The Balanced Scorecard and Its Application - Essay Example

No. 12345 THE BALANCED SCORECARD AND IT’S APPLICATION ABC of XYZ Department of Human Resource Management 08 February, 2010 Table of Contents Contents Page No Introduction 03 The Balanced Scorecard 04 Importance of Balanced Scorecards 05 Four Perspectives of Balanced Scorecard 06 Balanced Scorecard as Strategic Management System in Organizations 07 (a) Translating the Vision 07 (b) Communicating and Linking  07 (c) Business Planning 08 (d) Feedback and Learning 08 How to Build Up a Balanced Scorecard? 08 Use of Balanced Scorecard 10 (a) Private Sector 10 (b) Public Sector 10 Why Balanced Scorecards Do Not Work in Some Organizations? 11 Comparison of the Balanced Scorecard to Other Management Systems 12 (a) The Six Sigma Management Approach 12 (b) The Baldrige, EFQM, and APIC 12 Conclusion 13 Works Cited 14 Aasia Jahan Professor XYZ Business Administration 08 February, 2010 Introduction Tom Malone, President of Milliken and Company writes: “If you’re not keeping score, you’re only practicing.” In modern era, human resource management (HRM) has globally become one of the most important and popular field. The soul purpose of HRM is to deal the control and management of employees by applying effective policies and rewards. For this, human resource managers use different techniques and perform critical role to run, control and measure all areas of their organizations. The concept of Balanced Scorecard has spread all over the world business at a great speed.  The approach of Balanced Scorecard has straight away appealed the organizing bodies. With the support of just a single sheet of paper, the administrative authorities can achieve both the basic financial goals and the most significant non-financial drivers for the success. The main purpose of Balanced Scorecard is to assist the managers in using their elusive resources effectively. Executive authorities apply Balanced Scorecards to analyze and measure the performance of the employees proficiently. The managers use Balanced Scorecards as an additional aid along with other financial measures. This paper is initiated by the fact that numerous organizations are falling short in aligning their corporate strategy with their visions. In this paper, the strategic use of Balanced Scorecard is discussed which is considered as one of the important component of modern human resource management. The main purpose of the paper is to identify how a balanced scorecard can help the mangers to integrate a well-defined strategy and the vision. The Balanced Scorecard Balanced Scorecard is a measuring and strategic management tool that is used to bring all the organizational activities and employees’ performance with respect to its vision and strategies (Harvard Business Review, 1992 & 1993). It identifies a small number of financial and non-financial measures along with attached targets to them, so that they are assessed to verify whether or not the contemporary performance would meet the expected standards or goals. The Balanced Scorecard, developed by Dr. Robert Kaplan and Dr. David P. Norton, can be effectively and productively used in communications as well as to evaluate goals and performance of over all organization. According to David Norton, almost 60% of large US companies are using those Balanced Scorecard that merge financial and non-financial measures. Kaplan and Norton (1996) wrote their book The Balanced Scorecard: Translating Strategy into Action that “The name [balanced scorecard] reflected the balance between short and long term objectives, between financial and non-financial measures, between lagging and leading indicators, and between external and internal performance perspectives.”  The balanced score card system comprises of four perspectives which are considered as essential part of it. Brief Historical Background Art Schneiderman was an independent consultant who introduced the Balanced Scorecard for the first time in 1987 at Analog Devices (Cobbold & Lawrie, 2002). Time delivery and new product booking ratio, the cycle time, yield, and labor turnover were some of the measures which were discussed in the first Balanced Scorecard. Other early application of the use of this concept was by Harvard professors Dr. Rober S. Kaplan and David P.Norton. Both professors wrote number of journal articles about their dealings and findings through the Balanced Scorecard (Kaplan & Norton, 1996). Importance of Balanced Scorecards Generally there are 04 barriers to strategic execution like vision barriers, people barriers, resource barriers, and management barriers. According to Bryon Mignanelli of Balanced Scorecard Collaborative: (a) 95% of employees of an organization have no idea of its organizations strategy (b) 90% of organizations fall short to implement 100% of their strategies (c) 86% of executives arrange less than one hour per month to discuss the strategy (d) 70% of organizations do not include middle management in strategy process (e) 60% of organizations do not link their strategies to its financial plan (Source: http://www.valuecreationgroup.com) A good Balanced Scorecard can be the single and the best management tool in an organization which provides all the above facets of strategic management of an organization. The Balanced Scorecard is a rating system which deals with all levels of management as well as provides a vivid image of organizational goals, objectives, process, and its outcomes. In Balanced Scorecards, generally corporate management elaborates 03 categories i.e. the Mission, Vision and Strategy of an organization. Further 03 viewpoints are used to discuss and evaluate these 03 categories through Ownership, Stakeholders, and Employees. But despite of all its benefits, the Balanced Scorecard is just a recommendation. In fact, it encourages the executives to change the categories and viewpoints to compose the Balanced Scorecard, a suitable demonstration of their organizations. Like any other management tool, the Balanced Scorecard will be as effective as provided it is really adhered to. Since human error plays a vital role in the success or failure of any business, this can be reduced a lot by successfully implementing the appropriate Balanced Scorecard. As a whole, the progress of an organization can easily be monitored and evaluated by using Balanced Scorecard with proper leadership style and attention. A well studied Balanced Scorecard supports to: (a) Improve the alignment resulting whole staff marches to achieve a common goal through same strategy (b) Provide the information about the effects of individual job on the same strategy (c) Maintain a balance between financial and non-financial indicators as well as between long-term and short-term goals (d) Support the managers to evaluate the outcomes of their working strategy (e) Provide both the leading and lagging indicators Four Perspectives of Balanced Scorecard Since Balanced Scorecard is a strategic tool, therefore it mainly deals with 04 strategic perspectives. These four strategic perspectives along with their important generic measurements are listed below. S.No Perspective Generic Measurements 1 Financial (a) Goals: Survival, prosperity, success and growth (b) Measures: Revenue growth, cash flow, return on capital, economic value added, cost reduction, performance reliability 2 Customer (a) Goals: Customer’s satisfaction, profitability, retention, acquisition (b) Measures: Transaction cost ratios, key accounts, market share 3 Internal Business Process (a) Goals: Core Competence, business procedures, critical technologies, key skills (b) Measures: How well the company recognizes the future trends, quality, cost, and time, warranty, repair and deficiencies 4 Learning and Growth (a) Goals: Continuous improvement and development (b)Training, motivation and retention of human resource, critical information for front line employees, productivity of entrepreneurship (Kaplan & Norton, 1992) The graphic illustration appears below as Appendix-I on page 14, conveys the understanding of above detailed idea in short description. Balanced Scorecard as Strategic Management System in Organizations Prior to use the Balanced Scorecard in an organization, the first step is to assess organizational goals and vision, general business strategy, identification of business procedures, and then the measurement of organizational activities which reveal the picture of its progress toward the set objectives (Bremser & White, 2000 and Lecture, Sympuls Consulting Group). The Balanced Scorecard allows the managers to build following 04 new processes. (a) Translating the Vision It expresses the mission and vision statements along with integrated set of objectives and measures. It forces the higher authorities to develop operational measures. (b) Communicating and Linking  This process assists the managers to communicate the strategies throughout the organization. The important point is that there should be harmony between organizational and individual objectives through evaluation procedures and incentives. By using scorecard to create this harmony, managers apply three techniques (1) communicating and educating, (2) setting goals, and (3) linking rewards to performance measures. The first objective i.e. communicating and education is obtained by ensuring that whole staff is well aware of organizational strategies. Personal scorecard is a powerful tool to change the worker’s mind set to achieve set goals. It is just a simple card containing information about corporate vision, mission and measures. It helps the employees to transform set objectives into consequential tasks. Linking rewards to performance is an important tool to keep the employees motivated to achieve organizational objectives. Balanced Scorecard makes sure that standard and correct criteria are carried out to measure the performance of employees before given them incentive. (c) Business Planning The application of Balanced Scorecard integrates the budgeting processes and strategic planning of an organization. The managers set targets by picking measures to represent each of the four perspectives. Balanced Scorecard enables them to choose specific actions to achieve their targets. (d) Feedback and Learning The final process is feedback and learning by which managers keep an eye on feedback and then relate it to the organization’s strategy. The first three processes revolve around a constant objective but the scorecard becomes balanced by adding the feedback and learning process. How to Build Up a Balanced Scorecard? Balanced Scorecards provide a valuable structure to bring organizational changes by executing its organizational strategy. This can be done by connecting all facets of the organization and because of this aspect, the Balanced Scorecard so different. The process of building an effective Balanced Scorecard generally consists of seven steps over three phases. (a) The fundamental starting point behind the building of a Balanced Scorecard is to align the whole organization around a transparent and brief strategy. (b) Find out main strategic areas where the organization should focus. (c) The next step is to build a strategic network pertaining to each strategic area. This is the most difficult step because here the overall strategy is transformed into specific terms so that every person can understand. (d) At least one measurement is required for each strategic objective on each strategic framework. It gives an idea about the success or failure of achieving the strategic objectives. (e) At least one specific target must be mentioned against each measurement in the Balanced Scorecard. (f) Formal programs or projects ensure the achievements with respect to the strategy formulated in step 1. (g) After the completion of the Balanced Scorecard, it must vogue in other branches of the organization to obtain a coherent management system. This supports to the successful execution of the organizational strategy. The above mentioned estimates are for a complete management system and strategic planning which make the Balanced Scorecard sustainable by influencing the leadership, change management and communication strategy. Generally the first 03 steps take 02 to 03 months to implement.   Development of aligned corporate scorecards and support units take an additional 03 to 06 months. The implementation and maintaining of a balanced scorecard is not an easy and simple job. Professional help is required to build and execute it successfully. In current scenario, modern professional rates range from $1000 to $3000 per day. Depending upon the nature of the organization, the rate is not fixed and may change accordingly. Use of Balanced Scorecard I have divided this topic into following 02 sections. (a) Private Sector Since private sector is always keen for profit therefore financial perspective is always at the forefront in performance evaluation. In order to make it balance, it is vital to include other various factors to measure the financial value. Figure given on page 15 as Appendix-II provides a good illustration of the use of Balanced Scorecard in private sector. (b) Public Sector Normally an integrated perspective for performance measurement is considered vital in this category. Norton and Kaplan rearranged different perspectives because profit is not the driving force in public sector behavior. Financial measures are replaced by vision as the leading goal of the organization as well as with the support of 03 valuable perspectives i.e. costs, benefits, and legitimizing authorities. (i) Cost perspective deals with both financial and social costs (ii) Benefits are measured in financial terms as projects and programs (iii) Legitimizing authorities’ point of view refashions the customer perspective in a democratic environment (iv) Learning and innovation seek for consistent improvement and development in future. Figure given on page 16 as Appendix-III provides a good illustration of the use of Balanced Scorecard in public sector. Why Balanced Scorecards Do Not Work in Some Organizations? The answer of above question is not simple. Despite of containing multiple advantages, Balanced Scorecards sometimes don not meet the requirement of some organizations. In this regard, number of reasons can be discussed but I present few major reasons that are most associated with the failure of the Balanced Scorecards. (a) The actual operational activities exist at sub-process level. But in the Balanced Scorecards, high level goals reside at the high level and there is no deployment system that conveys these goals to the lower level. Ultimately a gap occurs between higher echelon and its employees to achieve the organizational objectives. (b) On the Balanced Scorecards, the non-financial variables (independent variables) are erroneously considered as the primary drivers for the approval of future stakeholders. (c) The Balanced Scorecard dopes not provide a quantitative relationship between expected financial results and the non-financial results. This is one of the reasons that it does not work in some particular organizations. (d) Sometimes metrics provided in the Balanced Scorecards are not appropriately defined. As a result, it does not come as a productive tool for the organizations. (e) One of the major shortcomings of the Balanced Scorecards is the achieving of organizational goals which are based on negotiation. Instead of negotiation, the improvement of goals must be based on the requirements of stakeholders and existing fundamental procedures. (f) The Balanced Scorecard involves too many objectives with too many performance metrics. It enables the organization to prioritize progress steps effectively. (g) Generally due to poor data on actual performance, most of the efforts are annulled invested in defining the performance measures. It does not enable the managers to monitor the actual changes from behavioral changes. (h) In the staff compensation plan, the Balanced Scorecard focuses too much on the money side and not on the organizational values and cultures. Comparison of the Balanced Scorecard to Other Management Systems (a) The Six Sigma Management Approach The Balanced Scorecard is used as a strategic management system while Six Sigma is usually defined in terms of quality improvement within the organization (Antony, 2008). Practioners use both the similar best practices of the Balanced Scorecards and the Six Sigma in design and deployment systems. Both of these management systems require the support of top-level management, efforts of a devoted team to bring cultural change, aligned strategy, implementation of improved projects, and the combination of top to bottom and bottom to top development. The practitioners of Six Sigma often implement the Balanced Scorecards to develop appropriate performance metrics. (b) The Baldrige, EFQM, and APIC The Baldrige Award, European Foundation for Quality Management (EFQM) and Army Performance Improvement Criteria (APIC) are examples of organizational management. Generally these assessment tools are applied successfully in a particular timeframe. They use a point scale to compare the real situation against a perfect score scale (generally 1000). Organizations are rewarded annually for their exceptional performance against this perfect scale. The application of the Balanced Scorecard is slightly different. It revolves around the assessment data to find out where the improvements and breakthroughs areas in performance are required so that the strategies can be re-analyzed to meet the required results. It means the Balanced Scorecard includes more than assessment, and thus is more forceful strategic management system than the Baldrige, EFQM, and APIC. Conclusion The Balanced Scorecard is a powerful tool that managers use to introduce change in their organization. But change is not always considered as a positive sign especially when it is associated with performance measures of human resource. By applying a well defined Balanced Scorecard, managers devise a concise and accurate strategy for their organizations. But on the other hand, maintaining and reviewing the Balanced Scorecard can put extra load of work on some employees. The Balanced Scorecard is a comprehensive tool that supports the top management to transform their organizational strategies into practical. Works Cited Antony, Jiju (2008). Pros and cons of Six Sigma: An Academic Perspective. Retrieved May 01, 2008. Art Schneiderman. The First Balanced Scorecard. Analog Devices: 1986-1991 Attending seminars with the Sympuls consulting group Bremser, W. G. & L. F. White. (2000). An Experiential Approach To Learning about the Balanced Scorecard. Journal of Accounting Education 18(3): 241-255. Cobbold, I. & Lawrie, G. (2002). The Development of the Balanced Scorecard as a Strategic Management Tool. Performance Measurement Association, 2002 Harvard Business Review, (Sept. 1993). Putting the Balanced Scorecard to Work Harvard Business Review, (Feb. 1992). The Balanced Scorecard - Measures that Drive Performance http://www.valuecreationgroup.com Kaplan, R.S & Norton, D.P (1996). The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Boston Appendix-I Four Perspectives of Balanced Scorecard (Source: Kaplan & Norton, 1996. The Balanced Scorecard. Harvard Business School Press: 9. Jan, Feb. 1996, p.76) Appendix-II Use of the Balanced Scorecard in Private Sector (Source: Kaplan & Norton, 1996) Appendix-III Use of the Balanced Scorecard in Public Sector (Source: Kaplan & Norton, 1996) Read More