Balanced Score Card - Essay Example

25 April 2008 Balance Score Card: A Critical Evaluation Many a times, well intentioned efforts fail because of a lack of a firm grip over reality. Hence a realistic and meaningful appraisal of ground realities is the bedrock on which a successful business enterprise rests. A company cannot make a fortune by relying on good intentions only. The real task is to develop an ability to quantify the objectives. Once siphoned out, numbers ultimately make it feasible to sort out the reasons behind undesirable failures and possibly suggest the means to avoid costly mistakes. This is easier said then done. Though, a majority of the companies are sharp at developing mission statements, the actual performance often leaves a lot to be desired. Owing to the negligible amount of facts and data at their disposal, companies fail to quantify the extent to which the desired results have been achieved. Ideally, the planning running the modern businesses should be such as to offer a ‘helicopter vision’ of the entire enterprise at one glance. Still, most of the businesses succumb to the conventional mistake of taking financial management for holistic planning. Mere financial management is not enough Using merely financial parameters to assess the health of a business is like trying to guess the IQ of a person on the basis of the size of his shoes. This stands to be more then true in the contemporary business environment where success is often defined by the availability and management of information. Traditionally speaking, the business owners till now have been relying solely on financial report cards to determine the extent to which their policies have succeeded. Such an approach can undoubtedly be classified as being partial in today’s technology driven economies. David P. Norton believes that financial management systems often miserably fail to recognize the importance of intangible assets like knowledge, customer satisfaction, employee motivation, work culture, etc (2001). Though they claim to give a realistic view of the state of affairs, their one-dimensional approach often fails to take into account the various human and cognitive factors that define the soul of an organization. Financial management is inadequate for directing and evaluating the strategies that a company must follow to create value by investing money and efforts in areas like technology, R&D, employee training, etc. At least the available data seems to convey so (University of Missouri 2001). It has been found that in an average company; only 5 percent of the work force understands their company strategy and only 25 percent of the managers have strategy linked incentives. May sound pathetic, but more then 60 percent of the businesses fail to link their budget to strategy. Nearly 86 percent of the executives spend less then an hour per month in discussing the company strategy. Things would not have been so pathetic if financial management had been more then enough to understand the dynamics in a company. This calls for a holistic system of business management accounting that takes into consideration all the tangible and intangible factors that influence the growth of a business. Most of the times, financial figures happen to be passive facts that only explain the past performance of a company without giving any meaningful insight into the existing realties or the strategies to be followed in the future. Balanced Scorecard (BSC) The concept of balanced scorecard was introduced by Robert Kaplan and David Norton in 1992 through a series of articles. At that time it attracted the attention of a lot of business leaders and led to their business bestseller,” The Balanced Scorecard: Translating Strategy into Action” (12Manage 2008). Balance Scorecard is a management system that can be used in all types of organizations to achieve efficiency and financial success. It helps in aligning the vision of an organization to its business activities. BSC enables the profit and non-profit organizations to set their business goals by incorporating a number of non-financial performance measures along with the existing financial data. It is a full fledged strategic planning and management system in itself. It not only helps in evaluating the performance of an organization, but also elaborates on the guidelines regarding the strategies to be followed. BSC helps the companies to decide about the parameters to be quantified to chalk out a successful action plan that is in tune with their overall vision. This strategic planning and management system also gives way to a realistic feedback mechanism pertaining to internal business processes and their resultant outcomes. In the last two decades, Balance Scorecard has gained in popularity and is now being used by a majority of reputed companies. It has proven to be a highly cherished system amongst the business communities all over the world (Atkinson and Epstein 2000). At present, almost 50 percent of the Fortune 500 companies use this management system. According to a recent survey, almost 50 percent of the Fortune 500 companies in the USA and Canada and nearly 40 percent in Europe do use a balanced scorecard to evaluate their performance and strategic planning. Balanced Scorecard is not only designed for big companies only, but small and medium sized business can also use it to streamline their planning efforts and strategies. Balanced Scorecards intend to achieve a series of interlinked business objectives. They not only help in translating the vision of a company into tangible business goals, but also help in disseminating this vision at all the levels in a business setup. This helps in defining the activities of all the employees in terms of achievement of business objectives. The business planning achieved by this system gives way to a dynamic feedback and learning mechanism within an organization. The biggest challenge before the early balanced scorecards was the selection of qualitative measures to be incorporated and their subjectivity. In the straight jacketed administrative systems of the past it often became difficult for the managers to explain why they choose a particular qualitative measure. The perception of a person pertaining to the relevance of a qualitative measure could vary from one individual to other in contrast to the financial data. This failed in yielding a scientific and mathematical authenticity to the balanced scorecard so designed. It also made it difficult to secure the allegiance of all the employees to a given balanced scorecard. This generated an aura of doubt around a balanced scorecard and made it very tough for some managers and employees to believe in the validity of information provided by such a balanced scorecard. However, the later day balanced scorecards somehow managed to overcome this debilitating problem. In new balanced scorecards, the qualitative measures were selected on the basis of their correlation to valid strategic objectives. Though the number of perspectives in the balanced scorecards remained the same, the selection of qualitative measures became more accurate and reliable. Managers were required to select a set of qualitative measures in a perspective by conclusively establishing a practical and discernable link between these objectives. All the qualitative measures were required to have practical cause and effect relationship with each other. This imparted a scientific and mathematical relevance to the balanced scorecards so designed. Such scorecards invited a greater trust and allegiance from the employees placed at all the levels in an organization. Advantages of balanced scorecards Balanced scorecard has definite advantages over other modes of strategic planning and measurement. The greatest plus point of this concept is that it provides a holistic picture of an organization. It shuns a segmented or scattered view of the overall functioning of an organization, based solely on financial or operational measures. It helps the employees and shareholders in understanding the overall strategy of a company and successfully solicits the desired response from them. Balanced scorecard also helps in a successful integration of various corporate programs and strategies. Disadvantages of balanced scorecard The biggest disadvantage of balanced scorecard is that that it calls for a strict adherence to the tools used and employed by it. Employees at all the levels in a company are required to show an unwavering commitment to the goals and objectives defined by it. In a realistic world, this sounds too good to be true. Also it is still quite ambiguous, so far as the selection of qualitative measures is concerned (Andersen 2004). The financial perspective The financial perspective should be just the right blend of measures selected to give a realistic view of the overall success of a company. Existing financial data should be correlated with the current and future data. Key statistical parameters should be selected to evaluate the performance and potential of a company. Vital success factors should be evaluated in terms of available and projected financial figures. The financial metrics should be evaluated from time to time according to the contemporary realities and situation. The customer perspective General criteria of customer satisfaction should be identified and listed. Customers should be classified into groups expecting specific advantages and benefits. Random customer surveys should be conducted to evaluate the level of customer satisfaction. Qualitative customer satisfaction data should be gathered by conducting meetings with the customer groups. Online, telephone and mail services should be evaluated and streamlined. Customer satisfaction data pertaining to important competitors should be collected from time to time. Price policy and quality level of the competitors should be religiously monitored. The internal perspective Performance levels within the company should be fine tuned to yield high quality goods and services. This will result in enhanced customer satisfaction leading to higher profits. Production and service delivery processes should be evaluated from time to time. Key processes should be identified with the intention to define process measures. Appropriate benchmarks and standards must be established within a company (Balanced Scorecard Institute 2007) The learning and growth perspective Policies and infrastructure should be so designed to augment the skills and knowledge of employees at all levels. Work climate must be engineered to achieve maximum employee satisfaction. Skills and capabilities achieved by all the employees should be measured and quantified. Measures pertaining to the technical and non technical skills achieved by employees should be designed. New ideas and sales figures furnished by the employees should be quantified and recorded on a regular basis. Case Studies I have the personal experience of using BSC to revive our family run rubber latex business in Malaysia. The main factor behind our success story was the appropriate choice of relevant measures in all the four perspectives. Keeping in tune with our policy of hiring and retaining productive employees, we choose three measures in the learning and growth perspective, the purpose behind which was to measure the levels of employee satisfaction on a regular basis. The skill levels and cultural maturity of all the employees was quantified on a regular basis. All employee promotions were linked to BSC. The basic objective behind quantifying the employee performance was to encourage initiative and a corporate culture relying on commitment and performance. Keeping with this philosophy, programs and parameters were designed to assess the programs truly valued by the employees. At a qualitative level, all the employees were regularly given a chance to review their managers. Twice a year, the HR personnel conducted face to face meetings with the employee groups. Monthly surveys were designed and conducted to measure the levels of employee satisfaction and skill up gradation. This enabled us to hire just the right kind of people who were good learners and identified with the organizational philosophy. Since then we have witnessed a twenty percent increase in our productivity. In the customer service perspective, our approach was to conduct random surveys and meetings with our customers to have an insight into the issues important to them. Customer expectations were assessed at a quantitative and qualitative level on a regular basis. Customer groups were often selected at random to gather data about the levels of customer satisfaction and to learn about the type of products our customers expected us to develop or were available with the competitors. The data about the levels of customer satisfaction of our competitors was also gathered on a regular basis. Our commitment to our customers and the timely resolution of problematic issues lead to a major boost in our sales. Internal metrics chosen by us focused on new product development as a percent of sales. The most important metric that was developed and quantified was safety. Infact safety was given the first priority at all the levels on the shop floor. The main thrust was not only on gathering and analysing the data, but execution of the designed strategy was given the first importance. Appropriate strategies and benchmarks established helped in picking up the sales of our new product that is extra refined rubber latex. Thus we successfully used BSC as a business tool to sort out the issues that mattered for our business. This resulted in a successful turnaround for our sick latex unit. The BSC acted as a one page visual representation of the goals and values that were vital for the growth and expansion of our business. The lesson learned was that it was very important to appropriately measure the right things to ensure the success of our business. May sound hackneyed, but it is true that,” you cannot improve what you cannot measure.” The goal of the balanced scorecard approach is to enable the managers and owners to have a multidimensional view of the organisation they own and run. The beauty of the thing is that a balanced scorecard system can successfully run and coexist with other management tools such as financial planning and strategic planning. Infact, if used with tact, all these approaches tend to complement each other. List of References Atkinson, Epstein M, 2000, Measure for Measure, CMA Management 74, pp. 22-28 Anderson. H, ‘disadvantages’, Performance Management Discussion Forum, viewed 25 April 2008, Daum, J 2001, ‘Interview with David P. Norton’, New Analyst Report, viewed 25 April 2008, ‘Explanation of Balanced Scorecard of Kaplon and Norton’, 12Manage, viewed 25 April 2008, ‘Management Concepts’, MBA UNIVERSE, viewed 25 April 2008, ‘The Balanced Scorecard’, Missouri Business, viewed 25 April 2008, ‘What is a Balanced Scorecard?’, Balanced Scorecard ‘ Institute, viewed 25 April 2008, Read More