- Jul 7, 2008
The Balanced Scorecard
Beginning with the simple measurements of profit, growth, or customer satisfaction, to a series of financial measurements, there has been a perceived continual need for more nonfinancial measurements. The need for measurements is growing due to the increased expectation of more process knowledge coupled with the lack of information about the process. Both for-profit and not-for-profit organizations use a variety of scorecards. Whenever an activity is performed, interest in measurement begins with a need to know the "goodness" of the activity's outcome. Measurements are taken related to the activity's consistency and the "goodness" of inputs to the activity. A challenge with the outcome-related measurements, however, is the lack of information due to the nature of the measurements and their application.
Financial measurements are easier to assess than the output measurements because of commonality across processes and industries. The Balanced Scorecard was introduced by Robert Kaplan and Ken Norton in the early 1990s as a framework for diversifying measurements beyond financial measurements. Since its inception, many companies have implemented or attempted to implement the Balanced Scorecard; however, its impact is not known yet. The Balanced Scorecard consists of four perspectives: Customers, Financial Operations, Internal Operations, and Learning and Growth. After reviewing its performance in the field, the following observations are apparent:
- The Balanced Scorecard was designed as a Strategic Management System and thus geared toward the organization's executives instead of toward operations. As a strategic management system, it does incorporate various aspects of the organization; however, it is not useful at the operations level.
- Employees at the operations level cannot relate to the Balanced Scorecard, thus causing a gap in communication between executives and employees.
- The Balanced Scorecard does not relate to the organization's structures; thus, it appears to be an imposed set of measurements. No actual business is organized as four perspectives with clear responsibility for each perspective. Therefore, successful implementation of the Balanced Scorecard appears to be questionable in the absence of clearly identified responsibilities.
- The Balanced Scorecard does not provide guidance for implementation at the process level. Although it can identify measures at the process output level, it does not clearly help in identifying relevant measurements at the process level, where all the opportunities in performance improvement reside.
- The Balanced Scorecard does not address the intangibles of an organization and thus remains incomplete. It does not address the issues of leadership, employee innovation, and improvement.
In several conferences we have asked the audience to raise their hands about using the Balanced Scorecard. Invariably, everyone raised their hand to demonstrate their use of the Balanced Scorecard. When we asked them how good they felt about the Balanced Scorecard's impact on their company's bottom line, no hand went up. In other instances when one of us asked about implementation of the Balanced Scorecard, we rarely saw any hand go up. Instead we got responses like, "It has been implemented in our Finance department," or "It is for our management." Such responses simply show that people are calling their measurements "the Balanced Scorecard" without using it as intended, implying that the Balanced Scorecard has been unable to address real business needs.
During the past 10 to 15 years, the business model has significantly changed. Factors such as globalization, increased competition, arrival of the Internet, outsourcing, and strength of Asian economies have all disrupted the current business model. In addition, the Balanced Scorecard has not changed its methodology since its inception. Although continual change is now fundamental to a business, the Balanced Scorecard has maintained its status quo. The measures of business performance within the Balanced Scorecard must change to represent the present reality.
Because the Balanced Scorecard, consisting of the four perspectives of Customers, Internal Operations, Financial Operations, and Learning and Growth, is the known measurement system to date, its variations have been implemented in several industries, such as human resources, healthcare, municipalities, and information technology. The conceptual breakthrough highlighted in the Balanced Scorecard led to diverse measurements. For example, when implemented at Halifax Regional Municipality in 2004, the Balanced Scorecard was diversified based on the priorities of the municipality's business strategies. Challenges faced in diversifying the scorecard included too many priorities, conflicting demands, and operational versus strategic emphases.