The Balanced Scorecard

This is primarily a fundamental academic article. It may still be of interest to practitioners, but its main aim is to communicate the basics of the Balanced Scorecard to students. A practitioner article on the BCS is planned for the future.

 

The balanced scorecard was developed by Kaplan & Norton (1992) and was initially described by the authors as a performance measurement system that added a customer, internal process, and innovation and learning perspective to the widely used set of financial performance measurement systems previously available. Kaplan & Norton argue that financial measurement systems are inherently short-term and state that while such measures were apt during the industrial era, today’s companies need to master a much wider set of competencies. In short, they presented the Balanced Scorecard as a means of answering the questions:

• How do customers see the organisation – which is answered through the customer perspective;
• What must the organisation excel at – answered through the internal process perspective;
• How can the organisation continue to improve and create value – answered through the innovation and learning, later renamed organisational growth, perspective; and
• How does the organisation look to shareholders – answered through the financial perspective. (Kaplan & Norton, 1992)

In other words, the Balanced Scorecard model is not a replacement for financial measurements, but an addition which helps add a long term focus to performance measurement, which is solidly grounded in the organisation’s competitive strategy (Kaplan & Norton, 1993; 1996a; 1996b). In other words, it bridges the well-known gap between two departments: corporate development (i.e. the department in charge of long-term strategy), and the controller of finance department (who budget for and measure short term performance).

From Measurement to Management

While initially presented as a model for performance measurement, it soon became clear to the authors that the Balanced Scorecard could be, and was already, be used as a strategic management system (Kaplan & Norton, 1996a); that is, as a means of strategy formulation, communication, and implementation (De Geuser, Mooraj & Oyon, 2009).To this end, Kaplan & Norton (1996a) summarised the process of linking short-term actions with long-term strategic objectives in four basic steps:

1. The Scorecard helps describe the organisation’s vision for the future to the organisation as a whole;
2. The Scorecard acts as a visual representation of the company’s strategy, thus offering a holistic model which allows employees to see how their efforts contribute to the success of the organisation;
3. The Scorecard focuses the organisations change efforts, thus overcoming the problem of multiple improvement programs such as total quality management or employee empowerment being run without an end-goal in mind, which often leads to disappointing results; and
4. The Scorecard facilitates organisational learning at all levels, including the executive level through “making the cause-and-effect hypotheses among objectives and measures explicit, [so that] businesses can test their strategy in-real time and adapt as they learn.” This is important as it is impossible to learn if one does not know whether a measure has been successful or not.

This link to the company’s, or strategic business units’, strategy is continuously stressed by the authors. In a statement that summarises the importance of basing the Balanced Scorecard measurements in the organisation’s strategy, Kaplan & Norton (1993, p.135) state that:

“…a critical test of a scorecard’s success is its transparency: from the 15 to 20 scorecard measures, an observer should be able to see through the business unit’s competitive strategy.”

Four Perspectives

As mentioned above, the four perspectives from which the Balanced Scorecard views performance are:

• The Financial Perspective
• The Customer Perspective
• The Internal Process Perspective
• The Innovation and Learning / Organisational Growth Perspective

Since the Balanced Scorecard is a framework for managing the implementation of strategy (Kaplan & Norton, 1996b) it follows that the goals set and measures used within each perspective aim to accomplish the same overall strategic goal. While one of the main criticisms of the Balanced Scorecard (more on which further down) is that that that it provides insufficient recommendations with regard to implementation and use (Ahn, 2009), which arguably as a fair criticism, the Kaplan & Norton do provide some general examples of the idea behind the process.

One particularly clear example of the interlinked nature of the perspectives is provided in Kaplan & Norton (1996a, pp.65-66). This example shows how a long-term financial goal (return on capital employed, or ROCE) is achieved through a combination of interlinked performance improvements in the other three perspectives. For interested readers the full example is available in the original article (see reference list at the end of this article), but the essence of the example has been used in the development of the Model 1- which also provides an overview of the four perspectives, brief definitions, and examples of measures that can be carried out within each.

Model - Overview of the balanced scorecard

As can be seen in Model 1, the target of increasing return on capital employed is achieved through first determining how this can be done – in this case it was hypothesised that expanded and/or repeat sales from existent customers could be used to meet the target, and that increased/repeat custom could be achieved through increased customer loyalty. The next question is the organisations must ask is “how do we achieve increased customer loyalty?” and the answer is to ask your customers what is of importance to them; in this case, the imagined customers answered that on-time delivery is highly important for their satisfaction. The next step is thus to determine how improved on-time delivery can be achieved, which falls into the “internal processes” perspective, and the proposed solution is to achieve shorter cycle times in operating processes and high-quality internal processes, which are noted down as internal goals. The final step, then, is how to reduce the cycle times of these internal processes, and one way to achieve this is through improving the skills of the operating personnel; that is, providing them with relevant training – an innovation and learning goal.

This sequence of events can also be expressed, as suggested by Kaplan & Norton (1996a) as a sequence of ‘if-then’ statements:

If we provide our employees with relevant training, then they will be able to do their job more efficiently;
If our employees can do their job more efficiently, then our operating processes’ cycle time will be reduced;
If our operating processes’ cycle time is reduced, then our on-time delivery rate will improve;
If our on-time delivery rates improve, then our customers are more likely to use us as their preferred supplier;
If we become our customers’ preferred supplier, then our return on capital employment will improve.

Articulating the sequence of events in this manner may make the links more readily understandable, but it’s not without fault. In an article based in the author’s experience of aiding the implementation of the Balanced Scorecard at ABB Industrie AG, Ahn (2001) argues that the use of ‘if-then’ statements is a flawed process, as it is always possible to argue links in this manner. This, arguably, is true; it would indeed some possible to create tenuous but acceptable links using ‘if-then’ statements, but that is not to saw that they are not without value. It would, however, be advisable to be critical in the appreciation of the suggested links.

Praise and Criticims

The Balanced Scorecard is one of the most influential models of the 20th century (Sibbet, 1997) and in 2007 some 66% of 1221 firms were found to use it (Rigby, 2005). It is no surprise, then, that the Balanced Scorecard has been the subject of much debate, nor that it has received both praise and criticism in the droves. While this article does not aim to go through this debate in detail – that would require an article of its own – some of the key findings and arguments are briefly outlined below.

Praise

While Ahn, and ABB Industrie AG, encountered a number of obstacles (outlined below) in their implementation of the Balanced Scorecard, their overall “experience with the use of the Balanced Scorecard has proved it to be of considerable benefit for connecting long-term strategic planning and short-term action and budget planning.” (Ahn, 2001, p.454) In a wider quantitative study which collected data from 76 companies, all of which had experience with the Balanced Scorecard, Geuser et al. (2009) found that the main benefits as perceived by these companies were

1. Better translation of strategy into operational terms;
2. Strategizing becomes a continuous process; and
3. The alignment of the organisation’s processes, competencies, services, and business units

Unsurprisingly, seeing as the study was based on the experiences of firms who had implemented the Scorecard, these findings appear to be broadly in line with what has been reported in the many qualitative studies that have been carried out.

Criticism

Perhaps the most noteworthy criticism aimed at the Balanced Scorecard is that it takes rather longer to implement than initially suggested by Kaplan & Norton; originally voiced by Weber & Schäffer ( ), this criticism was echoed by Ahn (2001). Indeed, in the case of Ahn and ABB Industrie, five full workshop days were sent on elaborating the Balanced Scored elements alone, which didn’t account for the preparatory work done leading up to the workshops. This, in turn, ties in to the fact that the Balanced Scorecard can be costly to implement (Ahn, 2001; Lipe & Salterio, 2000).

It has also been argued that there is a lack of empirical evidence to support the effectiveness of the model (Otley, 1999; Speckbacher et al., 2003; Norreklit, 2003; Davis and Albright, 2004), and that superiors are likely to ignore the unique measures associated with each SBU and focus instead on standardised performance measures (Lipe & Salterio, 2000). This latter argument means that the model may prove ineffective as SBU managers are likely to focus on the measures on which their individual performance is evaluated, and as such will not pay attention to unique measures (i.e. the drivers of their SBUs strategy) if these are not taken into account by superiors. It should, however, be noted that Lipe & Salterio reached this conclusion through a laboratory study including MBA students, rather than real-world data.

References

 

Kaplan, R.S. & Norton, D.P (1996a) ‘Using the Balanced Scorecard as a Strategic Management System’, Harvard Business Review, vol.74, no.1, pp.75-85

Kaplan, R.S. & Norton, D.P (1996b) ‘Linking the Balanced Scorecard to Strategy’, California Management Review, vol.39, no.1, pp.53-79

Kaplan, R.S. & Norton, D.P (1993) ‘Putting the Balanced Scorecard to Work’, Harvard Business Review, vol.71, no.5, pp.134-147

Kaplan, R.S. & Norton, D.P (1992) ‘The Balanced Scorecard-Measures that Drive Performance’, Harvard Business Review, vol.70, no.1, pp.71-79

De Geuser, F., Mooraj, S. & Oyon, D. (2009) ‘Does the Balanced Scorecard Add Value? Empirical Evidence on its Effect on Performance’, European Accounting Review, vol.18, no.1, pp.93-122

Lipe, M.G. & Salterio, S.E. (2000) ‘The Balanced Scorecard: Judgmental Effects of Common and Unique Performance Measures’, The Accounting Review, vol.75, no.3, pp.283-298

Otley, D. (1999) 'Performance Management: a framework for management control systems', Management Accounting Research, vol.10, no.4, pp.363-382

Speckbacher, G., Bischof, J. & Pfeiffer, T. (2003) 'A descriptive analysis on the implementation of Balanced Scorecard in German speaking countries', Management Accounting Research, vol.14, no.4, pp.361-388

Norreklit, H. (2003) 'The Balanced Scorecard: what is the score? A rhetorical analysis of the Balanced Scorecard', Accouting, Organisations and Society, vol.28, no.6, pp.591-619

Davis, S. & Albright, T. (2004) 'An investigation of the effect of Balanced Scorecard implementation on financial performance', Management Accounting Research, vol.15, no.2, pp.135-153