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BALANCED SCORECARD

DP RATHNASIRI

EDHRM/01/33

BALANCED SCORECARD
The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers in the early part of the 20th century. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. 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 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 benefits of the balanced scorecard have been identified by many organizations:

Improved organization alignment Improved communications, both internally and externally Linked strategy and operations More emphasis on strategy and organizational results I Integrated strategic planning and management.

PERSPECTIVES The balanced 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 & GROWTH PERSPECTIVE This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledgeworker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as

well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldric criteria call "high performance work systems."

THE BUSINESS PROCESS PERSPECTIVE This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements. These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. THE CUSTOMER PERSPECTIVE Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. THE FINANCIAL PERSPECTIVE Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financialrelated data, such as risk assessment and cost-benefit data, in this category. STRATEGY MAPPING Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows). The Nine Steps to Success balanced scorecard framework. This framework, first developed in 1997, has been used successfully in hundreds of organizations worldwide organizations including business and industry, Federal and municipal

governments, and nonprofit associations. Organizations ranging in size from six employees to over 100 thousand members have used the framework.

BUILDING & IMPLEMENTING A BALANCED SCORECARD: NINE STEPS TO SUCCESS

The Nine Steps to Success, is a disciplined, practical approach to developing a strategic planning and management system based on the balanced scorecard. Training is an integral part of the framework, as is coaching, change management, and problem solving. Emphasis is placed on teaching clients to fish, not handing them a fish, so the scorecard system can be sustained. A key benefit of using a disciplined framework is that it gives organizations a way to connect the dots between the various components of strategic planning and management, meaning that there will be a visible connection between the projects and programs that people are working on, the measurements being used to track success, the strategic objectives the organization is trying to accomplish and the mission, vision and strategy of the organization.

STEP ONE: ASSESSMENT

One of the scorecard building process starts with an assessment of the organizations Mission and Vision, challenges (pains), enablers, and values. Step One also includes preparing a change management plan for the organization, and conducting a focused communications workshop to identify key messages, media outlets, timing, and messengers.

STEP TWO: STRATEGY In Step Two, elements of the organizations strategy, including Strategic Results, Strategic Themes, and Perspectives, are developed by workshop participants to focus attention on customer needs and the organizations value proposition. STEP THREE: OBJECTIVES In Step Three, the strategic elements developed in Steps One and Two are decomposed into Strategic Objectives, which are the basic building blocks of strategy and define the organization's strategic intent. Objectives are first initiated and categorized on the Strategic Theme level, categorized by Perspective, linked in causeeffect linkages (Strategy Maps) for each Strategic Theme, and then later merged together to produce one set of Strategic Objectives for the entire organization. STEP FOUR: STRATEGY MAP In Step Four, the cause and effect linkages between the enterprise-wide Strategic Objectives are formalized in an enterprise-wide Strategy Map. The previously constructed theme Strategy Maps are merged into an overall enterprisewide Strategy Map that shows how the organization creates value for its customers and stakeholders. STEP FIVE: PERFORMANCE MEASURES In Step Five, Performance Measures are developed for each of the enterprisewide Strategic Objectives. Leading and lagging measures are identified, expected targets and thresholds are established, and baseline and benchmarking data is developed. Most of us have heard some version of the standard performance measurement clichs: what gets measured gets done, if you dont measure results, you cant tell success from failure and thus you cant claim or reward success or avoid unintentionally rewarding failure, if you cant recognize success, you cant learn from it; if you cant recognize failure, you cant correct it, if you cant measure it, you can neither manage it nor improve it," but what eludes many of us is the easy path to identifying truly strategic measurements without falling back on things that are easier to measure such as input, project or operational process

measurements. Performance Measurement is addressed in detail in Step Five of the Nine Steps to Success methodology. In this step, Performance Measures are developed for each of the Strategic Objectives. Leading and lagging measures are identified, expected targets and thresholds are established, and baseline and benchmarking data is developed. The focus on Strategic Objectives, which should articulate exactly what the organization is trying to accomplish, is the key to identifying truly strategic measurements. Strategic performance measures monitor the implementation and effectiveness of an organization's strategies, determine the gap between actual and targeted performance and determine organization effectiveness and operational efficiency. Good Performance Measures: Provide a way to see if our strategy is working Focus employees' attention on what matters most to success

Allow measurement of accomplishments, not just of the work that is performed Provide a common language for communication Are explicitly defined in terms of owner, unit of measure, collection frequency, data quality, expected value(targets), and thresholds Are valid, to ensure measurement of the right things Are verifiable, to ensure data collection accuracy

STEP SIX: INITIATIVES In Step Six, Strategic Initiatives are developed that support the Strategic Objectives. To build accountability throughout the organization, ownership of Performance Measures and Strategic Initiatives is assigned to the appropriate staff and documented in data definition tables. STEP SEVEN: AUTOMATION In Step Seven, the implementation process begins by applying performance measurement software to get the right performance information to the right people at the right time. Automation adds structure and discipline to implementing the Balanced Scorecard system, helps transform disparate corporate data into information and knowledge, and helps communicate performance information. In short, automation helps people make better decisions because it offers quick access to actual performance data. STEP EIGHT: CASCADE In Step Eight, the enterprise-level scorecard is cascaded down into business and support unit scorecards, meaning the organizational level scorecard (the first Tier)

is translated into business unit or support unit scorecards (the second Tier) and then later to team and individual scorecards (the third Tier). Cascading translates highlevel strategy into lower-level objectives, measures, and operational details. Cascading is the key to organization alignment around strategy. Team and individual scorecards link day-to-day work with department goals and corporate vision. Cascading is the key to organization alignment around strategy. Performance measures are developed for all objectives at all organization levels. As the scorecard management system is cascaded down through the organization, objectives become more operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as ownership is defined at each level. An emphasis on results and the strategies needed to produce results is communicated throughout the organization. STEP NINE: EVALUATION In Step Nine, an Evaluation of the completed scorecard is done. During this evaluation, the organization tries to answer questions such as, Are our strategies working?, Are we measuring the right things?, Has our environment changed? and Are we budgeting our money strategically?

MENT EMBRACING GOVERNNG EVIDENCE-BASED POLICY MAKING The challenges faced by government organizations are not that different than those of business. They need to do more with less, only all under the watchful eye of legislators, the media and the general public. And those challenges are best met with good performance management practices. Good government performance management needs solid strategic thinking and planning, clear articulation of key strategic objectives, transparent measurement of progress toward those objectives and analysis and communication of results to stakeholders. BUILDING A HIGH-PERFORMING GOVERNMENT The administration's management agenda will be based around six themes designed to create a High-Performing Government: 1. Putting Performance First: Replacing PART with a New Performance Improvement and Analysis Framework 2. Ensuring Responsible Spending of Recovery Act Funds 3. Transforming the Federal Workforce 4. Managing Across Sectors 5. Reforming Federal Contracting and Acquisition 6. Transparency, Technology, and Participatory Democracy

There are several major challenges to developing and sustaining the balanced scorecard:

Engaged leadership Maintaining momentum Measuring what matters Not using a disciplined framework to build the system Mistakenly thinking a scorecard system is a short-term project. Not involving a cross-section of the organization in developing the system Not thinking strategically enough Not incentivizing desired behavior changes

The "buzz word" may change, but not the underlying concepts, which are here to stay for a long time -- thinking strategically, measuring performance, evaluating results, feedback -- these are fundamental concepts in management that have been around a long time and will be here in the future. So managers who learn the methods of the balanced scorecard will be in a better position to lead in the future. They will have the right skills to think, plan and assess the success of their organizations -- these skills will be valuable for the foreseeable future. The balanced scorecard is intended as a strategic system for planning and managing a whole portfolio of programs within an organization. However, as a manager of one or more such programs, the balanced scorecard can help you. It raises the visibility of program performance -- not only in traditional on-time, on-budget terms, but also in terms of its strategic significance to the desired outcomes of the whole organization. So, if you know that you are working on a program that is vital and strategic, the balanced scorecard and its measurements can help you to defend your program. Also, since strategy is everyone's job, you can use the balanced scorecard's strategic map to guide the direction of your program to maximize outcome performance. As the de facto expert in your program's definition of performance, you have the right to define what metrics will be used to measure your program's performance -- in many cases, these metrics cannot be dictated from above. You also have the authority and responsibility to measure your own program's performance. By now, many major corporations have adopted, or are in the process of implementing, the balanced scorecard as their framework for executing strategy and monitoring performance. It has been found to be an effective way to achieve that most elusive of executive goals: execution. Also it has been accepted by most of the business departments of colleges and universities as a part of Is the balanced scorecard relevant to government agencies? Taxpayers, the ultimate customers of government, are demanding more accountability for the use of their funds. They want to see tangible results from all government agencies, at all levels. In the U.S., this demand is reflected in the Government Performance and Results Act of 1993, one of the most influential laws affecting how the Federal Government works. More recently, the President's Management Agenda, promulgated by the Office of

Management and Budget, includes language requiring performance-based scoring and budgeting of all activities of agencies in accordance with top-level strategies. The balanced scorecard is the only framework readily available that can align strategy, performance and budgeting to meet these requirements. Therefore, government agencies are increasingly looking to the balanced scorecard approach their management curriculum. Nonprofit organizations are committed to a mission, and they need to focus their limited resources efficiently in order to achieve mission effectiveness and value for their members and sponsors. The balanced scorecard system has a multiple focus on several perspectives, including financial performance. For a nonprofit organization, profit is not a determining goal of strategy; but good stewardship is important, so this perspective or lense is used to describe the financial aspect of performance. In this case, the balanced scorecard provides a comprehensive framework that will help association directors and managers better define strategies, track performance, and provide data to show their various stakeholder groups how well they are performing in terms of mission value and outcomes. While the balanced scorecard is almost always described as a strategic management system, Six Sigma is usually defined in terms of quality improvement related to internal business processes. Six Sigma is defined in Quality America as: " a Quality Improvement methodology structured to reduce product or service failure rates to a negligible level (six sigma is equivalent to approximately 3.4 failures per million events). To achieve these levels of quality, Six Sigma encompasses all aspects of a business, including management, service delivery, design, production and customer satisfaction." Six Sigma was developed at Motorola, GE and Allied Signal, and is widely used in many businesses. While the original concept has expanded over the years to become more strategic, most balanced scorecard organizations will use Six Sigma as project initiatives to improve the efficiency of internal business processes. Both Six Sigma and balanced scorecard practitioners use similar best practices in management to design and deploy these systems. They both require dedicated top-level management support, a dedicated team of change agents, strategic alignment, implementation of improvement initiatives as projects, cultural change management, and a combination of top-down and bottom-up development. Also, Six Sigma practitioners often adopt the balanced scorecard as a way of deriving appropriate performance metrics. The balanced scorecard is not a cookbook of performance measures. It requires creative strategic thinking and decisions by various people throughout an organization to develop an effective balanced scorecard system. No two organizations are alike. "Some assembly is required." The balanced scorecard, being a strategic management system, can serve as the "front end" for a performance-based budget. Its performance measures and strategic plans can provide rational guidance for budget formulation and resource allocation. In fact, some organizations have gone so far as to develop flexible strategic organizations and financial management systems that allow continuous reallocation of funds, without the need for major cyclical efforts in budgeting. It is important not only to build the system right, but to maintain it by continual use and re-education of personnel on its purpose and benefits. Since everything is changing in the business

environment, a balanced scorecard program is never "done" -- it is an ongoing journey. So the key is to maintain strategic alignment to mission and vision and desired long-term strategic results -- these are unlikely to change much, and they provide a "pivot" around which everything else revolves. Leaders should help to clarify this vision. Use the Institute's recommended communication techniques to keep people focused on these results and the strategies for getting there.

Reference :- Internet access of Balanced score card

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