Balanced Scorecard

From Virbus

[edit] 1 Summary

Balanced scorecard is a management system that measures and manages an organization’s progress toward strategic objectives. Balanced scorecard incorporates four perspectives: financial indicators, customer, internal business, and learning/innovation.

[edit] 2 Why should you use it?

The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action.It gives managers a comprehensive view of the performance of a business. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.

[edit] 3 Why has it been developed and who developed it?

A new approach to strategic management was developed an introduced by Robert Kaplan and David Norton in 1992. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

[edit] 4 When should you use it?

The Balanced Scorecard has been promoted as a tool to help organizations monitor the implementation of organizational strategy. Balanced Scorecard is a performance management tool: although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that Balanced Scorecard itself has no role in the formation of strategy. Balanced Scorecard can comfortably co-exist with strategic planning systems and other tools.

[edit] 5 How does it work?

Unlike traditional performance measurement systems, which have financial controls at their core, the Balanced Scorecard begins with an organization’s vision and strategy (at the center of the diagram).

This is accomplished by determining objectives and measures in each of the Scorecard’s four interrelated perspectives (see diagram). A popular model for working with balanced scorecard is to describe, for each perspective: 1. the long-term goals of the organization. 2. what success factors have been established to achieve these goals. 3. what activities should be carried out to achieve goals. 4. what indicators should be measured to monitor development.

Scorecard’s four interrelated perspectives:

1. Financial Perspective The measures in this perspective tell us whether our strategy execution - which is detailed through measures chosen in the other perspectives- is leading to improved bottom-line results. Key Performance Indicators: cash flow, ROI, revenues, return on capital employed, return on equity.

2. Customer Perspective When choosing measures, organizations must answer two critical questions: “Who are our target customers?” and “What is our value proposition in serving them?” Key Performance Indicators: Delivery Performance to Customer - by Date, Delivery Performance to Customer - by Quantity, Customer satisfaction rate, market share, customer loyalty.

3. Employee Learning and Growth Perspective In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Measures can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Key Performance Indicators: Investment Rate, Illness Rate, morale, knowledge, turnover, use of best demonstrated Practices.

4. Internal Business Process Perspective In the Internal Processes perspective of the Scorecard, we identify the key processes at which the organization must excel in order to continue adding value for customers. Each of the customer disciplines outlined previously will entail the efficient operation of specific internal processes in order to serve our customers and fulfil our value proposition. Our task in this perspective is to identify those processes and develop the best possible measures with which to track our progress. To satisfy customers, you may have to identify entirely new internal processes rather than focusing your efforts on the incremental improvement of existing activities. Service development and delivery, partnering with the community, and reporting are examples of items that may be represented in this perspective. Key Performance Indicators: productivity rates, quality measures, timeliness

To construct and implement a Balanced Scorecard, managers should: Articulate the business’s vision and strategy; Identify the performance categories that best link the business’s vision and strategy to its results (e.g., financial performance, operations, innovation, employee performance); Establish objectives that support the business’s vision and strategy; Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets; Ensure companywide acceptance of the measures; Create appropriate budgeting, tracking, communication, and reward systems; Collect and analyze performance data and compare actual results with desired performance; Take action to close unfavorable gaps.

[edit] 6 Related topics/tools

Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and -- primarily -- measurement-based management and feedback. Strategy maps Performance management Strategic management

[edit] 7 links/sources

Horváth & Partner (Hrsg.): Balanced Scorecard umsetzen, Stuttgart 2001.

Kaplan, R. S. / Norton, D. P.: The Balanced Scorecard – Measures that Drive Performance, in: Harvard Business Review, 1/1992, S. 71-79.

Kaplan, R. S. / Norton, D. P.: The Balanced Scorecard – Strategien erfolgreich umsetzen, Stuttgart 1997.

Karloef, Bengt. (2005) A to Z of Management Concepts and Models. London, , GBR: Thorogood.

Meyer, Marshall W. (2003) Rethinking Performance Measurement : Beyond the Balanced Scorecard. West Nyack, NY, USA: Cambridge University Press.

Niven, Paul R. (2005) Balanced Scorecard Diagnostics : Maintaining Maximum Performance. Hoboken, NJ, USA: John Wiley & Sons, Incorporated.