Implementation and Effectiveness of Balanced Scorecards - Research Proposal Example

THE BALANCED SCORECARD Implementation and effectiveness of Balanced Scorecards The Research Study: The Balanced Scorecard is a strategic management system that focuses upon the measurements of a company’s activities in terms of its vision and strategies. It eschews sole reliance on financial metrics and also emphasizes performance metrics in order to arrive at an effective assessment of the evaluation of the factors that drive corporate success. It has been found to be an effective management tool, which also presents scope for modifications. The purpose of this research study is as follows: (a) identify two to three local authorities in U.K. that use the balanced Scorecard (b) to conduct surveys among the management personnel at these organizations on the efficacy of the use of the scorecard in their firms (c) to compare the results obtained with those suggested by the literature review (d) to arrive at an assessment of how useful the balanced scorecard is. Literature Review: The Balanced Scorecard was first developed by Robert S. Kaplan and David P. Norton in 1992, in an article that appeared in the Harvard Business Review titled: “The Balanced Scorecard: Measures that drive performance.” This management strategy was devised in response to the fact that while most financial measures were able to track the past performance of a business, they were unable to effectively assess the intangible factors that contributed towards ensuring that the business retained a competitive advantage in the marketplace (Rutan 1996). The Balanced Scorecard is therefore a strategic measure of performance, not only from the financial point of view but from a more broad based perspective that also enables accurate projection of future goals and the degree of adherence of the business to those goals. The concept of performance measures was earlier developed by Peter Drucker as Management by Objectives (Birnbaum 2000:43-52). Employees in every department were to set out short-term objectives, which were to be achieved within a certain deadline. Companies such as General Motors and RCA Foods adopted this method of management, but it was found to be ineffective due to the failure to take into account the unpredictable human factor in actual practice. There are two underlying principles that drive the Balanced Scorecard. The first one is that adhering to strictly financial measures hinders a company’s ability to formulate long term value. The second principle is that what gets measured is what actually gets done. (www.tqe.com). Therefore, while the Balanced Scorecard retains traditional financial measures, it also includes such factors as customers, suppliers, technology, process, employees and innovation. Therefore, this strategy identifies four distinct areas that need to be analyzed: (a) Financial, Learning and growth, Customers and (d) Business process Kaplan and Norton advocate the design of a comprehensive set of develop a scorecard, to evaluate the status of the business and what needs to be done to improve or enhance the scorecard to make it balanced in all the four fronts identified above (Rutan 1996). A company that has a well crafted scorecard will demonstrate a balance on the basis of three distinct aspects: (a) a balance between measures for external shareholders and customers versus internal measures of innovation and growth within the organization; (b) a balance between measures derived from outcomes which reflect past performance vis a vis measures of future performance; and (c ) a balance between the objective measures of outcomes vis a vis the subjective measures of performance. In order to develop a balanced scorecard, Kaplan and Norton emphasize the value of team effort, which is the only means by which the long term value of the scorecard can be maintained (Monczewski, 2003). Feedback is also a vital part of the program. Another crucial aspect of this program is the collection of data, which helps to provide quantitative results that are evaluated by managers in order to aid in the decision making process for future Company strategy. Lastly, team work and good communication will ensure that a balanced scorecard is successful (Monczewski 2003). In recent years, improvements have been introduced into the BSC program by its authors through a concept known as “strategy mapping” whereby the cause and effect relationships between internal efficiency and customer perspectives, learning versus growth and other such relationships are given a visual form and further enhance the use of the balanced Scorecard as a tool for organizational change and strategy planning. Implementation of the Balanced Scorecard: The Balanced scorecard is not successful in every instance. Some Companies who are successful claim that it is BSC that is responsible for their success while others claim that the BSC is a complex process that is not easily implemented and is responsible for their failure. (www.tqe.com). Some of the successful users of Balanced Scorecards are AT&T, Texaco, Elf Autochem, Mobil Oil and Intel (Bailey, Chow and Heddad 1999). Among the benefits that have been shown to accrue through the use of Balanced Scorecards, the following are among the salient ones: (a) The alignment of short term strategies with long term strategies (b) Aligning performance metrics with desired long term goals (c) Improving communications within the organization (d) Helping to formulate concrete organizational strategies (e) Aligning divisional or regional goals in line with overall organizational goals and strategies (f) Updating and clarifying organizational strategies. In some organizations, the evaluation of non financial metrics has led to the development of new financial metrics such as SVA and EVA (Cooper et al 2001). However the authors of the Balanced scorecards argue that new financial metrics are also compatible with the existing balanced scorecards, since the evaluation of financial metrics is also a part of the overall strategy. The balanced scorecard has been adapted for use in the health care industry through an incremental approach model (Pineno 2002). This model makes use of certain probabilities in considering profit contributions and incremental cost analysis. When revenues are generated, they are traced back to the appropriate product or services to determine and minimize costs related to those activities (Pineno 2002:73). In an incremental model approach to the Balanced Scorecard, several hospitals in Canada and Ontario developed reports based upon the application of the score card in four salient areas: (a) Financial performance (b) patient satisfaction (c) system changes and (d) clinical utilization. (Pink et al 2001). Most of the measures of the actual outcomes were in line with targeted scores, however discrepancies were immediately identified in hospital care outcomes and the coordination of care, thereby indicating a need for management action in this regard. The Balanced scorecard is also used by Bank One of Columbus, Ohio and the items that are ranked on its scorecard are customer retention, customer services and customer satisfaction, which are monitored carefully on a per-customer basis, in order to retain customer loyalty (Morgan 1998). Similarly, the implementation of an incremental model of the balanced scorecard was also helpful in the case of Mayo Clinic which was able to evaluate performance on the basis of financial indicators and revise its performance and management system that was representative of its out patient practice. (Curtright et al 2000). The use of the balanced scorecard is also recommended in public sector organizations, especially for using IS systems. It could be suitable for public sector organizations because it has the potential to incorporate several different objectives, especially when it is coordinated with stakeholder analysis before determining the targeted goals and objectives of the public sector organizations.(Flak and Dertz 2003). Therefore, it is likely that it may prove to be useful when used by loack authorities. Criticism of the Balanced Scorecard approach: The Balanced scorecard has become known as the best management strategy, however, an important drawback was pointed out by DiMaggio and Powell (1983), since unlike institutional theory, the Balanced Scorecard approach ignores the importance of relative bargaining power within an organization, which plays a significant role in management decisions. The balanced and integrated performance management system that is purported to be a feature of the Balanced Scorecard has also been contested by Brignall and Modell (2000), who corroborate the views of Di Maggio and Powell that it may often be difficult to develop an integrated approach within an organization and certain managerial decisions may be taken to maintain the balance in a situation where there are imbalances in the power hierarchy. Yet another criticism that has been leveled against the Balanced Scorecard relates to its failure to incorporate social and environmental aspects as separate organizational perspectives.(Brignall, n.d). Moreover, the Balanced scorecard approach also relies heavily upon the linear cause and effect theory while the reality may be a high level of interdependence among factors and their causes and effects. Including social and environmental factors may add more complexity to an already difficult Company situation, however, the authors of the Balanced Scorecard have themselves identified that the limit of four perspectives is inadequate and cannot be assumed to be fixed.(Brignall n.d:6). Methodology: The method proposed is to approach two to three local authorities now using the scorecard, to solicit their participation in the study. Managers at all levels (environmental, Public relations, Finance, Personnel, etc) will be initially contacted by phone, then they will be provided with a questionnaire which will request them to rate the success of the scorecard in their organization on a Likert type subjective scale with responses ranging from 1 to 5 – “very bad”, “can’t say” “good”, etc. Sample questions will be as follows: (a) Does the scorecard successfully measure overall performance in your firm? (b) Does the scorecard help to align performance with long term goals? (c) Does the scorecard align long term and short term goals? (d) Does the scorecard help clarify organizational strategy? (e) Does it help align divisional goals within organizational goals? (f) Is it effective in managing costs? (g) Does it make allowance for power hierarchies within the organization? (h) Does it incorporate social goals? (i) Does it take into account environmental factors? An effort will be made to prepare succinct questionnaires which will not take up too much time of the managers/officials concerned. On the basis of the responses that are received, weighted averages will be taken, with the lower values indicating that the scorecard is not effective in a particular organization, while the higher values will indicate that it is being satisfactorily used and the average values obtained will provide a measure of its relative efficacy in use. In conjunction with the literature review which also suggests that the scorecard is not successful in all cases, it will be possible to make a determination for the sample considered, as to whether or not implementing the scorecard has been effective for medium sized organizations in the London area. The Likert type questionnaire method may be the best, because it does not consume a great deal of time of the respondents – they only have to tick relevant responses, so it may be easier to solicit their participation and cooperation. Moreover, as compared to face-to-face interviews, it will be a less expensive method and may even be administered through e-mail, which will make it faster and cheaper. The assignment of numerical values for the responses helps to analyze the data quantitatively, which will provide a more reliable measure as opposed to qualitative methods. Since qualitative methods are more suitable for very small samples where the fine nuances of difference are to measured, it may not be appropriate for this study which seeks to evaluate on an overall basis within a limited area in the UK and in the context of local authorities, how successfully the Balanced Scorecard has been implemented. Moreover, since the proposal aims to restrict the study as close to the London area as possible, it is also likely to satisfy the requirements for a representative sample. Plan of work: Activity Time Frame: 1. Contacting organizations to solicit their 3 days participation in the study 2. More literature review 2 weeks 3. Collecting responses from managers 3 weeks 4. Analyzing the data 2 weeks 5. Preliminary draft preparation 3 weeks 6. Editing, proofreading and finalizing draft 2 weeks Total time frame 12 weeks and 3 days Resources required: Access to library for management books, Online library and journal sources such as Proquest and EBSCO journals, Word processing and statistical software for data analysis, access to printing facilities to print questionnaires. References: * Bailey, A.R., Chow, C.W. and Haddad, K.M, 1999. “Continuous improvement in Business Education: Insights from the For Profit Sector and Business School Deans.” Journal of Education for Business, 74(3): 165-181 * Birnbaum, R, 2000. “Management Fads in Higher Education: Where They Come From, What They Do, Why They Fail”. San Francisco: Jossey-Bass. * Brignall, Stan, No Date. “The unbalanced Scorecard: A social and environmental critique” Aston Business School. [Online] Available at: http://www.environmental- center.com/articles/article1327/article1327.pdf; accessed 7/7/2006 * Cooper, S, Crowther D, Davies M and Davis, E.W, 2001. “Shareholder or stakeholder value.” London: CIMA. * Curtright, J.W., Stolp-Smith, S.C. and Edell, E.S., 2000. :Strategic performance management: development of a performance measurement system at the Mayo Clinic.” Journal of healthcare Management. 45(1):58-68 * DiMaggio, P.J. and Powell, WW, 1983. “The iron cage revisited: Institutional isomorphism in organizational fields.” American Sociological Review. 48:147-160. * Flak, Leif Skiftenes and Dertz, Willy, 2003. “Stakeholder Theory and Balanced Scorecard to improve IS development in public sector” [Online] Available at: http://www.hia.no/iris28/Docs/IRIS2028-1109.pdf; accessed 7/7/2006 * Kaplan R S and Norton D P, 1992. "The balanced scorecard: measures that drive performance", Harvard Business Review Jan – Feb: 71-80. * Kaplan R.S. and Norton D.P, 2000. “Having trouble with your strategy? Then map it” Harvard Business Review, September-October:167-176 * Monczewski, John P, 2003. “Critical roles for the Balanced Scorecard team” DM Review Magazine, August. [Online] Available at: http://www.dmreview.com/article_sub.cfm?articleId=7151; accessed 7/7/2006 * Morgan, M.W., 1998. “Improving business performance: Are you measuring up? Manage 49(2):10-13 * Pineno, Charles J, 2002. ”The balanced scorecard: An incremental approach model to health care” Journal of Health Care Finance. 28(4) : 69-81 * Pink, G.H., McKillop, I Schraa, E.G. and Preyra C et al, 2001. “Creating a Balanced Scorecard for a Hospital System” Journal of Health Care Finance 27(3):1-19 * Rutan, Steve, 1996. Book Review of “The Balanced Scorecard” by Robert S. Kaplan and David P. Norton. [Online] Available at: http://www.strategyletter.com/cp_0498/cp_br.asp; accessed 12/26/2005 * “The Balanced Scorecard: Overview” [Online] Available at: http://www.tqe.com/bsc.html; accessed 7/7/2006 Read More