Balanced scorecard
A balanced scorecard is a strategy performance management tool – a well-structured report used to keep track of the execution of activities by staff and to monitor the consequences arising from these actions.
The term 'balanced scorecard' primarily refers to a performance management report used by a management team, and typically focused on managing the implementation of a strategy or operational activities. In a 2020 survey 88% of respondents reported using the balanced scorecard for strategy implementation management, and 63% for operational management. Although less common, the balanced scorecard is also used by individuals to track personal performance; only 17% of respondents in the survey reported using balanced scorecards in this way. However it is clear from the same survey that a larger proportion use corporate balanced scorecard elements to inform personal goal setting and incentive calculations.
The critical characteristics that define a balanced scorecard are:
- its focus on the strategic agenda of the organization/coalition concerned;
- a focused set of measurements to monitor performance against objectives;
- a mix of financial and non-financial data items ; and,
- a portfolio of initiatives designed to impact performance of the measures/objectives.
Use
Two of the ideas that underpin modern balanced scorecard designs concern making it easier to select which data to observe, and ensuring that the choice of data is consistent with the ability of the observer to intervene.
History
Organizations have used systems consisting of a mix of financial and non-financial measures to track progress for quite some time. One such system, the Analog Devices Balanced Scorecard, was created by Art Schneiderman in 1987 at Analog Devices, a mid-sized semi-conductor company. Schneiderman's design was similar to what is now recognised as a "First Generation" balanced scorecard design.In 1990, Schneiderman participated in an unrelated research study led by Robert S. Kaplan in conjunction with US management consultancy Nolan-Norton, and during this study described his work on performance measurement. Subsequently, Kaplan and David P. Norton included anonymous details of this balanced scorecard design in a 1992 article. Although Kaplan and Norton's article was not the only paper on the topic published in early 1992, it was a popular success, and was quickly followed by a second in 1993. In 1996, the two authors published The Balanced Scorecard. These articles and the first book spread knowledge of the concept of balanced scorecards, leading to Kaplan and Norton being seen as the creators of the concept.
While the "corporate scorecard" terminology was coined by Schneiderman, the roots of performance management as an activity run deep in management literature and practice. Management historians such as Alfred Chandler suggest the origins of performance management can be seen in the emergence of the complex organization – most notably during the 19th century in the US. Other influences may include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers in the early part of the 20th century. The tool also draws strongly on the ideas of the 'resource based view of the firm' proposed by Edith Penrose. None of these influences is explicitly linked to in the original descriptions of balanced scorecard by Schneiderman, Maisel, or Kaplan & Norton.
Kaplan and Norton's first book remains their most popular. The book reflects the earliest incarnations of balanced scorecards – effectively restating the concept as described in the second Harvard Business Review article. Their second book, The Strategy Focused Organization, echoed work by others on the value of visually documenting the links between measures by proposing the "Strategic Linkage Model" or strategy map.
As the title of Kaplan and Norton's second book highlights, even by 2000 the focus of attention among thought-leaders was moving from the design of balanced scorecards themselves, towards the use of the balanced scorecard as a focal point within a more comprehensive strategic management system. Subsequent writing on the balanced scorecard by Kaplan & Norton has focused on its uses, rather than its design ; many others also continue to refine the device itself.
Characteristics
The characteristic feature of the balanced scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional financial or operational reports but a succinct summary that captures the information most relevant to those reading it. It is the method by which this 'most relevant' information is determined that most differentiates the various versions of the tool in circulation. The balanced scorecard indirectly also provides a useful insight into an organization's strategy – by requiring general strategic statements to be precipitated into more specific/tangible forms.The first versions of Kaplan and Norton's interpretation of the balanced scorecard asserted that relevance should derive from the corporate strategy, and proposed design methods that focused on choosing measures and targets associated with the main activities required to implement the strategy. As the initial audience for this were the readers of the Harvard Business Review, the proposal was translated into a form that made sense to a typical reader of that journal – managers of US commercial businesses. Accordingly, initial designs were encouraged to measure three categories of non-financial measure in addition to financial outputs – those of "customer," "internal business processes" and "learning and growth." These categories were not so relevant to public sector or non-profit organizations, or units within complex organizations, and much of the early literature on balanced scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups, Ahn, Elefalke, Brignall, Irwin, Radnor et al. ).
Modern balanced scorecards have evolved since the initial ideas proposed in the late 1980s and early 1990s and are significantly improved – being both more flexible and more effective.
Variants
Since the balanced scorecard was popularized in the early 1990s, a large number of alternatives to the original 'four box' balanced scorecard promoted by Kaplan and Norton in their various articles and books have emerged. Most have very limited application, and are typically proposed either by academics as vehicles for expanding the dialogue beyond the financial bottom line – e.g. Brignall or consultants as an attempt at differentiation to promote sales of books and / or consultancy, Bourne, Niven ).Many of the structural variations proposed are broadly similar, and a research paper published in 2004 attempted to identify a pattern in these alternatives – noting three distinct types of variation. The variations appeared to be part of an evolution of the balanced scorecard concept, and so the paper refers to these distinct types as "generations". Broadly, the original 'measures in four boxes' type design constitutes the 1st generation balanced scorecard design; balanced scorecard designs that include a 'strategy map' or 'strategic linkage model' constitute the 2nd Generation of Balanced Scorecard designs; and designs that augment the strategy map / strategic linkage model with a separate document describing the long-term outcomes sought from the strategy comprise the 3rd generation balanced scorecard design.
Variants that feature adaptations of the structure of the balanced scorecard to suit better a particular viewpoint or agenda are numerous. Examples of the focus of such adaptations include the triple bottom line, decision support, public sector management, and health care management. The performance management elements of the UN's Results Based Management system have strong design and structural similarities to those used in the 3rd Generation Balanced Scorecard design approach.
The balanced scorecard is also linked to quality management tools and activities. Although there are clear areas of cross-over and association, the two sets of tools are complementary rather than duplicative.
The balanced scorecard is also used to support the payments of incentives, even though it was not designed for this purpose and is not particularly suited to it.
Design
Design of a balanced scorecard is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance 'meets expectations'. By alerting managers to areas where performance deviates from expectations, they can be encouraged to focus their attention on these areas, and hopefully as a result trigger improved performance within the part of the organization they lead.The original thinking behind a balanced scorecard was for it to be focused on information relating to the implementation of a strategy, and over time there has been a blurring of the boundaries between conventional strategic planning and control activities and those required to design a balanced scorecard. This is illustrated by the four steps required to design a balanced scorecard included in Kaplan & Norton's writing on the subject in the late 1990s:
- Translating the vision into operational goals;
- Communicating the vision and link it to individual performance;
- Business planning; index setting
- Feedback and learning, and adjusting the strategy accordingly.
Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the balanced scorecard itself has no role in the formation of strategy. In fact, balanced scorecards can co-exist with strategic planning systems and other tools.