Question

The proponents of the balanced scorecard argue that it suggests a balanced framework of performance measurement and management which is strategically focused compared to the traditional performance measurement systems”. Comment on this statement and explain the challenges facing the implementation of the balanced scorecard system.                                      

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Answer 1

Balanced Scorecard

Introduction

The Balanced Scorecard (BSC) is a strategic performance management system used by many companies in the international business environment.The Balanced Scorecard is a performance measurement and strategic management system which appears suitable for use by all types and sizes of business. The BSC’s greatest strength for most businesses comes from its innate ability to integrate financial and non-financial measures together by measuring both strategic and business performance across four interrelated perspectives. Many studies have shown that the BSC can be successfully implemented within large-scale companies and organizations. However, there is limited empirical evidence regarding the use of the BSC within small companies.

The balanced scorecard was developed by Kaplan and Norton (1992) as a performance measurement framework that added strategic non-financial Performance measures to the traditional financial metrics to give managers and executives a more clear and holistic view of organizational performance. It has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The balanced scorecard was devised as a result of the need to incorporate non financial variables to measure performance of an organization.

challenges facing the implementation of the balanced scorecard system.    

Here are some of the key issues I have seen over the past several years that can cause a Balanced Scorecard initiative to fail:

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.

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.

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).