Balanced scorecard - a tool for performance measurement

Dr Lalith Senaweera

In the early 1990s, Robert S. Kaplan and David P. Norton introduced a 'balanced scorecard' as an integrated management system for performance measurement. Since then many organisations have tested the concept and there were many success stories about the application of this concept.

One of the important things is that through the balanced scorecard system an organisation's mission and business strategy can be translated into several specific strategic objectives that could be linked and measured operationally in an integrated manner.

Unique

In other words, the balanced scorecard can be used to link short-term operational control to the long-term vision and strategy of the business.

In that way the organisation focuses on controlling and monitoring day-to-day operations by using few critical drivers which are directly related to organisational performance and the growth and profitability of the organisation.

This innovative tool is unique when compared to traditional performance measurement tools as it considers the financial indices and the non-financial ones in determining corporate performance and it is not a performance measurement tool, but also a performance management system.

Many public, private, and not-for-profit organisations have adopted the scorecard as part of their strategic management approach.

Framework

The balanced scorecard is a framework of four major categories or perspectives for strategy implementation - financial, customer, internal business and innovation and learning.

The balanced scorecard indicates that the whole organisation can view the above four perspectives and develop metrics, collect data and analyse those relative to each of these perspectives.

In other words, it is necessary to identify the measures related to performance under each of the objectives set under the relevant perspective which would help the organisation to realise the goals set under each perspective.

This approach would help the organisation to focus on the most important things to achieve its vision and satisfy customers, stakeholders and employees. For example, when one considers public sector measures such as productivity, effectiveness, efficiency, quality financial control, equity and fairness can be considered properly under different perspectives.

The details of each perspective are: The Financial Perspective covers the financial objectives, measures, targets and initiatives of an organisation and allows managers to track financial success and shareholder value, the Customer Perspective covers the customer objectives, measures, targets and initiatives such as customer satisfaction, market share and product and services, the Internal Process Perspective covers internal operational objectives, measures, targets, initiatives, goals and outlines the key processes necessary to deliver the customer objectives, the Learning and Growth Perspective covers the objectives, measures, targets and initiatives of future success of an organisation such as human capital, including skills, training, leadership, systems and information databases.

Strategy map

However, it is important to note that the four perspective model has now been linked by a Strategy Map, which is at the heart of modern balanced scorecards.

A Strategy Map places the four perspectives in relation to each other to indicate that the objectives given under each perspective support each other. In other words strategy maps, outline what an organisation wants to accomplish and how it plans to accomplish it.

In effect, Strategy Map indicates the organisation's strategy in visual form so that managers can execute their strategy. Moreover, the strategy map ensures that an organisation's objectives in each of these perspectives are consistent and internally aligned.

This cause-and-effect logic is one of the most important elements of best-practice balanced scorecards. It is worthwile to indicate that the strategy map clarifies all cause and effect relationships so that an effective strategy can be developed and then optimised over time.

Therefore, it allows organisations to create an integrated set of strategic objectives on a single page.

Approach

The following steps can be used to develop a balanced scorecard. The steps can be tailor-made to suite the organisation's vision, mission and strategies.

Step one: It is necessary to conduct a SWOT or PESTEL analysis of the organisation to determine what needs to be done to be successful in the present and expected environment as it helps to revisit the vision, mission and strategies of the organisation. This will be the starting point and it provides the framework to develop the system.

Step two: Based on the above findings like strengths, weaknesses, opportunities and threats, the organisation will determine its strategic objectives to convert weaknesses and threats to opportunities and strengths while making strategies to capitalise on the strengths and opportunities.

These strategic objectives are the main building blocks and need to be determined focusing on the four perspectives.

The objectives are initiated and categorised by perspective and connected with the cause-and-effect relationships to develop a strategy map.

Step three: Considering the above, measures need to be identified based on the strategic objectives and baseline data has to be developed and targets need to be set.

It is necessary to develop qualitative and quantitative measures to have a broader look at the organisation. It is also necessary to remember that one measure should be included for each strategic objective only if it is necessary as too many measures would lead to a problematic situation.

Step four: It is necessary to identify the relevant initiatives to ensure that targets can be met providing a path to achieve strategic objectives set under each perspective. It is also necessary to ensure ownership of each measure and initiative by assigning responsibility to the relevant personnel as 'owners'.

Step five: A corporate card will be developed and based on that card the departmental cards and individual cards should be developed linking all cards in a cascaded form so that an integrated approach can be developed. It is necessary to develop a traffic light system as part of the reporting system to get a direct idea.

Step six: Once the activities are completed, the implementation process can be launched. Accordingly, a proper feed-back can be obtained from the relevant process owners to make better decisions and proper adjustments.

An emphasis on results and the initiatives needed to be discussed at each level at defined intervals to make it more effective.

Step seven: It is necessary to look at the results and the management should take appropriate action to realign the initiatives to ensure that the organisation will always move in the right direction.

The holistic view gives an idea about the performance of the organisation. The scorecard in other words provides you with feedback on how you are doing and how well you are achieving your strategic direction.

Benefits: It helps to translate the strategy into performance measures and targets focus on the entire organisation and to determine what must be done to create a breakthrough performance, integrate all programs and processes to improve organisational effectiveness and enable employees to see what they must do well to achieve objectives.

The writer is the Director General of the Sri Lanka Standards Institution