Balanced Scorecard 101, The

Accountancy SA,  Mar 2005  by Dent, Rowan

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Since its introduction in the USA in the early 1990s, the Balanced Scorecard has proven itself as a highly successful performance management tool in measuring business performance.

Created some 10 years ago by Kaplan and Norton, a Harvard Business School Professor and a business consultant, it is not regarded as a management fad and has been translated into nineteen different languages and apparently used in most countries in the world. One of the Scorecard's biggest claims to fame was the Mobil, North America case study, which turned the company into an industry leader. There have been some failures though, but as David Norton points out, if it worked once it must have something.

One of the problems confronting managers in trying to implement the Scorecard is that the original work is written using a good deal of Harvard Business School jargon, making it difficult to interpret and analyse. This has led to an abundance of seminars on the subject as managers try to unlock the secrets of The Balanced Scorecard, looking for the silver bullet to solve all their business problems. Unfortunately there are no silver bullets but the Scorecard is a management framework, which can transform business performance.

Origins of Performance Management

To fully understand the Balanced Scorecard one must go back to the origins of performance management, when the guru of all management gurus, Peter Drucker, wrote in the 1950s that two of the keys to successful management were:

* Setting objectives; and

* Measuring performance.

Today most business leaders have followed his teachings but when it comes to measuring performance, many have found it difficult and time consuming. It is essential, however, that once strategic objectives have been set, to know how well the organisation is performing.

Hence clichés like 'If you measure it, you can manage it' or 'You get what you measure.'Today's performance management tools make it much easier to measure performance.

Indicators or targets also motivate team and individual achievement, which is so important if a company wants to become a high performance organisation.

What makes the Balanced Scorecard so different?

Expressed in its simplest terms the Balanced Scorecard is a set of objectives and measures. It does however have the following distinguishing features.

Four Perspectives

The objectives and measures are developed across four perspectives of the business:

* Financial;

* Customers;

* In ternal Processes; and

* Learning Et Growth (employees).

This creates a balanced perspective across all facets of the business rather than focusing primarily on historical financial results. The authors argue that the old financial accounting model is no longer good enough, as it does not measure processes, which create value for customers. In today's economy intangible assets like the skills and knowledge of your people, systems and brands make up the greater portion of a company's assets. The Balance Sheet was primarily designed to reflect tangible assets like plant and machinery, inventories etc. Despite the progress which has been made in valuing intangible assets, their view is that there is a need to measure more than financial performance.

It is recommended that only between 20-25 measures should be developed. This creates focus on the few key areas where a business must excel.

Cause & effect linkages

The authors argue that Financial outcomes are the economic consequences of actions already taken within the organisation. These are dependent firstly on what value products and services deliver to Customers, which in turn is dependant on the quality of Internal Processes, which support front line staff. Everything is dependant on the skills and systems available to employees and their innovation or Learning and Growth in order to meet these objectives.

By translating strategy into tangible objectives and measures and linking the sequence of actions that must be taken with customers, internal processes, learning and growth, the Balanced Scorecard shows how the financial objectives are to be achieved.

There is therefore a cause and effect relationship between the objectives and measures and by working with the causes, or performance drivers, one is able to trigger new responses in the organisation and change future outcomes. Expressed in simple terms, your Scorecard must show what you want to achieve, how are you going to do it and when will you know that you have succeeded.

Strategy Maps

The concept is very clearly demonstrated with a Strategy Map. This is the title of Kaplan and Norton's latest book and maps can be developed as an interim step in the design of your scorecard. They are also very effective in communicating strategy to employees.

Implementing the Scorecard is an area where many failures occur. Regular review meetings are necessary. If performance is under target, managers need to indicate what action plans they are putting in place to improve performance. When targets are achieved this should be recognised and the organisation must celebrate its successes by giving positive feedback to employees. This is the real power of performance management.