Balance Scorecard

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Mar 20, 2007
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What is Balance Scorecard? What is the process of implementation and difficulties in implementation?

The Balanced Scorecard (BSC) is a performance management tool which began as a concept for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy.By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests. Organizations were encouraged to measure—in addition to financial outputs—what influenced such financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.The underlying rationale is that organizations cannot directly influence financial outcomes, as these are"lag" measures, and that the use of financial measures alone to inform the strategic control of the firm is unwise.Organizations should instead also measure those areas where direct management intervention is possible. In so doing, the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. In practice, early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Customer," "Internal Business Processes"and "Learning and Growth."The balance scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

•The learning and growth perspective: “To achieve our vision, how will we sustain our ability to change and improve?”

•The business process perspective: “To satisfy our shareholders and customers what business processes must we excel at?”

•The customer perspective: “To achieve our vision, how should we appear to our customer?”

•The financial perspective: “To succeed financially, how should we appear to our shareholders?”

Implementing a Balanced Scorecard
We can summarize the implantation of a balanced scorecard in four general steps;
1.Define strategy.
2.Define measure of strategy.
3.Integrate measures into the management system.
4.Review measures and result frequently.Each of these steps is iterative, requiring the participation of senior executive and employees throughout the organization

Define Strategy
The balance scorecard builds a link between strategy and operational action. As a result it is necessary to begin the process of defining a balanced scorecard by defining the organization goals are explicit and what that targets have been developed.

Define Measures of Strategy
The next step is to develop measures in support of the articulate strategy. It is imperative that the organization focuses on a few critical measures at this point; otherwise management will be overloaded with measures. Also, it is important that the individual measures be linked with each other in a cause effect manner

Integrated Measures into the management system

The balanced scorecard must be integrated with the organization formal and informal structure, its culture, and its human resources practice. While the balanced Scorecard gives some means for balancing measures, the measures can still become unbalanced by others system in the organization such as compensation policies that compensate the manager strictly based on financial performance.

Review Measures and result Frequently

Once the balance scorecard is up and running it must be consistently reviewed by senior management. Theorganization should be looking for the following
•How do the outcome measures say the organization is doing?​
•How do the driver measures say the organization is doing?​
•How has the organization’s strategy changed since the last review?​
•How has the scorecard measures changed?​

The most important aspects of these reviews are as follows;
•They tell management whether the strategy is being implemented correctly and how successfully the strategy is working.​
•They show that management is serious about the importance of these measures.​
•They maintain alignment of measure to ever changing strategies.​

Difficulties in implementing Balanced Scorecard

The following problems unless suitably dealt with, could limit the usefulness of the balanced scorecard approach:
•Poor correlation between non-financial measures and result.
•Fixation on financial result. No mechanism for improvement.
•No mechanism for improvement.
•Measures overload.

Poor Correlation between Non-financial measures and result
Simply put there is no guarantee that future profitably will allow targets achievement in any non-financial area.This is probably the biggest problem with the balanced scorecard because there is an inherent assumption that future profitability does follow from achieving the scorecard measures, identifying the cause effect relationships among the different measures is easier said than done.This will be a problem with any system that is trying to develop proxy measures for future performance. While this does not mean that the balanced Scorecard should be abandoned it is imp that comp adopting such a system understand that the links between non-financial measures and financial performance are still poorly understood.

Fixation on Financial Results
As previously discussed not only are most senior managers well trained and very adept with financial measures but they also most keenly feel pressure regarding the financial performance of their comp. Shareholder are vocal and the board of directors often applies pressure on the stakeholders behalf. This pressure often overwhelms the long term uncertain payback of the non financial measures.

Non mechanism for Improvement
One of the most overlooked pitfalls of the balanced scorecard is that a company cannot achieve Stretch goals if the Company has no mechanism for improvement .Unfortunately achieving many of these goals require complete shifts in the way that business is done yet the company often does not have mechanism to make those shifts . The mechanism available takes additional resource and requires a changed in the company culture. These changes do not happen overnight nor do they respond automatically to a new stretch targets. Inertia often works against the company employees are accustomed to a self limited cycle of setting targets, missing those targets and read justing the targets to reflect what was actually achieved. Without a method for making improvement, improvements are unlikely to consistently happen no matter how good the stretch goal sound.

Measurement overload
How many critical measures can one manager track at one time without losing? Unfortunately there is no right answer to this question except it is more than 1 and less than 50. It too few then the manager is ignoring measures that are critical to creating success. If it too many then the manager may risk losing focus and trying to do too many things at once.
 
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