Balanced scorecard - 4 perspectives of the Balanced Scorecard
The Balanced Scorecard concept is a management and measurement system which enables organizations to clarify their vision and strategy and translate them into action. The goal of the balanced scorecard is to tie business performance to organizational strategy by measuring results in four areas: financial performance, customer knowledge, internal business processes, and learning and growth.
History of the Balanced Scorecard
In 1992, an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review caused a lot of attention for their method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996. The financial performance of an organization is essential for its success. Even non-profit organizations must deal in a sensible way with funds they receive. However, a pure financial approach for managing organizations suffers from two drawbacks:
It is historical.
Whilst it tells us what has happened to the organization, it may not tell us what is currently happening. Nor it is a good indicator of future performance.
It is too low.
It is common for the current market value of an organization to exceed the market value of its assets. Tobin's-q measures the ratio of the value of a company's assets to its market value. The excess value is resulting from intangible assets. This kind of value is not measured by normal financial reporting.
4 perspectives of the Balanced Scorecard
The Balanced Scorecard method of Kaplan and Norton is a strategic approach, and performance management system, that enables organizations to translate a company's vision and strategy into implementation, working from 4 perspectives:
Business process perspective.
Learning and growth perspective.
The balanced scorecard forces managers to look at the business from four important perspectives. It links performance measures by requiring firms to address four basic questions:
How do customers see us? - Customer perspective
What must we excel at? - Internal perspective
Can we continue to improve and create value? - Innovation & learning perspective
How do we look to shareholders? - Financial perspective
This allows the monitoring of present performance, but the method also tries to capture information about how well the organization is positioned to perform in the future.
1. The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will make sure to provide it. In fact, there is often more than sufficient handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financial issues leads to an unbalanced situation with regard to other perspectives. There is perhaps a need to include additional financial related data, such as risk assessment and cost-benefit data, in this category.
2. The customer perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any company. These are called leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline. Even though the current financial picture may seem (still) good. In developing metrics for satisfaction, customers should be analyzed. In terms of kinds of customers, and of the kinds of processes for which we are providing a product or service to those customer groups.
3. The Business Process perspective
This perspective refers to internal business processes. Measurements based on this perspective will show the managers how well their business is running, and whether its products and services conform to customer requirements. These metrics have to be carefully designed by those that know these processes most intimately. In addition to the strategic management processes, two kinds of business processes may be identified:
Mission-oriented processes. Many unique problems are encountered in these processes.
Support processes. The support processes are more repetitive in nature, and hence easier to measure and to benchmark. Generic measurement methods can be used.
4. Learning and Growth perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge worker organization, people are the main resource. In the current climate of rapid technological, economic changes and new legislation and regulations, it is becoming necessary for knowledge workers to learn continuously. Government agencies often find themselves unable to hire new technical workers and at the same time is showing a decline in training of existing employees. Kaplan and Norton emphasize that 'learning' is something more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools such as an Intranet.
The integration of these four perspectives into a one graphical appealing picture, has made the Balanced Scorecard method very successful as a management methodology.
Benefits of usage of the Balanced Scorecard
Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard:
Focusing the whole organization on the few key things needed to create breakthrough performance.
Helps to integrate various corporate programs. Such as: quality, re-engineering, and customer service initiatives.
Breaking down strategic measures towards lower levels, so that unit managers, operators, and employees can see what's required at their level to achieve excellent overall performance.
Objectives, Measures, Targets, and Initiatives
For each perspective of the Balanced Scorecard four things are monitored (scored):
Objectives: major objectives to be achieved, for example, profitable growth.
Measures: the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin.
Targets: the specific target values for the measures, for example, 7% annual decline in manufacturing disruptions.
Initiatives: projects or programs to be initiated in order to meet the objective.
These can be organized for each perspective in a table as shown below.
HR and the Balanced Scorecard
One effective approach to the measurement (if the strategic performance of organisations, including their Industrial Relations (IR) departments, is the balanced scorecard. The balanced scorecard is a framework organizations use to report on a diverse set of performance measures. Organizations that use a balanced scorecard recognize that focusing strictly on financial measures can limit their view. The balanced scorecard balances financial and nonfinancial measures so that managers focus on long-term drivers of performance and organizational sustainability. As shown in Figure. the balanced scorecard measures performance in four areas:
Financial measures: Traditional financial measures such as profit and loss, operating margins, utilization of capital, return on investment, and return on assets are needed to ensure that the organization manages its bottom line effectively.
Internal business processes: Product and service quality, efficiency and productivity, conformance with standards, and cycle times can be measured to ensure that the operation turns smoothly and efficiently.
Customer relations: Customer satisfaction, loyally, and retention are important to ensure that the organization is meeting customer expectations and can depend on repeat business from its customers.
Learning and growth activities: Employee training and development, mentoring programs, succession planning, and knowledge creation and sharing provide the necessary talent and human capital pool to ensure the future of the organization.
Organizational results in each of these areas determine it the organization is progressing toward its strategic objectives. For example, some firms have noticed that when survey results show a decline in employee satisfaction, several months later there is a decline in customer loyalty and repeat customer sales. Or expenditures in employee leadership development training can be linked to lower employee turnover and reduced time to hire managers from outside the organization.
More than 60% of organizations claim to use a balanced scorecard approach. Firms as diverse as Blue Cross. Verizon, and the Mayo Clinic have used this approach to align performance measures with their organizational strategy. Using the balanced scorecard requires spending considerable rime and effort to identify the appropriate HR measures in each of the four areas and how they tie to strategic organizational success. The balanced scorecard should align with company goals and focus on results. To be effective, the HR scorecard should address three elements—accountability, validity, and actionable results. However, regardless of the time and effort spent trying to develop and use objective measures in the balanced scorecard, subjectivity in what is selected and how the measures are interpreted can still occur.