What exactly is a balance scorecard? According to Dylan Miyake, a balance scorecard can be thought of as a strategic chart of accounts for a company. He also adds that a balance scorecard captures both the financial and non-financial elements of a business's strategy and its discusses the cause and effects of the relationships that drive business results. A balance scorecard is a combination of quantitative and qualitative measures; it acknowledges the expectations of the different stakeholders of a business and relates an assessment of performance to choice of strategy. ( Gerry Johnson, kevan Scholes, Richard Whittington)
Paul R. Niven states that a Balance Scorecard is a mechanism that is used to track a business's achievements, it allows you to measure and capture the right amount of skills, processes and customer requirements are needed to lead your company to a desired financial future, Carter McNamara says that a Balance Scorecard is a performance management approach that focuses on the overall performance indicators which includes customers perspectives, internal-business processes, learning and growth and financial, to monitor progress towards a business strategy goals.
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On the other hand Cuck Hannabarger, Charls Hanabarger, Rick Buchman, Fedrick Buchman and peter Economy states that a Balance Scorecard is a management system that allows your organisation to set, track and achieve its key business strategies and objectives. They say that once the company has developed the business strategies they must deploy and track the strategies through four legs of the Balance Scorecard. These four legs are made up of distinctive business perspectives namely, the customer's legs, financial legs, the internal business process leg and the knowledge, education and growth leg.
1. Why do you think organisations often find the Balanced Scorecard difficult to implement in practice:
Like any measurement tool to measure a business's performance you are likely to come across some difficulties while trying to implement it in practise. Balance Scorecards have some difficulties while implemented in practice therefore by looking at variety of points we can come up with the conclusion of why it's difficult. Once they have been viewed the difficulties will then be discussed in detail.
According to Balance Scorecard Institution they have listed seven difficulties that you might come across while using the technique namely:
Difficulties of maintain the momentum and is time consuming
It Might be difficult to measure what is important and matters
Not using a well defined discipline framework that helps to build the system
Mistaking the Scorecard system as a short term project
Some difficulties to involve cross sections of the organisation
The difficulties of changes for a desired behaviour
Difficulty of not having a clear strategy
According to Stephen Smith, Senior Vice President and Managing Executive, Rummler-Brache Group she states that there isn't really anything wrong with the concept of a balance scorecard but the main problem is that it doesn't provide a practical guidance for deployment. Stephan lists of difficulties are similar to those of the balance scorecard institution but she adds five more to the list of the difficulties which are:
Poorly defined metrics
Lack of efficient data collection and reporting
Lack of formal review structure
No process improvement methodology
And that it's too internally focused.
On the other hand according to Mike Hammer and Dr Robert W Davies, They agree with the above mentioned difficulties but add three more difficulties not yet mentioned:
The fact that sometimes different stakeholder are nor involved in the process
Lack of understanding of the behaviour that measures will stimulate
Not having total support
In all we have got 15 different difficulties people have come across while implementing a balance scorecard in practise. Therefore by looking at these points closely we will understand why. The first point made was that the balance scorecard is time consuming and that it's difficult to maintain momentum, this is because the balance scorecard is not a quick fix measurement and some people mistake it to be just that. Balance Scorecard involves a lot of thought and a lot of consideration in order for it to be usefull.
The implementation phase does take time and time is money therefore making it costly as well therefore it is also difficult to maintain momentum as some people might lose the energy in the implantation phase. It can also be very time consuming to implement if your
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organisation is large due to the fact that it would require also of top level support and commitment in order for the system to be put in place.
The second point made was that it is difficult to identify the problem areas that matter the most. If you measure the financial department due to the fact that sales are decreasing for example you need to ensure that you look at your customers as well and identify if they are satisfied still with the actual products and services because they are the ones at the end of the day that make you business successful or not. It must be clear when using a Balance Scorecard you must evaluate the four legs mentioned, if not then one is overlooking certain parts of the business that matters. Thirdly if an organisation does not communicate and define the disciple framework it cannot guide the employees on what exactly they must do. If everyone was working towards a different goal or strategy the system will not work, therefore it's vital everyone knows how to behave and do their work accordingly.
With the fourth point a lot of people use the scorecard for short term purpose and that is why it is difficult to implement as there is not enough time to cover all the aspects that need to be covered. Balanced Scorecards take time to implement and is there to help predict future problems so it would not be wise to use it only for short term purposes as the result will not be as accurate. The fifth point was that some find it difficult to involve cross sections in an organisation this eventually will lead to some people not knowing what to do and this can cause the program or strategy to fail which results in low performances. The whole idea of the balanced scorecard is to alert the managers of areas within their organisation that are not performing as expected, therefore if you do not involve all sections you might miss out on important results.
The second last point made by the Balanced Scorecard Institution is that you might find difficulties of changes for a desired behaviour, this difficulty can slow down processes within an organisation as some people will resist to changes. It is vital to make necessary changes to increase the level of performances so you could offer certain benefits to the employees to motivate them on why the change will benefit them. Lastly the reason why some might find it difficult to implement the balanced scorecard in practices is because they don't have a clear strategy. Failing to define and communicate a clear strategy will lead to an ambiguous and confused scorecard. Therefore an ill-defined strategy results your organisation lacking consistency across areas and functions.
The eighth point was made by Stephen Smith was that the Balanced Scorecard itself is poorly defined. Metrics need to clear and relevant according to your strategy. They should be explained with visuals to help it be easily understood. Information for the balanced scorecard needs to be collected frequently in order t make the right decisions and then it should be defined in such a way that the measurements made are consistent and applied across the whole firm. Therefore it is vital that the metrics is not poorly defined as it can result in people avoiding accountability for bad results. The ninth point was lacking efficient data; this can result in making it difficult to implement the scorecard in practice as some companies view the scorecard as time and energy consuming. Therefore it is vital not to waste the time and look for information that you that will help prioritize key performance indicators in order to invest in information that is most relevant.
The tenth point lacking formal review structure, if your company is affected by daily changes it is vital that the metrics are also reviewed daily because if not problems will arise. Meetings should be held in order to clearly define the roles of each an employee and expectations of them these expectations should be agreed upon. The reviews of the metrics should ideally be cross functional, including peer groups who have a shared responsibility for process results. If there is no formal review structure it might be difficult to implement behaviour change that might help the success of you metrics program.
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The eleventh point basically indicates that the balanced scorecard system relies on effective and efficient methods to be implemented once problems have been identified. The problem of not having improvement methods in place makes it difficult to identify if the balance scorecard was implemented correctly. The last point identified by Stephen is that companies tend to concentrate mostly on the internal factors while putting it into practice. The goal of the balanced scorecard is to achieve balance of the enterprise markets, shareholders, competitors, employees and stakeholders. Therefore if you too focused on one section you are missing out on the possible threats and opportunities within the external environment.
The last three difficulties will be discussed by Mike Hammer and Dr Robert W Davies. The thirteenth point is by not including all you different stakeholders in the process might lead to unhappiness. It is vital to let your stakeholders know how your company is performing and if you don't they will consider selling their shares as they might not want to be kept in the dark. This can affect the business and the quality of how the balance scorecard is done because the stakeholders that are not included or involved in the process might slow the performance measures down as they will want to know why some areas are performing bad, by letting them see how the process is done and involving them you will be saving time.
The second last point made was that if you have employees that lack an understanding of the actual measures and the behaviour required then they could cause problems with the actual implementations of the balance scorecard as they might don't behaviour in the manner that is expected in order to stimulate accurate measurements. The last point made was not actually having total support on using the balances scorecard to measure performances; this could be another reason why it's difficult to implement it in practice as if some people had to disagree with using the balance score card it causes a holt in the process and therefore it will not be accurate as in the time of discussing the disagreement changes would have already occurred.
Therefore with all the above discussed difficulties it is vital that your balanced scorecard system is produced by you company in order to help managers make the right decisions and provide the necessary feedback to the necessary people. The feedback should include both information about the internal business processes and the external outcomes in order to help improve the performances and results. These difficulties on the other hand can be improved if one is prepared and knows exactly what to do.
2. What arguments would you use to persuade an organisation to adopt the Balanced Scorecard approach?
Balanced Scorecards are seen as a strategic performance management tool and this can help identify, control and monitor any problems that arise within the organisation therefore I would say that it would be wise for an organisation to adopt the Balance Scorecard and the reasons been will be discussed below due to researching different views of advantages from three different authors.
According to Sandra McCarthy and Alan Chapman they state that a balanced scorecard can help your organisation result in six ways:
Motivate and educate employees
Monitors your organisation progress
Enhances your business information system
It creates greater customer satisfaction
Increases financial usage
Builds on other management ideas
According to Beverley Dianne Calhoun she has added four other points on why the use of a balanced scorecard can help your organisation:
Views the actual performances of the organisation
Performances are viewed and managed in an ongoing manner
Enhances career development programs
Improves productivity and innovation
Uses Holistic approach
Lastly according to Paul R Niven he adds to say that by using the Balanced Scorecard it will help your organisation to:
It looks at the financial and non-financial factors of your business
It provides detail on the business performances beyond that obtained from the market measures
It supports strategic planning and management
In all there are 15 reasons on why a business should adopt the balanced scorecard. Therefore by looking at why the balance scorecard would advantage the company we can determine if it is worthwhile for the company. When looking at the first reason of the scorecard improving processes this is because the scorecard allows measurements of a company's performances for the present and future, by measuring the rate of progress in the activities according to the traditional financial measures, performance measures relating to customer services and effectiveness of product development. (Robert S. Kaplan, David P.
Norton)This allows the company to view how the company is doing and if it is not up to standard that they can sort it out before any major problems occur.
The second point made is that a balanced scorecard can help motivate and educate your employees in the sense of having your corporate values play a key part in creating a culture where the employees will be motivated toward achieving business performances. By setting and meeting individual goals of balanced scorecard with the business goals can help ensure employees know what they are doing. The basic idea behind the balance scorecard is to show interest in the employees and how they are performing. Even though there are no incentives tied to achieving a particular goal, the simple fact of measuring their performance shows interest in the people and that the company is paying attention to them, and at the same time the employees are learning how to better their performances with the feedback they get.
The third point is that by using the balance scorecard you are able to monitor business process. This indeed is an advantage of the measurement tool as you are able to identify where the problem areas are and try put plans in place to correct it before it becomes an issue. The balanced scorecard will allow you to also monitor whether or not the objectives have been set and which planned actions are working. Management teams primarily use the scorecard to help support their decision making about their interventions needed.
The fourth point is that it enhances the business information system. The balanced scorecard basically is a map that translates complex business information into something that everyone can understand. The balanced scorecard has set methods starting with defining the targets of an organisation and then that is followed by the scorecard measures. The Balanced scorecard gives organisation structure around the way the organisation can measure how well they are functioning and how they can predict future performances.
The fifth point was that by using a balanced scorecard you can improve customer satisfaction because of the fact that with the scorecard it looks at four perspectives mentioned earlier such as the customer, financial, the internal business process and the knowledge, education and growth perspectives. With each of these perspectives in place they each have their own defined objectives that help employee's concentrate on what part is important. The sixth point is that with the balanced scorecard it can help your organisation increase its financial usage due to the fact that if the results of the balanced scorecard shows that you have reached your intended goals it shows your investors you are in a good capital position which can help when you need to borrow money or need certain loans.
The seventh point is that the balanced scorecard builds on other management ideas such as total quality management process. The key difference between the balanced scorecard and Total Quality Management is that with the balanced scorecard you get extensive feedback from your internal business process outputs to your outcomes. With it building on other management ideas you getting the most out of one tool and this ensures that you get the quality from the use of the scorecard.
The eighth point made by Beverly is that with the balanced scorecard it views an organisations actual performance; this is an advantage as you are able to look at those four areas of your business. The fact that the measurements of the scorecard have a set
structure that will help ensure that the actual performances are viewed, the first step is assessing a company's organisational structure, then identifying strategic themes, then defining strategies and perspectives, to developing a strategy map, then deriving performance metrics, then crafting and prioritising strategic initiatives, then to automate and communicate, then cascade the balanced scorecard throughout the organisation, and lastly to collect date, evaluate and revise it. With these steps in place an organisation will be able to identify the true results of their performances.
The ninth point is that the performances are viewed and managed in an ongoing manner meaning no matter what the performance results are the balance scorecard ensures that there is structure within the organisation and that the issues are communicated and dealt with, as seen in the stages of the balance scorecard. The tenth point made is that the balance scorecard can help enhance the career development programs due to one of the perspective the balanced scorecard looks at the growth, knowledge and learning gained and due to the employees been exposed to learn and gain knowledge helps them to do better in their jobs and to perform well and achieve their goals.
The eleventh point is that by using a balance scorecard you increase productivity and innovation, this is because the balance scorecard acknowledges the actual importance of the inputs from the customers, staff and suppliers. The balanced scorecard also acknowledges the data that is concerned with processes, technology and innovation which therefore helps the organisation create a desired future. The twelfth point is that the balance scorecard uses a more holistic approach meaning that it allows analysing of information according to how it was gathered and it was used to deal with investment decisions and other issues.
The thirteenth point was made by Paul R Niven and he states that the balanced scorecard looks at both the financial and non financial factors of your business and this is an advantage due to the fact that the both these factors are been examined and measure. The balanced scorecard allows action to be put in place to correct bad performances and by looking at the non financial aspect it helps create future customer value and in turn that affects profits. The fourteenth point is that it provides detail on the business performances beyond that obtained from the market measure and with a well managed balance scorecard it can identify and measure the key actions that will be needed in order to deliver a planned performance. With a well designed strategy map it can also help fill the gap of employees that do not understand what has to be done to reach the goals.
Lastly the balanced scorecard helps support strategic planning and management in the sense that they are both used to align the business activities in order to have a clear vision statement for the organisation. The Balanced Scorecard basically attempts to translate the hopes of the company's vision/mission statement into a more understandable ways and into practicalities of managing the business better at every level.
The Balanced Scorecard does look at four perspectives and each perspective has their own visions, and quantitative measures and goals. With all the discussions about how the balanced scorecard can either be an advantage to your company or it can be a disadvantage but overall the Balanced Scorecard is a tool just to help manage your company's performances and even though it might take time, effort and money it can only be worth the while.
The Balanced Scorecard at the end of the day can help your company in so many ways as it aligns your short and long term goals with each other and ensures that they are clearly communicated to your employees. It also helps Managers to make their decisions as they will be guided with the results of the performances of the company. The whole idea of the Balanced Scorecard is basically intended for planning and managing a company's portfolio. It helps you to be aware of your performances in terms of what your desired outcomes are for the organisation. The Balanced Scorecard also is used as a strategic map that guides the direction of your program in order to maximise the outcome.
The Balanced Scorecard is a great tool but in order for it to be successful a company needs to have a clear strategy and feedback is also essential and should be an ongoing contribution by everyone in the organisation. Kaplan and Norton referred to the fact that in their experience of the balanced scorecard it does not consist of many ratios but rather includes a lot of information about the company and their successes. The more a Balanced Scorecard is integrated in an organisation the more practical the implementation becomes as it is integrated into the overall management and reporting system and is therefore implemented in the companies objectives for the customers, employees and the partners of the company.
The important aspect is not wait for ideal situation to use the scorecard otherwise you might never end up using it, put the balanced scorecard to use as soon as possible in order to help the operations of your company and build on competitive advantages to be better than your competitors. The balance scorecard does not guarantee success but you do develop capabilities for your company which can help with future risks you might face and helps with identifying opportunities.
Gerry Johnson, Kevan Scholes, Richard Whittington, (1998): Exploring Corporate Strategy Text and Cases, 6th edition, FT Prentice Hall pg 450. http://www.123helpme.com/view.asp?id=149201
Chuck Hannabarger, Charles Hannabarger, Rick Buchman, Fredrick Buchman and peter Economy, Balanced Scorecard for Dummies, Retreived 4th April 2010, http://books.google.co.za/books?id=M001IPhuMbQC&pg=PA10&dq=what+is+balanced+score+card&hl=en&ei=JZS4S735FJPWNaakneIL&sa=X&oi=book_result&ct=result&resnum=4&ved=0CFAQ6AEwAw#v=onepage&q=what%20is%20balanced%20score%20card&f=false
Stephen Smith, Senior Vice President and Managing Executive, Rummler-Brache Group Tuesday April 11, 2006 (5)
Mike Hammer and Dr Robert W Davies, Imhotep Consultancy Limited Registered in England, retrieved 4th April 2010, http://www.drrobertdavies.com/balancedscorecardsuccess.php
Sandra McCarthy and Alan Chapman, retrieved 4th April 2010 http://www.businessballs.com/balanced_scorecard.htm
Beverley Dianne Calhoun, Using the Balanced Scorecard to determine Corporate information and needs, Octorber 19th 2004, page 7-9