In the beginning work was simple, less complicated as it didnt have a complex flow or structure. Everything seemed alright as people went to work in the morning and later on went home in the evening without having to worry about goals, targets, assessments or incentives. However, with time the situation did not stay this way so long; as we live in a world of day to day change. With bosses everywhere who aimed at increased annual profits year by year, the whole work environment changed; I think the best term to use would be it revolutionized. Revolution took us from the age of darkness into a dawn of a new era of enlightenment. This era was full of things such assessments, metric driven incentives (MDIs) amongst others; all of them focusing on financial aspects of organizations with the aim of improving organization through increased margins and reducing costs. However, in every revolution, there is bound to be downfalls. The newly introduced MDIs did not work so well, an example being a situation where cost reduction would be at the risk of decrease in quality, staff or even loss of customer base. Luckily enough, it was not too long after these problems emerged that great minds came up with a solution. In 1993, Robert S Kaplan and David P Norton developed the Balanced Scorecard; the solution to problems arising from previous MDIs. This paper looks at what a balanced score card is, its different constituents, how an organization can develop a balanced score card and what role does it play in production and service organizations. (Kaplan, Robert S, 1993)
So what do we mean when we say a Balanced Scorecard? From a general perspective, a balanced score card can be viewed as an attempt to translates the hopes of a companys vision statement to a practical way of managing the business in a much better way. A balanced score card can also be viewed as a system of strategic planning and management that is used to make sure that the activities of a business go hand in hand with the vision statement of the business. These two definitions of balanced scorecard make me reach a conclusion that a balanced scorecard is like a guide or a map to ensure the improvement and success of a company.
History of the Balanced Scorecard
Kaplan and Norton introduced the balanced scorecard in one of the 1992 Harvard Business Review article. This article was based on a 1990 Nolan, Norton multi-company research project that studied the measurement of performance of companies which created value from their intangible assets. Kaplan and Norton believed that if you can measure what you can say and express it in numbers, then it has value to you; otherwise your knowledge is meaningless. After its publication in 1992, several companies adopted it. The adoption of the scorecard provided insight on its power and potential and over the next few years Kaplan and Norton expanded its concept into a management tool for describing, communicating and implementing strategy.
Before the balanced scorecard was introduced, there had been previous efforts to use non-financial measures to motivate, measure and evaluate the performance of organizations. An example was the project conducted by General Electric corporate staff group. The GE project aimed at developing performance measures for decentralized business unit and they came up with seven nonfinancial metrics and one financial metrics to assess divisional performance. These nonfinancial metrics included market share, productivity, product leadership, personnel development, employee attitude, public responsibility and a balance between short-term and long-term objectives. The one financial metric was profitability that was accounted for by measuring the residual income. From these metrics, one can visualize some aspects of the balanced scorecard; the two seem to have some similarities as if they are of a common origin. Within the proposed metrics of GE project were the roots of the balanced scorecard. Later on, Herbs Simon and his colleagues studied the role of accounting information in organization; they explored the role of both financial and nonfinancial l information in answering three questions: score card questions, attention-directing questions and problems solving questions. For example:
- Scorecard questions: Is my performance, excellent, average or poor?
- Attention-directing questions: So what are the problems that I need to look into?
- Problem-solving questions: What is the best way to do the job?
Simons study was probably the first to introduce the term scorecard. When the scorecard was introduced in 1992, it was adopted y may private, public and nonprofit organizations globally over the next 15 years. The scorecard developed from just being a tool for assessing performance to a management and strategy implementation tool (Kaplan, n.d.).
Perspectives of the balanced scorecard Initially, merit-driven incentives focused on the financial aspects of the business with the aim of increasing profits and reducing costs. This was the arising need to exploit intangible assets. This was enabled by the introduction of the balanced scorecard. It is essential to note that the aim of the development of the scorecard was not to get rid of the old financial measures of business assessment, but rather to complement them; however most companies at first treated the scorecard as replacement of financial measures. It is through the scorecard that a link between a companys long -term strategy and it short-term financial goals could be created. The creation of this link was due to the fact that the scorecard enabled the managers to introduce four new processes or perspectives in the company. These perspectives include; financial perspective, customer perspective, internal perspective and learning and growth perspective.
There are essential things that an organization needs to know before embarking on a balanced scorecard path. An organization needs to know the following; its mission statement, the organizations strategic plan or vision, the financial status of the organization, the current structure and operation of the organization, the level of expertise of the employees and the customer satisfaction. This information is very valuable when it comes to choosing the measures to take in each of the processes in the scorecard approach. For example, knowing the financial status of the organization will enable the company to take appropriate measures when it comes to the financial process of the scorecard.
So what do all these four processes of the balanced scorecard entail? To start with, let us look at the financial aspect. The financial aspect involves areas such as return on investment, cash flow, return on capital employed and financial results. Internal business processes entails a variety of areas such as number of activities per function, alignment of people in the right department, duplicate activities across functions, bottleneck processes and automation process. Customer process on the other hand looks at delivery to and quality performance for customer, customer satisfaction rate, percentage of market and customer retention rate. Finally, learning and growth entails employees turnover, job satisfaction and training or learning opportunities. A general overview of the processes would deem the first process as suitable for enabling the manager or organization to translate its vision. The manager is able to come up with a plan and express it in terms that can direct action at the local level. The second process, internal perspective, requires communicating the developed plan at all organization levels and linking the strategy with unit and individual goal. Financial perspective, the third process, generally involves business planning where the company is able to integrate their business plan and their financial plans. The last processes, learning and growth perspective is the feedback and learning process. It is through this process that the company gets to strategically learn by gathering feedbacks, testing hypotheses on which a strategy is based and making the required changes.
Development of a balanced scorecard
Kaplan and Norton initially developed the scorecard identifying the four perspectives. However, they also did mention that the scorecard is not a template that can be applied to every business. Kaplan and Norton asserted that the scorecard is a flexible tool and hence its formulation should be modified to fit the vision and strategy of each organization. It is, therefore, important for each organization to have a unique path to follow in building a balance scorecard. For instance, in certain organization, a scorecard focused on top management without extension to lower levels may be developed. In another organization, the top management may elaborate the strategy of the organization especially to key units that drive and measure the strategys success. In most organizations a systematic development plan is usually developed to create and encourage commitment to the scorecard among all the levels of the company. The balanced scorecard is therefore developed in a project profile that is made up of a series of steps.
Step1: PreparationThe first step in development of the scorecard is preparation. In this stage the organization need to identify the business unit where the scorecard is appropriate at the top level of the organization. In simpler terms, this entails the selection of a specific business unit that has its own customer and market where the balanced scorecard would be appropriate. Apart from having specific customers and market, the business unit should also have it channels of distribution, production facilities and measure of financial performance.
Step 2: First round interviewAfter identification of the business unit, the facilitator of the balanced scorecard needs to carry out the first round interview. The list of interviewee usually includes the executives of the business unit, principal shareholder and some key customers. The interview period is usually about 90 minutes. Interviewing of the executive enables the facilitator to find out their contribution to the strategic objectives and proposed tentative proposal of the scorecard. (Kaplan, Robert S.; 1996)Information from the major shareholder is essential as the facilitator would be able to know their financial expectations from the business unit. The final first-round interviews on key customer play a crucial role in learning about their performance expectation from the best suppliers.
Step 3: First round executive workshopThe third step in project profile of developing a balanced scorecard involv...
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