Balanced Scorecard Development Free Essays

string(86) " related trying to show one as the causation of one another; simply to reach targets\." Abstract The balanced scorecard was introduced in 1992 as a performance measurement tool and has developed now to form a strategic management system. This paper uses eight articles, identified in Figure 1 along with extra materials to track and analyse developments in the design and implementation. The paper shows examples of the scorecard in practice and concludes that developments have been beneficial overall. We will write a custom essay sample on Balanced Scorecard Development or any similar topic only for you Order Now It also highlights problems encountered along the way and further areas for improvement. For years managers have used financial measures to monitor performance however a study carried out in 1990 led to the development of the first generation balanced scorecard (BSC); a strategic planning and management system. By including financial and operational measures,it solved the issue that managers were beginning to reject financial measures during the 1980s and 1990s (Letza, 1996). The BSC originated analysing four perspectives; customer, internal, learning and financial,with focus driven by four questions shown in Figure 2. The BSC encouraged managers to focus on few critical measures to prevent complexity and information overload, however ensured several areas were looked at simultaneously as organisations became more complex (Kaplan Norton, 1992). Choice around the measures allows adaptability and flexibility when using the model. This is vital in order to keep up with global competition and the ever changing environment. Companies must acknowledge this flexibility and as their strategy changes, so must the measures to stay in line with overall aims. The introduction of the BSC coincided with the recession in the 1980’s and 1990’s. Therefore companies will have been more enthusiastic about performance measurement and seen this as a good way to track progress towards strategy, growth and profit. Today, 20 years on, the core perspectives have stayed with the individual measures being adapted and perspectives added depending on the company’s strategic goals. The BSC has evolved from a performance measurement tool enforced by few, to a strategic management tool used worldwide; with the main developments being ‘driven primarily by observed weaknesses in the design process rather than in the architecture of the original idea’ (CobboldLawrie, 2002). Financial measures were satisfactory for the industrial era however adapting to change in skills and competencies allowed the scorecard to produce ‘richer and more relevant information about activities they are managing than is provided by financial measures alone’ (CobboldLawrie, 2002). No individual measure produces adequate information to plan. When planning a journey, the objective is to get from one point to another with lots of dials producing information on the likelihood of succeeding. The fuel gage alone doesn’t set the scene however collectively the measures allow a judgements and decisions to be made. For example, to increase the likelihood of success you may add more oil or fuel. In business with the objective to boost sales you may increase quality and therefore sales. Introducing operational measures to performance measurement, allows these factors be monitored as the drivers of future financial performance. As the number of measures is limited, companies must identify the factors that are key performance drivers in order to achieve successful implementation. With the first generation scorecard, very little was known about the implementation of the BSC. This meant companies were not gaining the full effects of improved performance. ‘What you measure is what you get’ (Kaplan ;Norton, 1992). Therefore if you measure things that have no influence, directly or indirectly to profitability and growth then it will be impossible to improve. Hence the measures must be in line with a company’s strategic objectives. Kaplan and Nortonintroduced the four processes for managing strategy shown in Figure 3 to emphasise the need for the BSC to be linked to strategy, but there was no clarity to the importance and effect of this. Many would have good measures in place such as customer satisfaction but would not analyse this further to improve profitability, therefore a wasted opportunity as there was no real vision of making it happen. The design however, was taken on successfully by many companies as it brought everything together in one clear report. Words were kept minimal and visual aids were used to represent and explain measures. This proved effective as few words paint huge pictures, and people are designed to accept pictures and often remember these better. The BSC also looks at the whole organisation as opposed to separate departments therefore bringing all silos together. Many organisations have individual cultures within each silo and therefore departments are often driven towards targets at departmental level as opposed to overall corporate objectives. Therefore it is crucial that all measures are monitored to ensure that the targets are met through the right objectives, and not at the expense of another. For example the production department may increase productivity leading to more sales and potentially higher profits however the quality may slack causing customer satisfaction to fall. This could cause reputational damage leading customers to go to competitors who offer higher quality. The second generation scorecard expanded on this highlighting filtering and clustering as areas of concern. This took the BSC from the measurement system to an integrated management system while still focussing on strategy and performance drivers. Often this involved relating measures to key performance indicators. The second generation scorecard introduced strategic objectives and developed causality further. This development addressed the issue of an ‘inability to link a company’s long-term strategy with its short term actions’ (Kaplan ; Norton, 1996). Adding phrases to the four perspectivesallowed companies to select measures around their strategic vision. This selection method provided more thoroughness and made implementation clearer and more defined. Causality was included in the first generation scorecard with the four statements shown in Figure 4 but the second generation developed this by indicating relationships between the measures across the perspectives shown in Figure 5; as opposed to just vague links between the perspectives. This increased the urge to ‘prove’ links (Kaplan ; Norton, 1996). This could have been bad for companies as employees may have tried to link movements in the performance measures that weren’t related trying to show one as the causation of one another; simply to reach targets. You read "Balanced Scorecard Development" in category "Essay examples" This would be more common when financial rewards were linked to performance. Even with this is mind, the linkage model became an important part of the BSC design. Introduction of software reporting systems improved managers’ ability to react with fast diagnosis and quick interventions when problems occurred. The early software provided by AT;T, and later by companies including IBM; used email and diary programs to fasten this process. Software caused confusion as many believed it would enable design and implementation of the BSC. However, it is performance management software to use after implementation to ensure performance information gets ‘to the right people at the right time’ (Balanced Scorecard Institute, 2013). As it allowed data to be stored, objectives could be allocated to owners and measures to objectives; allowing managers to make historical comparisons to measure performance accurately over time. It also helped communicate the information effectively and enforced more control and organisation. Some packages allow performance to be measured and tracked at departmental level, project level or the organisation as a whole. This only works if there is strategic alignment throughout the hierarchy. Organisations can then narrow down the specific areas that are underperforming in order to increase focus to improve or divest that part. Although the software has many benefits some find it ‘difficult to adapt to the needs of a growing and dynamic company’ (IBM, 2013). Hence, many prefer to use self-developed software however it sometimes lacks required functions and solutions to the cause and effect; as the specialist skills are not there to develop the program. Difficulties still arose in selecting relevant measures and target setting due to conflicting thoughts amongst management. There was also difficulty communicating the linkage model to lower level staff if they did not already have knowledge of the model. This could cause problems when trying to motivate teams as there will be different interpretations of aims and targets; therefore employees working towards different goals. The late 1990’s saw the third generation and the development of the destination statement (Figure 6) in order to achieve clarification through checking the measures, objectives and targets selected. The destination statement is a form of ‘what if’ analysis that brought the tool closer to company strategy, it’s management and implementation. By estimating quantified amounts of consequences and achievementsfor a set future period; companies could easily compare actual achievements to targets and benchmark against others externally, in the case it was to stick with objectives from the linkage model. For example the destination statement would predict a rate of customer satisfaction for 3 years that you could check back against annually. This will identify under achievements, perhaps where you can enhance quality to boost satisfaction; and over achievements where you can identify what successful policies to keep. Management teams could easily relate to the statement to communicate down the hierarchy in order to gain a single interpretation, as it did not include looking at complex strategic objectives. Therefore a reversal of design as it was seen as an early stage in the process, as opposed to the final,making selection of measures and ausality easier. Companies have proven success without financial measures. Svenska Handelsbanken, while not disclosing use of the BSC; have gone over thirty years with ‘no budgets, no absolute targets, and no fixed plans’ but with specific performance measures in place (Daum, 2001). More recently, in 2003 a new CEO adopted the BSC for Lloyds TSB in order to ‘show employees how their actions impact their colleagues and customers and how this, in turn, translates into our overall performance’ (Lloyds TSB, 2013). This linked objectives of 80,000 employees, emphasizing the advantage of aligning the whole organisation. By involving employees at every level in some aspect of the process generates ‘acceptance of and commitment to the concept’ (Ward, 2005). Implementation proved successful to drive the company towards growth and away from being sales and cost driven, which had caused them to lose their strong market position. ‘The cause and effect chain of events’ was critical for them to see that would drive the revenue up as opposed to just a target of increased sales (Ward, 2005). As Lloyds are large and have overseas staff they could have faced technical and strategic challenges including cultural conflict and difficulties selecting measures. Companies with a diverse workforce should ensure they measure things that can be influenced and changed by employees. Lloyds also highlighted the point that implementation takes time and resources to ensure thoroughness. A tight deadline imposed ‘danger of completing the task while missing the goal’ (Ward, 2005). They recognized the importance employees understanding the concept before implementation so brought in a BSC specialist, who had worked closely with Kaplan and Norton to run seminars and lectures; in order to reduce this danger. Not only do employees need to understand the concept and accept the process; they should include feedback including how many employees see it as motivational and effective. If employees do not enjoy what they are doing they will be inclined to only meet targets and not excel further. The strong focus of the scorecard encourages companies to focus on what they really need to measure as opposed to what is easy to measure; resulting in all decisions being made around the strategy. The BSC changed the way people looked at performance measurement. Previously it was seen as a method to ontrol employees but the tool encourages targets in order for employees to work towards. The idea was that employees would adapt their behaviour accordingly to reach goals; hence giving them more freedom, motivation and involvement in the process. However, some may argue that the focus has shifted too far towards operational matters that there is not financial involvement. Adaptability should allow those com panies to change to their needs. The BSC will vary for each company depending on how dynamic the industry is and what the individual aims and strategy include. Lloyds TSB added a fifth perspective as they felt it was a key driver to the company’s strategic direction. Although there are BSC failures, the advances in the design have allowed more successful implementations over the years. There is now more knowledge and literature available because more companies have adopted this management tool; but more importantly there are significant successes documented for teams to learn from. With corporate social responsibility being so highly regarded nowadays due to greater awareness and regulation, modern scorecards have seen a fifth sub-perspective introduced; environment/external. This shows the broader impact on society than is indicated through the customer perspective; hence giving more in-depth analysis. As long as the process is carefully planned, communicated and regularly monitored it should prove successful however there is always room for improvement with the uncertainty in the ever changing environment. The scorecard, instead of providing single destination outcomes could include risk and probabilities related to various possible outcomes. In conclusion, the economic environment is only going to become more dynamic but the last twenty years has proven that continuous developments should ensure the BSC is kept up to date in order to stay a useful management tool. Figure 1 – Main Articles Used Author| Title| Daum. J| Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century? | Cobbold. I ; Lawrie. G| The Development of the Balanced Scorecard as a Strategic Management tool| Kaplan. R ; Norton. D| The balanced scorecard – measures that drive performance| Kaplan. R ; Norton. D| Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part 1| Kaplan. R ; Norton. D| Using the balanced scorecard as a strategic management system| Letza. S| The design and implementation of the balanced business scorecard| Schneiderman. A| Why Balanced Scorecards Fail| Ward. A| Implementing the Balanced Scorecard at Lloyds TSB| * Full references for the articles are shown in the reference list at the end of this paper* Figure 2 – Four Perspectives for Balanced Scorecard Perspective| Why? | Customer| â€Å"To achieve our vision, how should we appear to our customers? | Internal Business Process| â€Å"To satisfy our shareholders and customers, what business processes must we excel at? â€Å"| Learning and Growth| â€Å"To achieve our vision, how will we sustain our ability to change and improve? â€Å"| Financial| â€Å"To succeed financially, how should we appear to our shareholders? â€Å"| Figure 3 – The Balanced Scorecar d Process Adapted from – Kaplan, R. S. and Norton, D. P. , Using the balanced scorecard as a strategic management system, Harvard Business Review, January-February 1996, 75-85. Available from: http://scholar. google. co. uk [Accessed 23 February 2013] Figure 4 – First Generation Balanced Scorecard Source – Antunes. G et al. , Process improvement measures in social area organisations: A study in institutions for elderly: survey results, The TQM Journal. Available from: http://www. emeraldinsight. com [Accessed 15 February 2013] Figure 5 – Second Generation Balanced Scorecard/Linkage Model Source – Cobbold, I. C. and Lawrie, G. J. G. , 2002. The Development of the Balanced Scorecard as a Strategic Management tool, 2GC Website. Available from: http://www. 2gc. co. uk [Accessed 19 February 2013] Figure 6 – Third Generation Balance Scorecard/Destination Statement Andersen. H. , Effective quality management through third-generation balanced scorecard, International Journal of Productivity and Performance Management, Available from: http://www. emeraldinsight. com [Accessed 21 February 2013] References Andersen. H. , Effective quality management through third-generation balanced scorecard, International Journal of Productivity and Performance Management, Available from: http://www. emeraldinsight. com [Accessed 21 February 2013] Antunes. G et al. , Process improvement measures in social area organisations: A study in institutions for elderly: survey results, The TQM Journal. Available from: http://www. emeraldinsight. com [Accessed 15 February 2013] Balanced Scorecard Institue, 2013. The Balanced Scorecard Technology: Strategic Performance Management Automation. U. S. Balanced Scorecard Institute. Available from: http://www. bala ncedscorecard. org/software/balancedscorecardsoftware/tabid/61/default. aspx Balanced Scorecard Institue, 2013. What is the Balanced Scorecard. U. S. Balanced Scorecard Institute. Available from: http://www. balancedscorecard. org/bscresources/aboutthebalancedscorecard/ tabid/55/default. aspx Cobbold, I. C. and Lawrie, G. J. G. , 2002. The Development of the Balanced Scorecard as a Strategic Management tool, 2GC Website. Available from: http://www. 2gc. co. uk [Accessed 19 February 2013] Daum, J. H. , Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century? , Controlling finance, July 2002. Available from: http://scholar. google. co. uk [Accessed 4 March 2013] Drury, C. , 2008. Management and Cost Accounting. 7th Edition. London: Cengage Learning. IBM, 2013. Balanced Scorecard Software. U. S. IBM. Available From: http://www-01. ibm. com/ software/analytics/cognos/balanced-scorecard-software. tml IBM, 2013. Innovation Center. U. S. IBM. Available From: http://www-01. ibm. com/software/ data/cognos/innovation-center/advisors. html Kaplan, R. S. and Norton, D. P. , The balanced scorecard – measures that drive performance, Harvard Business Review, January-February 1992, 71-79. Available from: http://scholar. google. co. uk [Accessed 21 February 2013] Kaplan, R. S. and Norton, D. P. , Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part 1, American Accounting Association Accounting Horizons, 15 (1), 75-85. Available from: http://scholar. google. co. k [Accessed 23 February 2013] Kaplan, R. S. and Norton, D. P. , Using the balanced scorecard as a strategic management system, Harvard Business Review, January-February 1996, 75-85. Available from: http://scholar. google. co. uk [Accessed 23 February 2013] Letza, S. , 1996. The design and implementation of the balanced business scorecard. Business Process Re-engineering Mangement Journal, 2(3), 54-76. Available from: http://www. emeraldinsight. com [Accessed 15 February 2013] Lloyds Banking Group plc, 2009. Annual Report 2008. United Kingdom: Lloyds Banking Group plc. Available from: http://www. lloydsbankinggroup. om/investors/financial_performance/ company_results. asp#2007 Lloyds Banking Group plc, 2013. Performance Management. United Kingdom. Lloyds Banking Group pl c. Available from: http://www. lloydstsb-annualreport. com/businessreview/our_people/ performance_management/ Schneiderman, A. M. , Why Balanced Scorecards Fail, Journal of Strategic Performance, January 1999, 6-11. Available from: http://scholar. google. co. uk [Accessed 6 March 2013] Ward, A. , Implementing the Balanced Scorecard at Lloyds TSB, Strategic HR Review, 4 (3), 16-19. Available from : http://www. emeraldinsight. com [Accessed 28 February 2013] How to cite Balanced Scorecard Development, Essay examples