Performance Management: Balanced Scorecard - Essay Example

PERFORMANCE MANAGEMENT: BALANCED SCORECARD STUDENT NAME COURSE TUTOR DATE Table of Contents Table of Contents 2 EXECUTIVE SUMMARY 3 Introduction 4 Background 4 Components of BSC 5 Advantages of Balance Scorecard 9 Disadvantages of Balance Scorecard 10 Example 12 Conclusion 14 References 15 EXECUTIVE SUMMARY In any given company, management is a crucial area because improper management leads to low customer demands, low returns and profits, a dissolution or winding up of the company for failure of meeting its financial objectives. A performance measurement system that adopted must be able to achieve a balance that is capable of supporting the progress of already pre-determined goals of the company as well as its visions and aims. The sole purpose of any company is to make a profit and the persons who own the business and proprietors contribute money, labor and property known as capital in the advancement of a business. Performance management system has been defined by Biticti, Carrie, Mcdevitt (1997) as “a system of information which is at the heart of the performance management process, and it is of critical importance to the effective and efficient functioning of the performance management” (p. 522). In essence, therefore, a performance system including the Balanced Scorecard method is aimed at improving performance and for a company to be successful it must be able to measure its effectiveness. The sole responsibility of any manager in a company is to arrange the management of the business, responsibility of planning and controlling the daily operations of the business to fulfill the ultimate objectives of making a profit and sustainability of the company. This paper will therefore focus on what in the Balance Scorecard as a management system, its advantages and disadvantages in the company as well as how it incorporates the social and environmental issues in the management of the institution. Key Words: Balance Scorecard (BSC) Introduction Background The Balanced Scorecard (BSC) Approach was developed in the early 1990s by David Norton and Robert Kaplan (1992) from a research institute known as Nolan Norton Institute a research company. The Balanced Scorecard was published in both the Harvard Business Review and the Harvard business Press in Boston. By mid 1993, the BSC was largely used by managers as tool to help companies in the translation and the implementation of strategy (Kaplan & Norton, 1996). As a matter of fact, it was not only used to clarify and communicate the organizational strategies, it later became very useful in the management of those strategies. Ideally, the main objective of the balanced approach was to provide a comprehensive methodology as to what organizations should measure to ensure there is balance in each organizational perspective. Since then, the BSC has evolved gradually to serve both as a management tool and also a measurement system (Kaplan & Norton, 1996). Generally, the BSC methodology does not rule out the use of traditional financial metrics but integrates into management to give a better insight to the business. The BSC methodology is adopted to supplement the insufficiency’s that is necessary for a current business to create a future value by means of investments in innovation, employee, suppliers and customers as well as the use of new technological tools. The BSC method emphasizes in the collection of financial data in a timeliness and accurate matter through a centralized and automated processing. It is material to state that the main impetus in pushing to adopt the balanced scorecard approach was based on the premise that traditionally the financial approach in performance management was unbalanced. This is because financial data as a tool to measure performance only reflected on past performance of the company and hence it was unpredictable because a company could not determine its future performance (Kaplan & Norton 2002). Moreover, it would be detrimental for the company current market value to exceed the market value of its assets because the difference of the two represents an intangible asset and it would be difficult to effectively measure the financial value of intangible assets. These deficiencies were identified through the research carried out by Norton and Kaplan in 1990s in various companies for purpose of exploring a new method of performance measurement. The essence of developing the BSC to replace the traditional techniques cannot be ignored. Essentially, the BSC was developed with the core purpose of helping to achieve a balance among the management objectives of the organizations. These include the short-term, long-term and medium-term objectives (Ghosh & Mukherjee, 2006). The BSC also reconciles the non-financial and the financial indicators of the business thus creating a sense of understanding. Moreover, a core purpose of the development of the BSC was to eliminate the vagueness and ambiguity that previously existed (Kaplan & Norton, 1996). By providing a common communication platform within an organization for both the managers and the members, the BSC proves to be a very effective tool in all types of organizational management. Components of BSC The Balanced Scorecard has been understood as a management system structured based on the logic of plan-do-check-act. It is the central organizing framework for almost all managerial processes in any organization (Kaplan & Norton, 1996). Accordingly, Van den Heuvel & Broekman (1998) stated that a self respecting organization cannot do without BSC because it is capable of transforming strategies of the company into relevant actions. It is crucial in all organizational processes such as goal setting, budgeting, and allocation of resources as well as feedback and learning. Kaplan and Norton (1992) stated that the BSC management mode was not only aimed at being used as a measuring tool, but was to ensure that companies and organizations could identify their vision and strategy and translate them to a specific action that was able to coherently measure those set of actions. According to Fielden (1999), BSC is used worldwide by organizations to translate vision and strategy into a measurable objective. This way, it helps translates an organization’s mission into comprehensive measures to be performed later in future. It has continued to take hold in more and more organizations across the world. It provides managers with the basic instrumentation needed to plan for future competitive successes (Kaplan & Norton, 2002). The BSC methodology was created on the premise of four main perspectives; a) The Financial perspective mainly deals with how a company should handle their financial statements and how they relay the financial information to the public. The financial perspectives encompass the issue of cash flow measures and financial ratios within the company. It is the financial perspective that enables the company to identify how it wishes to be viewed by its investors as well as its shareholders. Notably, it enables companies to achieve their financial objectives by rating their financial performance. Moreover, companies are able to track their financial results by use of a balanced score card because it enables them to monitor their progress and assess the assets as well as the liabilities of the business in order to determine future performance. b) The customer perspective is usually considered on the basis of how the company should be viewed from the customer’s point of view. This encompasses the issue of how much time the company should spend in conducting customer surveys and customer calls. Any organization or company should strive to develop and maintain good customer relationships. This can only be achieved by retaining the loyalty of current customers and striving to win new ones. A customer is a unique asset to the business this is because a dissatisfied and an aggrieved customer would decide to go to another supplier or service provider if the company fails to recognize their unique role in the future existence and performance of the company. c) The internal perspective is taken from the standpoint of the business and this is intended to satisfy both the shareholders and customers. The BSC approach rests on the premise that the internal business of any organization must be both mission oriented as well as support oriented. This indicates that the business must have a mission to satisfy its customers and shareholders and additionally have a support system in cases of emergencies such as rework. Moreover, can the company sustain the training of the employees when they adopt new technology tools? d) The learning perspective is viewed on the basis of how sustainable the company should be based on the vision enshrined in the company. Learning encompasses the training of the employees, organizational attitude as well as what improvements should be made to ensure that the staff is adequately trained to handle all the company’s tasks. The learning perspective also entails the organization’s ability to change and improve which includes adapting to and coping with new situations. Now, the bigger crux of the BSC is to link together these four perspectives. It connects them in a casual chain that passes through all the four (Norreklit, 2000 p. 68). According to Kaplan and Norton (1996 p. 31), they will assume the following chain sequence: learning perspective » internal business perspective » customer perspective » financial perspective. These are what will drive the entire organization’s business into achieving its strategies. Below is an illustration indicating the same. Figure1; The Balanced Scorecard Source: Kaplan and Norton (1996 p.9) If the Company chooses to adopt this method then the Kaplan and Norton recommends that the company should undertake at least nine steps to implement and create the balanced approach within the organization; I. Perform an overall organizational assessment II. Identify strategic themes III. Define perspectives and strategic objectives IV. Develop a strategy map for the company because it is capable of linking the desired productivity and growth outcomes, customer value proposition, outstanding performance in internal processes and the capabilities of internal assets (Kaplan & Norton 2002). V. Drive performance metric VI. Refine and prioritize strategic initiatives VII. Automate and communicate VIII. Implement the balance scorecard through the organization IX. Collect data, evaluate and revise Advantages of Balance Scorecard a) One major advantage of the BSC methodology is by playing a crucial role in the definition and communication amongst the interests of the managers, employees, investors and even customers (Kaplan &Norton, 1993). According to Banker, Chang, Pizzini (2004) they state that once it is articulated and linked between performance measures and strategy objectives, once it is understood it can be easily translated to help the organizations to improve performance. It enables the organizations to introduce new systems of governance into their management processes while still focusing on achieving their strategy. b) Additionally the BSC method enables managers within the company to effectively outline financial outcomes while concurrently monitoring the available resources so that the company can be able to obtain intangible assets for future growth of the company (Kaplan and Norton, 1993). The BSC helps the companies in tracking their financial performance in order to determine whether the organization is incurring profits or losses. c) Another advantage is that the BSC method enables managers and company executives to evaluate performance indicators that would be able to forecast the viability and the existence of the company. This is because through the use of the BSC methodology a company can quickly uncover hidden assets and information. Moreover, the BSC does not rely on the short-term measures will instead help in leveraging the long-term functionality of the organization without having to alter the structure of the business (Ghosh & Mukherjee, 2006 p. 65). d) BSC methodology is also capable of successfully identify the cause and effect between the various constituents of a company (Kaplan & Norton, 1996). According to Norreklit (2000), the main attribute of the BSC methodology is to permit measurement in non-financial areas in order to predict the future financial performance of the company. e) Additionally, the BSC has been described to be the most ideal in capturing the critical activities of the organization that create value and especially those that are created by the skilled and motivated participants. In this manner, it is able to retain the financial perspective of the company or the organization and reveal the necessary value drivers for both short-term and long-term competitive performance (Kaplan & Norton, 1996). Disadvantages of Balance Scorecard a) Amongst the main challenges of implementing the BSC method is that it can be difficult and quite time consuming to implement. This is because the development of a BSC requires a lot of skillfulness and expertise (Ghosh & Mukherjee, 2006). Kaplan and Norton (1996) estimated that in adopting the BSC method it would take a company or an organization at least two years to sufficiently and effectively implement the system throughout the entire organization. It would be therefore material that any company that chooses the BSC method, the company must be willing and committed to guarantee that there is a long-term commitment at all the levels of the organization for it to be successful. b) The other disadvantage of the method is that it limits that company’s primary objectives especially the financial objectives into the customer, internal process and the learning objectives (Ghosh & Mukherjee, 2006). This is because the capital employed by the company will be utilized in operational measures of the company. In this case, companies have to re-evaluate the basic assumptions of their set goals and focus on a mission to produce optimal outcomes with their operational measures (Ghosh & Mukherjee, 2006). c) Another delimit according to Ghosh & Mukherjee (2006), is that the scorecard method needs to include a large number of non-financial and financial measures to be efficient and useful and therefore it needs to be continually modified on the basis of measurement and feedback. The only way for a score card to be useful is if it assigns measures to both the financial and non-financial weights of the organization. Therefore, unless it does this, the BSC method becomes absolutely insignificant. d) On the other hand, the BSC method is disadvantageous for an investment company because the company would only be interested in financial performance and not any other perspective adopted through BSC. In addition, once the metrics on the score card are changed, it becomes difficult to integrate it into the planning and budgeting processes of the company thus making it a bit complicated to use it in the management process (Ghosh & Mukherjee, 2006). e) Further the shareholders, creditors and debenture holders of the company are usually interested in the company’s financial standing other than the operating performances hence compels the company to only value financial perspectives and hence making the BSC method imbalanced. f) Notably, the BSC has been discredited for failing to address the issue of corporate social responsibility (CSR) which is a new emerging trend in the business world. CSR is particularly essential for enterprise profitability as it ensures sustainable growth as well as positive development within an organization (Ghosh & Mukherjee, 2006). If this perspective is missing in the BSC, then it can be said to be lagging behind time. Example An illustration of how the Balance scorecard works would be adopted from a simplified strategy map by Kaplan and Norton (2002). Adopting the BSC method in a private company implies that that the management should focus more on the shareholder value. A company manager should ensure that there the company targets the shareholders and that there is value for them in terms of their investment. The fact that the senior management targets the improvement of the company and ensures that it is competetive in the market. This is because the BSC method operates on the premise that a shareholders’ interest in the company but as long as their price, product and service needs are met. In order for the company to secure a better financial status, the priority of the company would be to ensure that the customers’ demands are met through the budget priorities. The senior manager should ensure that within the budget, enough money is given to improve the financial standing of the company. Using this model it highlights that the key feature for improving returns of the company and savings is to ensure that there are competitive prices, high levels of quality, the speedy delivery of goods and that a comprehensive solution is given to customer problems. The strategy adopted must be capable of meeting the long term financial abilities of the company. Conclusion A performance management system is important for any company to ensure that the company achieves its main objectives and goals. The main advantage achieved through the BSC system is through ensuring that the company is effective and timely financial reports are provided to the company. If any company chooses to adopt the balance scorecard, then they must ensure that they dutifully adopt and value the strategic plan to attain the financial perspective of the company. To be advantageous the BSC must be based on a vision strategy of the company to ensure that the learning perspective, customers, internal processes and finance are well strategized and synchronized to achieve the objectives of the company. The disadvantages of the systems mainly evolve around the issue of the time taken to fully implement it in the organization. It is limited also on the basis that if a company focuses on one outcome then the BSC would be adopted halfway and would not meet its objectives fully. BSC has also been critiqued for missing the CSR element. Nevertheless a company needs a performance strategy and without the strategy, the objectives and company’s vision will not be attained. References Banker, R. Chang, H. & Pizzini, M. (2004). The Balanced Scorecard judgmental effects of performance measures linked to strategy. Accounting review, (79), No 1. Pp 1-23. Brian Lesinski, (October 14 2004) Introduction to the Balance Scorecard Approach, Paper presented as the Cornell Advanced EMS Workshop. Bititci, U. Carrie, A & Mcdevitt, l. (1997) Integrated performance measurement system: a development guide. International journal of operations & production management, (17), No 5-6. pp 522-534 Fielden, T. (1999) “Pilot Refines Decision Support,” InfoWorld, November 29, p. 77-78 Ghosh S., & Mukherjee S. (2006) Measurement of corporate performance through balanced scorecard: an overview. Vidyasagar University Journal of Commerce (1)1 p. 64-67 Kaplan, Robert S. and Norton, David P. (1996). "Using the Balanced Scorecard as a Strategic Management System." Harvard Business Review. (January-February): 75 - 85 Kaplan, Robert, & David, Norton. (1996). The Balanced Scorecard: Translating Strategy into Action. Boston MA: Harvard Business School Press. Kaplan, R. S. & Norton, D. P. (2002). Strategy maps. Converting Intangible Assets Into Tangible Outcomes. Harvard Business Review. Nørreklit, H. (2000) “The balance on the Balanced Scorecard – a critical analysis of some of its assumptions,” Management Accounting Review, vol. 11 Van den Heuvel, H.; Broekman, L. (1998) Wolf in schaapskleren 2 – Scorecard nader gebalanceerd, Personeelbeleid, 34, p. 23–26. Read More