Balanced Scorecard

[Rupinder N 31]

Q. 181  Kaplan and Norton identified that businesses largely rely on financial metrics which does not give enough indication of  where the business is headed. To overcome this limitation, they came up with Balanced Scorecard. When does using a Balanced Scorecard become ineffective? In other words, what are the caution points while setting up the Balanced Scorecard for an organisation?

 

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

• All questions so far can be seen here - https://www.benchmarksixsigma.com/forum/lean-six-sigma-business-excellence-questions/
• Please visit the forum home page at https://www.benchmarksixsigma.com/forum/ to respond to the latest question open till the next Tuesday/ Friday evening as per Indian Standard Time.  
• The best answer is always shown at the top among responses and the author finds honorable mention in our Business Excellence dictionary at https://www.benchmarksixsigma.com/forum/business-excellence-dictionary-glossary/ along with the related term.

 

[Mohamed Asif 23]

Kaplan and Norton’s Balanced Scorecard helped in measuring the performance of the business in terms of both Financial and Non-Financial metrics.

It was developed based on four perspectives viz. Financial, Customer, Internal Process and Learning and growth perspective.

It is a powerful tool and the Objective of Balanced Scorecard is to create Cause and Effect logic for Organizations strategy goal.

 

Quote

 “The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success” – Robert S. Kaplan  

Below is the representation of the Balanced Scorecard framework:

 

 

Each perspective would have objective, measure, target and initiatives for goal conversion.
For instance,
Objective: “Cut Rework cost”
Metric: “Annual Savings”, “Cost of Poor Quality”
Target: By 80%
Initiatives: Replacing manual inspection with Automation; Implementing Mistake proofing in Operations

 

Principles to remember when mapping goals into perspectives
• Follow Cause and Effect Logic Between perspectives
• Mapping business goals
• Align KPI’s with Goals

 

Balanced Scorecard is mostly compared with the Performance Pyramid model as both are methods of strategically driven performance management systems.

 

Some of the Advantages of Balanced Scorecard includes:
• This tool helps organization to create breakthrough performance
• It helps in making strategy operational
• It acts as a vital component in device integration
• It drills down organization level measures to functional measures

 

Balanced Scorecard becomes ineffective under below scenario’s
• When there are too many performance Indicators

• When everyone in the organization is not involved
• When the metrics are poorly defined

Quote

"What you measure is what you get" - Kaplan & Norton

• When KPI’s are insufficient
• Lack of Planning
• Lack of Communication
• When there is no balance between the four perspectives
• When Leadership is just focusing on Financial metrics / Performance
• It does not have Infinite Shelf life  When Balanced scorecard is not updated in regular frequency (Sustainability would be an issue)
• When using the tool for Strategy Formulation (It is a tool for strategy implementation)
• Not capturing voice from external stakeholders apart from customers such as from Suppliers and public authorities
• It doesn’t include environmental factors and metrics that can influence overall performance of the organization

• When it takes time for Implementation/deployment, this is mainly because of the below reasons

• No proper understanding of Balanced Scorecard
• Lack of Management Support for implementation
• No proper training
• Inadequate Information Technology support

Other cautious elements/disadvantages of Balanced Scorecard would include
• High implementation cost for deploying balanced scorecard (number of employees trained * training hours * Cost per hour for FTE)
• Objectives to be defined clearly (SMART)
• Four perspectives do not provide holistic end to end picture
• It doesn’t provide recommendations as output
• It takes time to measure the output and its time-consuming process
• Translation strategy into objectives needs to be accurate
• When Cause and Effect relationship is inaccurate it can lead to inappropriate performance indicators
• Lack of validation: It doesn’t provide mechanism for maintaining the relevance of the defined measures.
• When there is lack of integration between strategy level and operation level metrics (It is not bi-way process)
• Competitor analysis is not a part of the framework

 

To overcome these limitations, companies should focus on the below parameters,
Emphasis: Instead of considering all the available metrics and taking it to balanced score card, take only the metrics which matters, “Vital Few” and focusing on the metrics would give tremendous results

 

Validation: Validate metrics, KPIs, objectives, strategy link. Ensure cause and effect logic is validated

 

Clarity: Organization should have clear communication plan to clarity its strategy @ all levels – factory, mid management, senior management. Strategy should flow from top management and cascading goals should be done with utmost attention

 

Integration: it is significant and essential for an organization to ensure balanced scorecard is successful. Integrating performance measure with the development practices would ensure the initiative is effective.  

 

When setting up Balanced Scorecard, we will have to focus on below points:

Define / Evaluate: Vision & Mission, values, communication and change management plan
Set Strategy: Aligning Organizations strategy with themes, results and perspectives
Set Objective: Strategic objective categorized and drilled by perspectives and aligning cause and effect linkages
Strategy Map: Extend the map organization wide, thus creating Enterprise wide Strategy Map
Performance measures: Objectives, measures, target and initiatives are set and measured
Accountability: Involving everyone in organization and assigning responsibility and ownership of the performance measures
Assessment: Assessing the performance and monitoring the progress to ensure strategic objectives are aligned
Alignments: Alignment / Realignment is done carefully for successful deployment
Evaluation: Evaluate result for sustenance

[Venugopal R 67]

Benchmark Six Sigma Expert View by Venugopal R

 

If we look at various Business Excellence models that emerged from different parts of the world, we will be able to see that all these models have modules addressing Financial, Customer, Operational and very importantly ‘Employee Engagement’ requirements. For instance, the Malcolm Baldrige Excellence systems address ‘Leadership System’ that includes Organizational performance. It has customer management system, Operations focus system and Workforce Engagement and Knowledge Management Systems. Of course, there are other modules as well, however, I am picking these topics in relevance to those addressed as part of the ‘Balanced Scorecard System’

Organizations that practice Six Sigma as an enterprise program, will have to address the Strategic, Tactical and Cultural elements. In the strategic element, the key focal areas are consented, which would certainly include the goals with respect to Financials and Customer focus. These goals are further deployed into Operational goals and converted as projects. While undertaking these projects, the requirements relating to knowledge and organisational capabilities get surfaced and addressed. The cultural element focuses on various human aspects relating to Change Management, motivation and inspiring innovations.

The balance scorecard framework which covers Financial, Customer, Internal business processes and Organizational capacity is a very useful methodology that integrates into any such excellence programs.

Just like any other Companywide program, the Balance Scorecard must be viewed not just a scorecard, but a program that integrates and involves the entire organization to get oriented towards the overall vision and mission. Ultimately, the financial goals matter most; however the focus needs to be on understanding the enablers to achieve it. Even during Balance Scorecard implementation, we do come across undue focus being given on Financial objectives, which is against the very intent of the Balance Score Card System (BSCS).

Incidentally, one of the challenges that I had faced while driving six sigma programs is that many project charters were turned down because the projected benefits could not be expressed monetarily. Then a scheme was introduced that will permit such projects as ‘Yellow Belt’ projects with intangible benefits, and if in due course, the team is able to figure out the financials, the project would be considered for being upgraded as 'Green Belt'. This not only encouraged to initiate more projects, but it was also seen that for many such projects, the teams were able to express the benefits tangibly by the time they reached the Improve phase! Thus one has to find ways of integrating 'non-monitory' objectives that deserve attention.

Not preparing a BSCS mapping is another pitfall. The mapping is a good representation of how the broad initiatives under each element of BSCS relate and link up to the overall business goals.

Choice of KPIs is an important area – we should not over do the KPIs at the same time not miss out the key ones. There are bound to be numerous metrics, that could relate to certain key performance indicators. Adequate ground work, deliberation and cross functional consensus are required to decide the most important and workable ones.

All KPIs need to worded, defined and quantified in such a way that they focus on the outcome and not on the initiative. For example, ‘Setting up a Service Incidence redressal system’ is a good initiative but an example of a good KPI would be to “Reduce the cycle time for closure of Service Incidences from current 72 hours to 24 hours”.

Not having periodical reviews, say, once a quarter of the organization goals will be another pitfall. The conditions of the market, business and other factors do keep changing and it is likely that the relevance of certain goals could have changed over a period of time. A periodic review and relevance check of the goals with appropriate corrections, if applicable will be important to ensure the validity of the KPIs.

[Natwar Lal 38]

Balanced Scorecard becomes ineffective in the following situations

 

1. It is used as a Measurement System instead of a Management system

2. Too many metrics are included in it OR too less metrics are included in it

(general rule of thumb is to have around 20 metrics)

3. Chosen metrics do not align with the organization strategy

4. Disproportionately high number of metrics chosen in one of the legs

5. No action taken even if metric is in RED

6. No leading indicators / metrics included

7. Dedicated monthly scorecard review meetings not set up and/or relevant stakeholders are not invited to such meetings

8. Metric does not represent the true picture (e.g. data manipulation done to keep the metric in Green to avoid displeasure from senior management or to avoid taking up improvement projects)

9. People unaware of the usage and importance of a Balanced Scorecard

10. Balanced scorecard developed at an org level not broken down for each department (in such scenario departments are not in sync and continue to track conflicting metrics of their own)

11. Operational definitions for metrics in the balanced scorecard are ambiguous and different people have different interpretations of the same metric

[Praveen Kumar K 1]

When does using a Balanced Scorecard become ineffective? In other words, what are the caution points while setting up the Balanced Scorecard for an organisation?

 

No strong leadership support for implementing the balance scorecard
Metrics are not relevant and clear
Poor data management input and review mechanism
No balanced focus
Support for all relevant stakeholders

[Vastupal Vashisth 34]

BALANCED SCORECARD:

balanced scorecard known as BSC was given by Kaplan & Nortan in 1992. According to Kaplan & Nortan , BSC translates mission of an organization into a set of performance measures which provides the outline for a strategic management and measurement system. there is no guidelines given by Kaplan & Nortan for combining dissimilar measures. 

According to Lawrie and Cobbold(2004), BSC evolution may be represented by three generations of BSC's. Focus has been changed continuously in all three like in early 1990s teh main focus was on development of financial and non financial measures, in mid 1990s it was shifted to alignment of these measures with strategy and later in 2001, BSC has changed its shape as a strategy implementation tool form its development as a performance measurement tool.

There are four different prospective of BSCs whcih are given below:

1. Financial Prospective:  these are considers as lagging indicator and long term aims for the organization. we can say that financial objectives will be treated as goals of the organization which is a tangible outcome of a corporate strategy. in this we can include like profitability, sales growth, Share in market, ROI, income etc.

 

2. Customer Value Prospective: organizations focus to identify its potential customers in their targeted segment and generate sales, loyalty form them by providing them good services/products.

 

3. Internal Business Process Prospective:  in this organizations tries to find out their critical processes, skills of people, their competencies and technologies so that they can deliver value proposition to their customers.

 

4. Learning & Growth Prospective:  organizations consider intangible assets in this prospective to formulate &  implement their strategy. the main objective of this prospective is to identify human resources, their attitude towards work, knowledge and ability to learn to support the internal processes .

 

There are various caution points while setting up Balanced Scorecard. Some of them are given below:

1. Make full understanding of Balanced Scorecard before its implementation.
2. Make sure that there is full support of executives and top management.
3. make sure that there is proper education and training given to implement BSCs'
4. Make sure that strategy of the organization should be formulated in the strategy map while setting up BSCs'
5. There should be involvement of whole organization
6. There should be proper communication plan for all people in the organization
7. KPI should be clearly defined and alligned
8. make sure that BSCs' should contain less subjectivity because more the subjectivity more will be gaming played by emplyoees and subjectivity creates uncertainty. 
9. make sure that there should be proper combination of financial and non financial measures.
10.  way of combining of measures should be like that there will be control over gaming done employees 
11. Measures should predict long term performance for the organization
12. combine distortion which is caused by subjectivity
13. there should be validation of measures by statistically testing of the business model.
14. there should be trade off between generic and specific measures . generic measures flow from top down and specific measures from bottom. 
15. take non financial measures which is heading with financial measures which is looking behind.

 

[J R Sankar 0]

The Balanced Scorecard (BSC) is a strategic performance measurement tool that is used to translate an organization’s strategic goals into a set of performance objectives.

While BSC is used successfully by many organizations, some organizations have experienced failure due to,  

1)     Poor designing of BSC,

2)     Lack of Senior management commitment

3)     Strategy not linked to departmental, team and individual goals,

4)     Not identifying right measures

5)     No balance between leading and lagging indicators or financial and non-financial measures

6)     No performance revision mechanism, i.e. measures get out of date.

7)     Unrealistic targets

8)     Measures conflict with reward system

9)     Hiring inexperienced consultants

10)Lack of feed back on how the strategy is being implemented and whether it is working.

 

These factors make using a BSC ineffective.

For successful implementation of BSC its better to use a checklist to find problems and fix them at the early stages.

For Planning

 

1.     Clearly defined strategy

2.     Regular strategic revisions and appraisals

3. Critical success factors are clearly defined

4. Long term goals are accurately translated into short term targets

5. Short and long term Financial, sales performance measures are in place

6.  Key strategies & targets are clearly cascaded throughout the organization.

7. Targets are 'owned' across the organisation

8. Performance standards & KPI's are in place for all key processes

9. Plans & Targets are regularly achieved.

10. Top management’s focus on business development.

 

For Performance

1.      Updated Management Information System

2.      Easily understandable reports

3.      Areas of ‘over’ and ‘under’ performance clearly highlighted

4.      Long and short term performance are clearly measured and reported

5.      Easy to Drill down for further detail and explonation

 

For Alignment of the organization

 

1.     clear shared Vision is understood and 'owned' throughout the organization

2.     Operational KPI's reflect the key goals of the organization

3.     All areas of the orgainsation are working in unison and trying to beat the competition.  

4.      IT developments are fully supporting changing needs of the organization

5.     Training & Development programmes reflect the changing needs of the organization.

6.     Staff are rewarded on the basis of performance linked to key strategic Goals.

 

For Change Management

 

1.     Continuously adjusting the organisation in line with market developments

2.     Strong leadership qualities, excellent decision making capabilities & initiative in key front line positions are present throughout the organization

3.     Management & staff are well informed about what is happening in the organization

4.     Able to react quickly to, or lead on, new developments in the sector

5.     Organisation is Highly elastic and flexible to change

 

These check points ensure successful implementation of Balanced scorecared

 

 

[Rupinder N 31]

The best answer is that of Mohamed Asif. Each answer has great inputs, and it is recommended to go through all to get a holistic view.

 

Benchmark Expert View is provided by Venugopal R.