Proven Strategies
Consulting |
What
is the Balanced Scorecard?
A
new approach to strategic management was developed in
the early 1990's by Drs. Robert Kaplan (Harvard Business
School) and David Norton. They named this system the
'balanced scorecard'. Recognizing some of the weaknesses
and vagueness of previous management approaches, the
balanced scorecard approach provides a clear prescription
as to what companies should measure in order to 'balance'
the financial perspective.The balanced scorecard is a management
system (not only a measurement system) that
enables organizations to clarify their vision and strategy
and translate them into action. It provides feedback
around both the internal business processes and external
outcomes in order to continuously improve strategic performance
and results. When fully deployed, the balanced scorecard
transforms strategic planning from an academic exercise
into the nerve center of an enterprise. Kaplan
and Norton describe the innovation of the balanced scorecard
as follows:
"The
balanced scorecard retains traditional financial measures.
But financial measures tell the story of past events,
an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships
were not critical for success. These financial measures
are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create
future value through investment in customers, suppliers,
employees, processes, technology, and innovation."
The
Balanced Scorecard and Measurement-Based Management
The
balanced scorecard methodology builds on some key concepts
of previous management ideas such as Total Quality Management
(TQM), including customer-defined quality, continuous
improvement, employee empowerment, and -- primarily --
measurement-based management and feedback.
Double-Loop
Feedback
In
traditional industrial activity, "quality control" and "zero
defects" were the watchwords. In order to shield
the customer from receiving poor quality products, aggressive
efforts were focused on inspection and testing at the
end of the production line. The problem with this approach
-- as pointed out by Deming -- is that the true causes
of defects could never be identified, and there would
always be inefficiencies due to the rejection of defects.
What Deming saw was that variation is created at every
step in a production process, and the causes of variation
need to be identified and fixed. If this can be done,
then there is a way to reduce the defects and improve
product quality indefinitely. To establish such a process,
Deming emphasized that all business processes should
be part of a system with feedback loops. The feedback
data should be examined by managers to determine the
causes of variation, what are the processes with significant
problems, and then they can focus attention on fixing
that subset of processes. The balanced scorecard incorporates
feedback around internal business process outputs , but
also adds a feedback loop around the outcomes of business
strategies.
Outcome
Metrics
You
can't improve what you can't measure. So metrics must
be developed based on the priorities of the strategic
plan, which provides the key business drivers and criteria
for metrics managers most desire to watch. Processes
are then designed to collect information relevant to
these metrics and reduce it to numerical form for storage,
display, and analysis. Decision makers examine the outcomes
of various measured processes and strategies and track
the results to guide the company and provide feedback.
So
the value of metrics is in their ability to provide a
factual basis for defining:
- Strategic feedback to
show the present status of the organization from many
perspectives for decision makers
- Diagnostic feedback into
various processes to guide improvements on a continuous
basis
- Trends in performance
over time as the metrics are tracked
- Feedback around the measurement
methods themselves, and which metrics should be tracked
- Quantitative inputs to
forecasting methods and models for decision support
systems
