Question

Discuss the successful application of the Balanced Scorecard of the computer industry or sector. Find and list the reasons for the success and at least two factors that posed a problem.

Answer 1

BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. Gartner Group suggests that over 50% of large US firms have adopted the BSC. More than half of major companies in the US, Europe, and Asia are using the BSC, with use growing in those areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard fifth on its top ten most widely used management tools around the world, a list that includes closely-related strategic planning at number one. BSC has also been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.

The BSC suggests that we view the organization from four perspectives, and to develop objectives, measures (KPIs), targets, and initiatives (actions) relative to each of these points of view:

• Financial: often renamed Stewardship or other more appropriate name in the public sector, this perspective views organizational financial performance and the use of financial resources
• Customer/Stakeholder: this perspective views organizational performance from the point of view the customer or other key stakeholders that the organization is designed to serve
• Internal Process: views organizational performance through the lenses of the quality and efficiency related to our product or services or other key business processes
• Organizational Capacity (originally called Learning and Growth): views organizational performance through the lenses of human capital, infrastructure, technology, culture and other capacities that are key to breakthrough performance

Reason For The Success

In the early 1990s, the Balanced Scorecard (BSC) was introduced by Robert Kaplan, a Harvard Business School professor, and David Norton, the founder and president of Balanced Scorecard Collaborative, Inc., as a new way to work with business strategy. Today, more than half of the Fortune 1,000 companies in North America use the BSC, which has become the hallmark of a well-run organization. Many organizations say the scorecard is the foundation of their measurement and management systems.

Often, business owners and executives fall prey to the allure of setting too many financial goals. Or their goals are exclusively financial. Thinking too much about the financial side of business detracts from the other reasons they’re in business, such as employing people, contributing to their communities, or providing a needed product or service. Enter the Balanced Scorecard.

The BSC is an excellent management tool that ensure you have a holistic and balanced strategy as well as a way to track performance over time to asses whether goals are being met. To have that balanced and holistic strategy, organizations must have goals that feed off each other. The four perspectives are:

• Financial
• Customer
• Internal/Operational Process
• People/Learning

Take Yogurt Beach, a company with a top-line financial goal to increase the revenue by 10% annually: How will the owner achieve her financial goal? Sell more yogurt. In order to sell more yogurt, she must have a great product that’s different from the competitor down the street and provide outstanding customer service. And what does she need to do to deliver great customer service? Have efficient processes that deliver yogurt quickly. To excel at quick delivery, she has to have well-trained, friendly employees. With this example you can see how every step of the Balanced Scorecard is needed to be successful.

Factors and Problems

Poorly Defined Metrics

Metrics need to be relevant and clear. They should be depicted with visual indicators that are easily understood. In addition, metrics need to be collected at the ideal frequency for making decisions, and defined in such a way that the measurement can be consistently applied across the firm, even if their targets of performance differ (and they should). A system that has sloppy or inconsistently defined metrics will be vulnerable to criticism by people who want to avoid accountability for results.

Lack of Efficient Data Collection and Reporting

A primary reason that companies overemphasize financial metrics at the expense of other important operating variables is the simple fact that systems already exist for collecting and reporting financial measures. Companies that deliberately plan to define the vital few metrics and commit the resources to automate data collection and subsequent reporting tend to achieve good results. Unfortunately, in most organizations, if collecting metrics data consumes too much time and energy, they will not be captured. That is why it is important to prioritize key performance indicators so you can be confident that your investment in metrics is spent on the information that will be most relevant to improving organizational performance.

Lack of a Formal Review Structure

Scorecards work best when they are reviewed frequently enough to make a difference. If a metric value changes on a daily basis and the variables within the control of management can be affected on a daily basis, then the metric should be reviewed on a daily basis. Additionally, metrics review meetings should follow a standard agenda, with clearly defined roles for all attendees and an expectation that follow through on any agreed upon actions will be monitored at each meeting.

Finally, review of metrics is ideally cross-functional, including peer groups who have a shared responsibility for process results. It is important to begin these meetings as early as possible in the deployment of a new metrics system. Do not wait until all of the metrics are defined, automated and deployed. Start with the metrics you already have defined and with manual data collection, if necessary. This is an important behavior change, which is essential for the success of your metrics program.

No Process Improvement Methodology

The value of Balance Scorecard systems relies on the premise that once performance problems are identified, there is an efficient and effective method for diagnosing and addressing root causes. Solutions can then be developed and performance gaps can be closed. If the organization does not have standard methodologies and toolkits for addressing process problems, the amount of effort required to derive a problem solving approach for each new performance gap could eventually damage the performance improvement program as it will be seen as taking too many resources away from daily operations. When this happens, there can be no adaptation and performance will continue to deteriorate. Using time-tested process improvement methodologies, perhaps in combination with problem solving methodologies (e.g. Six Sigma) can greatly alleviate this problem.

Too Much Internal Focus

One major criticism of the Balanced Scorecard is that it encourages an internal focus. This is not as much an indictment of the principle as it is the way companies put the principle into practice. To help overcome this problem, you should ALWAYS start with an external focus – the view of your organization’s SuperSystem. The goal is to achieve a balance of enterprise level metrics as you assess the organization’s market, shareholders, competitors, employees and stakeholders. Executives will use data about their SuperSystem to assess Strengths, Weaknesses, Opportunities and Threats (SWOT). This will then guide them to gaps in their enterprise level metrics. Then, all other levels of metrics are tested for alignment with the enterprise level metrics, thereby ensuring that even internal metrics link to external performance drivers.