Evaluating The BSC As A Performance Management Tool

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Abstract

In ever changing business lAndscape, the businesses face the intensified competition and experience the emergence of more knowledgeable and demanding customers in a free market era. Therefore measuring organizational performance solely on the basis of financial indicators will only reflect the past performance but will provide very little insight into long term sustainability and hence considered to be inadequate and misleading. Balanced Scorecard (BSC) introduced by Kaplan and Nortan tried to blend other aspects in addition to the so called financial indicators. Accordingly, the BSC in addition to financial perspective introduced key performance indicators around three dimensions namely customer, internal business processes and learning & growth. However, despite its well rounded and innovative design and wide adoption in organizations the full potential of it is yet to be achieved mainly due to evolvement of dimensions in today's context beyond the four perspectives in its design and also due to poor implementation. Therefore BSC should continually be refined taking into consideration the key success factors which affects organizational performance while strengthening the implementation.

INTRODUCTION TO BALANCED SCORECARD (BSC)

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Traditionally the financial indicators such as net profit, Return on Investments (RoI), Earnings Per Share (EPS), Price Earning (P/E) ratio and etc., as an unwritten rule, were considered as the cornerstone on which the performance or the health of organizations was measured which in turn formed the basis on which the performance of members at all levels of the organizations was measured. However, with the intensified competition and emergence of more knowledgeable and demanding customers in a free market era the business landscape underwent a paradigm shift. Therefore measuring organizational performance and in turn the performance of employees solely on the basis of financial measures which effectively represent the lagging indicators of past performance and having a little predictive value was considered as inappropriate. In the sense the past results will not assure the future performance, rather the long term sustainability of any organization depends upon various other factors such as core competencies of people coupled with job satisfaction and citizenship, strength of customer relationship, learning and innovation, internal business processes, technology, quality and etc. which in turn better place the organization to enjoy a sustainable competitive advantage.

As a result, a performance measurement system which blends all the aspects including so called financial indicators was considered as more appropriate since it would allow organizations to measure past as well as to predict how the future would look like (predictive value). In this backdrop, Robert S. Kaplan and David P. Norton in 1992 introduced the concept of "Balanced Scorecard (BSC)" with a set of measures which complements financial measures of past performance with drivers of future performance and thereby to have a holistic, integrated view of business performance. Though the name was new, the concept was an evolution of various concepts introduced under number of theories and concepts like Activity Based Management, Management By Objectives, Total Quality Management, Strategic Management, Delegation of Authority (empowerment), Decentralization of Decision-Making and etc., but what is unique about BSC is that it combined the critical essence of all these concepts and theories into an integrated measurement system of performance (Ghosh S. & Mukherjee S - 2006). BSC is a strategic management system (not merely a performance measurement system) and enables organizations to integrate their strategies/visions around specific objectives, goals and measures. Then those objectives and goals along with the designed performance measures (KPIs) are shared and communicated across the organization. Further, Targets are planned and set to align with strategic initiatives.

Accordingly the BSC in addition to Financial perspective (traditional performance measurement indicator) introduced key performance indicators around three dimensions namely customer, internal business processes and learning & growth and attempted to answer the following four key questions.

1. How do customers see us?

2. What must we excel at?

3. Can we continue to improve and create value?

4. How do we look to shareholders?

The rational put forward on these four perspectives are knowledge & skills of employees is the foundation of all innovation and improvements (Learning & Growth perspective), skilled and empowered employees will improve the ways they work (Internal Process perspective), improved work processes will lead to increased customer satisfaction (Customer perspective) and finally increased customer satisfaction will lead to better financial results (Financial perspective) (Ghosh S. & Mukherjee S.- 2006)

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Since the concept of BSC was first introduced in 1992, many organizations globally as well as locally adopted the BSC as their performance measurement tool due to its innovative approach and also due to the fact that it has "balanced" the key dimensions of performance directly linking with vision, mission and strategies. However, this does not suggest that all organizations have achieved success and design of BSC is perfect but rather BSC exhibited well rounded approach to performance management.

However, we witness that world has changed significantly since 1992 and this is not different when it comes to business landscape. Therefore it is worthwhile to critically assess whether BSC still holds the all perspectives to better measure the organizational performance and what improvements can be made to it to measure current performance as well as to strengthen its predictive value.

CRITICAL EVALUATION OF BSC AND RECOMMENDATIONS FOR IMPROVEMENT OF BSC

The understanding of BSC and its underlying philosophy has placed in a better position to critically evaluate BSC on its positive and negative aspects in the current context.

As discussed in the preceding section, the BSC made a major breakthrough in measuring performance beyond the traditional financial measures which primarily focused on shareholder value creation. Placing too much reliance on shareholders' value creation will put pressure on management to focus only on short term results at the expense of long term growth and success. Further, unlike in the past today organizations are responsible for wide array of stakeholders internally and externally including shareholders. Moreover shareholders are also demanding an insight into long term sustainability in addition to short term results. As an example in the recent past we witnessed several corporate failures such as Golden Key, Enron (USA), Sathyam Computers in India, Lehman Brothers (USA) and WorldCom (USA) and etc., due to excessive reliance on financial indicators to measure performance. If I may further elaborate the former Chairman of Sathyam Computers informed all concerned parties via his letter dated 7 January 2009 that the Company misrepresented its financials to meet the analysts' financial forecasts and targets set.

Moreover, unlike the conventional performance measurement systems, the BSC clearly communicate the factors that drive performance and then facilitate the performance measurement process on the basis of drivers indentified under each of four perspectives.

The application of BSC allows measuring performance from a four broader perspectives and aligning each measure with vision, mission and strategies. This has helped organizations to strike a balance between both short term and long term concerns, financial and non financial concerns, and internal and external concerns.

In addition to its primary role as a performance measurement tool, the BSC also has been instrumental in laying the foundation for a new strategic management system enabling organizations to introduce new governance and renew processes focusing on strategy.

BSC with clearly defined KPIs and measurement criteria under each perspective allows management to assess its strengths and weaknesses and thereby it prompts them to identify the root causes of alarming signals to arrest the situations before they get aggravated. As an example if BSC indicates that there is an issue in the customer service then the Company can address before customers shift to competitors. Also it allows responding to the challenges posed by competitive and ever changing environment as organizations are dynamic and see a much broader picture of the organization and its environment.

Further, the evaluation of business performance with BSC system help to inculcate personnel discipline and motivation as in certain instances the employees and even management do not know they are engage in and performing something inappropriate. As an example despite the improvements in revenue (financial perspective) if customers are not happy (customer perspective) then it would suggest that the organization should act on this and this also would indicate that the organization performs below its full potential due to customer issues.

Despite the positive aspects, the BSC also suffers from major weaknesses and could be discussed as below:

First BSC trying to decompose the organizational performance measurement criteria into four major perspectives but in the current context the organizational performance and long term sustainability are impacted by factors beyond what were originally introduced. These factors mainly include the Corporate Social Responsibility (CSR) and environmental concerns. The concept of Triple Bottom Line (TPL - Profit, People and Planet) has gained momentum in the recent past which described that organizational performance should be measured in terms of a) economic (traditional) b) environmental and c) social perspectives.

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The concept of CSR (social aspect) in nutshell demands all entities to be socially responsible as a good corporate citizen and should contribute towards meeting society's expectations. The environmental aspect concerns that the activities of the entity should be conducted in a way that do not harm the environment in which the entity operates. Here the emphasis is that the mere achievements of economic targets with no due care to other aspects will unlikely to assure the long term sustainability and growth. As a result the focus on environmental and CSR has been a central part of today strategic management process but yet to be an integral part of BSC. Further, adding more fuel to this is the regular companies reporting (including annual reports) contain detail sections about the contribution towards CSR and entities environment footprint.

Further, the suppliers, competitors and regulators have also not been part of BSC but it can be argued that suppliers and regulations could be part of Internal Process perspective but in today's business environment, awareness about suppliers and competitors' actions are considered to be vital for survival and hence mere inclusion within Internal Process perspective might not suffice the need. Further, the impact of regulations has been widened over the years and hence should be a key indicator to measure performance.

Another perspective is the ethical behavior and adhering to core values of the organization in achieving the objectives. In this it is important to assess how the objectives are achieved without merely looking at how much was achieved.

The above suggest that BSC should not be limited to its original perspectives which would have been sufficient and appropriate given the environment prevailed at the time of its introduction but rather it should be a dynamic process whereby parameters are continually refined (not static but dynamic) to meet the needs of the ever changing environment and to better place organizations to achieve their strategies. However, adding more perspectives will result in BSC become more complex and will lead to more measures being included resulting in issues at implementation.

Another observation is that the perspectives in BSC may not be equally applicable and hence may not share equal weights or prominence for all organizations and even all divisions within an entity. The BSC should be driven by overall business strategies and hence companies may be bias towards the dimensions in BSC that closely relate their strategic intent. As an example the relative importance of perspectives for an investment company and manufacturing set up will be different. Further, a division like Research & Development will have very little financial emphasis other than managing within allocated budget limits in contract the Finance & Treasury Division.

All the above suggest that the BSC should be broadened to include new dimensions but this exercise should to be done with a careful thought process otherwise BSC would be "bias" rather than "balanced" and eventually become more complex. My recommendation to effectively handle this need is to make increased specialization and thereby to have industry specific BSC formats and assign weights to different measures (both financial and non-financial) on the basis of their importance to the industry sector is concerned. The assigning equal weights to all perspectives are not practical and appropriate. Further, the organizations who have adopted BSC have been assigning weights in order of importance. Moreover, with all these contentions the automation of balanced score card should not be overlooked and for it to act as a continuous monitoring tool and provide feedback, the organizations should always try to automate the BSC.

Another point I have noticed is inclusion of large number of financial and non financial measures within BSC making it very complex to monitor and give feedback regularly resulting in the organizations are finding it difficult to get the full benefits. Therefore it is recommended that only key measures are considered which ensure smooth implementation. The automation suggested above would help in addressing this concern.

Apart from improvement points discussed above the following recommendations could also be used to make the implementation of BSC successful (Zairi M.& Jarrar Y - 2010):

An organization-wide adoption of BSC, i.e. covering all key organizational functions;

Use BSC to provide objective data for business decisions;

Ensure commitment, to and buy-in for, the BSC at all organizational levels, particularly at the top;

More emphasis on training;

Align the reward and recognition system directly with BSC; and

Facilitate implementation by breaking down organizational barriers which hampers its successful implementation.

CONCLUSION

Despite superior design and comprehensiveness focusing on wide array of perspectives which have a direct bearing on current and future performance of organizations, the BSC is yet to achieve its full potential due to issues related to its design and poor implementation. However, BSC still prevails as an influential and widely used and recognized framework for measurement of performance. The most appropriate way to go forward, to sustain BSC popularity and to get the best results, is to continually refine the BSC on the basis of critical success factors influencing organizational performance. It is challenging to translate the BSC with ever changing business needs but the future of BSC depends upon how it changes itself to fit in the current formula.

Further, the introduction of specialized BSC formats based on the different sectors could also be useful to have a proper mix of performance measures under each perspective in order of importance. Last but not least the automation of BSC would help to overcome most of the issues associated with implementation.

REFERENCES AND BIBILIOGRAPHY

Armstrong, M. (2008), Performance Management: Key strategies and practical guidelines, (3rd ed.) India: Kogan Page

Ghosh S. & Mukherjee S. Article on Measurement Of Corporate Performance Through Balanced Scorecard: An Overview in the Vidyasagar University Journal of Commerce Vol. 11, March 2006

http://histrategy.blogspot.com/2011/02/balanced-scorecard-tool-in-strategy.html retrieved on 04 May 2011

Letter issued by Ramalinga R. B. (Former Chairman of Sathyam Computers Services Limited) on 7 January 2009

http://www.ecbpm.com/files/Performance%20Management/Best%20Practice%20for%20Implementing%20the%20Balanced%20Scorecard.pdf retrieved on 13 May 2011 - Research Paper: RP-ECBPM/0027 by Zairi M.& Jarrar Y. on Best Practices for Implementing the Balanced Scorecard (2010)