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A Balanced Look at the Balanced Scorecard

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									             The Balanced Scorecard: A Tenth Anniversary Review

                                    Maris G. Martinsons

Ten years ago, Professor Robert Kaplan of Harvard University and David Norton, an
American management consultant, proposed the concept of a balanced scorecard to
measure and manage corporate performance1. They argued that traditional financial
accounting measures, such as the return on investment and payback period, offered an
incomplete and outdated picture of business performance that hindered the creation of
long-term business value.

As a result, Kaplan and Norton suggested that financial measures be supplemented
with data that would reflect customer satisfaction, internal business processes, and
the ability to learn and grow. Their scorecard evaluates corporate performance from
four perspectives (as shown in Figure 1).

                       Figure 1. The Balanced Scorecard
                     (adapted from Kaplan and Norton, 1992)

                              Financial Perspective
                          Are we meeting the expectations
                               of our shareholders?




     Customer Perspective                           Internal Process Perspective
   Are we delighting (or at least                    Are we doing the right things
    satisfying) our customers?                          and doing things right?




                              Learning and Growth
                                  Perspective
                         Are we prepared for the future?


The balanced scorecard has been a very attractive concept. Over the past decade,
thousands of managers all over the world have implemented this concept in one form or
another. As the lead author of a research paper2 that extended the concept from the
corporate level to specific organizational units and even individual projects, I must
take some responsibility for the widespread application of the balanced scorecard.
After reviewing the application of this concept and its consequences, I have
concluded that the balanced scorecard has been a mixed blessing. Those of us
responsible for the popularity of the concept may deserve blame as well as credit.
Let me explain.
On the positive side, the balanced scorecard has helped managers to recognise that
financial measurements are necessary but not sufficient. Perhaps most importantly,
they do not fully account for intangible assets and especially knowledge-based
assets. Business success in traditional industries is often based on economies of scale
and/or scope and thus closely linked to the efficient allocation of financial and physical
capital. This type of resource allocation can be monitored and controlled fairly well by
using financial measures. However, the ability to mobilize and exploit softer and less
tangible knowledge resources is increasingly important in information industries3.
Unfortunately, traditional financial measures are poorly suited to manage a knowledge-
intensive company.

Relying too much on financial indicators can also promote efforts to maximize short-
term results. With management bonuses and stock options tied to quarterly revenue
and income, managers had a strong incentive to “make the numbers” even if that
means sacrificing longer-term value creation.

The balanced scorecard retains financial measures, but supplements them with
leading indicators that reflect the drivers of future financial performance. With the
scorecard, top managers can keep a close eye different aspects of their organisation
and its environment in much the same way that a pilot would view different instrument
panels when flying an airplane. My own research indicates that there is a significant
positive relationship between the leading indicators of corporate performance from
one year and the lagging indicators - financial measures - in the next year. This
means that the financial future of a company can be forecast reliably, and investor
expectations managed ahead of time, by monitoring certain non-financial indicators.

Medical doctors typically examine a patient’s health by checking their heartbeat,
blood pressure, and the composition of body fluids. Similarly, a few key indicators
provide a reliable guide to corporate health. A balanced scorecard that is carefully
designed will encourage a laser-like focus on those key indicators. After managers
communicate their envisioned future for the organisation, the stakeholders can work
together and focus their daily efforts on realizing the vision by striving to improve key
performance dimensions, such as retaining customers or lowering production costs.

The balanced scorecard can help to align the interests of people at various levels of
the organisation by drawing their attention to a common set of indicators. In some
cases, this alignment has been made explicit by developing departmental and even
individual scorecards that are based upon the corporate scorecard. Ideally, a
balanced scorecard will indicate whether a company has a motivated and prepared
workforce (learning and growth perspective), effective processes (operational
perspective), and delighted customers (customer perspective). Positive leading
indicators should result in superior long-term financial performance.

Unfortunately, the balanced scorecard also has a negative side. As with almost any
management technology, it must be adapted to the context. For example, industry
specifics and the cultural differences between North America and Greater China
mean that the scorecard used by an oil company in Houston cannot be transplanted
directly to an import/export firm in Hong Kong.
I am aware of at least two local companies that initially tried to duplicate the
scorecards of U.S. companies in similar industries. Not surprisingly, differences in
both external business environments and internal management practices created
insurmountable problems at the implementation stage. Both companies ended up
rethinking their approaches to corporate performance management and revising their
scorecards. Many other local firms have found it difficult to collect data on their
internal processes because they have yet to be formalised or documented.

Even more seriously, misuse of the balanced scorecard may have contributed to the
dot-com bubble that has burst in recent months. The balanced scorecard concept
moves stakeholders away from a single-minded obsession with traditional accounting
data. However, in extreme cases, financial performance measures were apparently
forgotten as managers, stock analysts and investors became obsessed with
customer satisfaction and intangible asset growth. Amazon.com was the global
poster boy for the online retailers that concentrated on revenue growth. They have
gone to great lengths to satisfy and retain their customers, even if that meant losing
money on every transaction. Many other dot-coms, including adMart in Hong Kong,
adopted similar business philosophies that were unsustainable.

Although the balanced scorecard goes beyond financial measures, it does not get rid
of them. The name of the concept reflects the intent to keep score on a set of items
that balance short and long term objectives, financial and non-financial measures,
lagging and leading indicators, and internal and external performance perspectives.
Nevertheless, making money must be ultimate goal for a private-sector enterprise.

It is absolutely critical to select customer, process and innovation/growth measures
that are leading indicators of financial success. Airplane pilots are trained to look at
their altimeters and fuel gauges without losing sight of their intended destination.
Similarly, successful managers will focus their behaviors in order to improve the
performance dimensions that support long-term profitability.

A balanced scorecard can help managers to focus on the right things. However, a
decade of experience indicates that these right things will vary from industry to
industry, and from company to company, depending on its own resources and
competitive position. Managers must identify the right things for their organization so
that they can focus on improving the dimensions of performance that really matter.


1
 Kaplan, R. and Norton, D. (1992). The balanced scorecard - measures that drive performance,
Harvard Business Review, 70(1), pp. 71-79.
2
  M. Martinsons, R. Davison and D. Tse (1999). The balanced scorecard: A foundation for
the strategic management of information systems, Decision Support Systems, 25, pp. 71-88.
3
 J. M. Burn and M. G. Martinsons (1997). Information Technology and the Challenge for
Hong Kong, University of Hong Kong Press.

								
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