, BSC would fail to serve its purpose (Molleman, 2007). Therefore, use a selective approach to measures that are related in some way or other with the organization’s strategy (Punniyamoorthy & Murali, 2008). Lack of senior management contribution: Evaluating the project to just middle management and defining it as performance measurement, is the major cause of failure (Molleman, 2007). Senior management’s contribution is important as they have a complete picture of the company which will support to align the project to implement the strategy properly. Building quantitative relation between financial and non-financial indicators: These two measures are the independent variables, but the internal factors of financial measures are dependent on each other, which cannot make the quantifiable linkage and result in poor results (Molleman, 2007). Introducing balance scorecard only for reward: The BSC can only be effective when a connection is built between compensation and strategic measures and most importantly when it is the part of the strategic interpretation process in the company (Molleman, 2007). CONCLUSION: The Balanced Scorecard is one of the most effective performance measurement systems which involves both financial and non-financial indicators. It puts together the set of measures evaluated from the company’s strategy and presents senior managers the complete overview of entire company’s performance. Moreover, it supports the communication process all through the organization which gives the clear understanding of the company’s objectives at all levels and speed up the decision making process The Balanced Scorecard system has been criticized by many researchers. But beside its all pitfalls, it is an ample tool to interpret the business strategy into effective objectives. The proper implementation of the BSC system should also focus on the structure and culture of the company to function even more productively. REFERENCES: Atkinson, A., Banker, R., Kaplan, R., and Young, S. (2001). Management Accounting. 3rd edition. Upper Saddle River, NJ: Prentice Hall. Atkinson, H. (2006). Strategy implementation: a role for the balanced scorecard?. Management Decision, vol. 44, no. 10, pp. 1441-1460. Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: translating strategy into action. Harvard Business Press. Kaplan, R., 2010. Conceptual Foundations of the Balanced Scorecard. Harvard Business School, Harvard University. Available from http://www.hbs.edu/faculty/Publication%20Files/10-074.pdf [Accessed 02 May 2014]. Liang, Y., Wang, Y. (2006). Review on Studies of BSC. Available from http://www.google.com.pk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0CFoQFjAG&url=http%3A%2F%2Fwww.paper.edu.cn%2Fen_releasepaper%2FdownPaper%2F200612-267&ei=QE1jU-jlFsGl0AWXoYG4Bw&usg=AFQjCNG8ec_bnp_yRCGva08DiOO1YzB2Qw&sig2=ZQ1jBiNlGRxctwkfgfMgFg&bvm=bv.65788261,d.d2k [Accessed 02 May 2014] Molleman, B. (2007). The challenge of implementing the Balanced Scorecard. In6th Twente Student Conference on IT. Cerca con Google. Available from http://slc.co.ke/sites/default/files/the-challenge-of-implementing-the-balanced-scorecard.pdf [Accessed 02 May 2014)] Norreklit, H. (2000). The balance on the balanced scorecard a critical analysis of some of its assumptions. Management accounting research, vol. 11, no. 1, pp. 65-88 Nørreklit, H. (2003). The balanced scorecard: what is the score? A rhetorical analysis of the balanced scorecard. Accounting, organizations and society, vol. 28, no. 6, pp. 591-619. Palladium, n.d.. Balance Scorecard. [online] Available at: http://www.thepalladiumgroup.com/about/thoughtleadership/Pages/BalancedScorecard.aspx [Accessed 02 May 2014]. Punniyamoorthy, M., & Murali, R. (2008). Balanced score for the balanced scorecard: a benchmarking tool. Benchmarking: An International Journal, vol. 15, no. 4, pp. 420-443 Read More