Balance Scorecard

“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.“

BALANCED SCORE CARDBalance scorecard is a system that measures and

evaluates the progress of an organization towards strategic objectives incorporating financial indicators as well as three other perspectives namely customer, internal business and learning / innovation.

The scorecard delineates the linkages between the four perspectives and the impact / interdependence among them. It helps an organization to provide continuity as well as monitor past present and potential performance.

However, the most important aspect of a balanced scorecard is that it enables the company to decide what is vital for the business to set appropriate targets and provide the necessary motivation to the employees for achieving the same.

BALANCED SCORE CARD The balanced scorecard system came of age during

the 90’s and Kaplan and Norton popularized it in 1992. Professional manager, the official magazine of Chartered Management Institute, UK reports reveal that the companies are very receptive to this tool and nearly 40% of UK companies have used it and 50% of them to a “great extent”. Comprehension about this system is wide spread both in US and Europe.

This system has been instituted not so much in terms of Key Performance Indicators (KPI) and target setting, but more for aligning actions to the company’s strategy. Actually, a comprehensive scorecard identifies exactly where the company is heading and what the company is trying to achieve. It also explains the objectives and communicates them across the organization.

BALANCED SCORE CARD The first step towards using this tool is to design it

properly on the basis of a consensus on the targets for achievement. As the scorecard is very powerful it is important to measure the deviations correctly and early. A delay in tracking may lead to the company derail from its track.

Approach to a balanced scorecard has following steps: How do we look to shareholders? Or to succeed

financially how should we appear to our shareholders? – Financial perspective

Identify goals / strategic objectives Develop measures Set targets Develop key performance indicators Take initiatives

BALANCED SCORE CARD What must we excel at? Or to satisfy our

shareholders and customers what business processes must we excel at? – Internal business

Identify goals / strategic objectives Develop measures Set targets Develop Key performance Indicators Take initiatives

BALANCED SCORE CARD Can we continue to improve and create

value? Or to achieve our vision how will we sustain our ability to change and improve? – Innovation and learning perspective

Identify goals / strategic objectives Develop measures Set targets Develop Key performance Indicators Take Initiatives

BALANCED SCORE CARD

How do customers see us? Or to achieve our vision how should we appear to our customers? – Customer perspective

Identify goals / strategic objectives Develop measures Set targets Develop Key performance Indicators Take Initiatives

BALANCED SCORE CARDo Note 1: All the above four steps are not

sequential; they are interdependent and as such will have to be developed through cross-functional effort.

o Note 2: The Key Performance Indicators will have to be developed for different layers of organization and different functions as they have a cascading effort across the organization. These indicators help to detect whether there is a short fall or the targets have been exceeded.

o Note 3: The Key Performance Indicators also become the lead indicators to portray misalignment and strategy at a point of time.

BALANCED SCORE CARDCompanies have used balanced scoreboard on an on

going basis as part of their strategic management activities. The mission statement is connected to its purpose and spelt out clearly as key values.

The balanced scorecard is likened to a steering wheel with four gears (Four perspectives) – customer, financial, operations and people. Latterly, a fifth (perspective) has been included in the form of community to reflect the impact of changing environment.

As a steering wheel balanced scorecard communicates the direction of strategy as it is being implemented through out the organization.

In some companies the business plan itself is prepared using balanced scorecard and also provide incentives on achievement of results.

The results are monitored on quarterly basis and more frequent review meetings.

BALANCED SCORE CARD The scorecard has been improved to account intangibles like

managing people, learning perspective, community behavior and so on. However, it is important to interpret these outputs and fully investigate the results, as there is a certain amount of complexity in the framework. Another salient feature of balanced scorecard is that it has a flexible framework that can be applied and adapted for a big or small business and for different circumstances and situations.

Canada’s Management Accounting guideline applying the balanced scorecard states “managers can use the balanced scorecard as a means to articulate strategy, communicate its details, motivate people to executive plans and enable executives to monitor results. Perhaps the prime advantage is that a broad array of indicators can improve the decision making that contributes to strategic success…Non financial measures enable managers to consider more factors critical to long term performance.”

BALANCED SCORE CARD Corporate social responsibility has gained great currency

and has become part of annual reporting by organizations across the globe. In India, the governments during the last decade have been advocating public private partnership in many projects that are oriented towards community development.

The focus of a company in respect of corporate social responsibility is to integrate this responsibility into the balanced scorecard’s four perspectives so that they can be monitored.

It will also establish proper alignment with the company’s strategy. The following table shows the integration of corporate social responsibility to balanced scorecard:

Balanced scorecard approach

Financial Perspective

Goals Measures

Internal Business Perspective

Goals Measures

Innovation andLearning Perspective

Goals Measures

Customer Perspective

Goals Measures

How do we lookto shareholders?

What must we excel at?

Can we continue toimprove and create value?

How do customers see us?

Kaplan, Robert S., and David P. Norton, “The Balanced Scorecard - MeasuresThat Drive Performance,” Harvard Business Review, January-February 1992, pp. 71-79.

Balanced scorecard approach

Balanced Score Card & Corporate Social Responsibility

Source: Figure 3, page 859, “The balanced scorecard and corporate social responsibility: Aligning values for profit”, David Crawford and Total Scaletta – The Management Accountant, Volume 42, No.11, November 2007.

Three Different Management Approaches

Project Management Business Process Improvement Balanced Scorecard

Age of Approach

Decades Began in DoD 1992 Began in 1990

Prime Customer

External Sponsor Internal Director External IG, Internal Director

Goal Definition

Project Requirements, Mission Needs Statement

Cost, cycle time reductions Strategic management system

Focus Technical Mission Business Processes Multiple perspectives

Scope Specialized unit unit to enterprise dept. to enterprise

Plans Plan of Action & Milestones Process Improvement Plan Strategic Plan, Performance Plan

Schedule & teaming

Work Breakdown Schedule, Action Items

Team directed, focus groupsCross-functional teams, 1-2 yr.

implementation

Management Activities

Team building, Budgeting, Task Tracking, Reviews

Baseline process analysis, to-be process design, automation

Define metrics, collect data, analyze data, decide on changes

Tools Microsoft Project, Primavera TurboBPR, IDEF0 Data collection system, scorecards

Measures of success

Deliverables on time, on budget

Cost reductions minus cost of BPI effort

Learning what strategies work; improved results on many metrics

SCM & BSC Integration

The four Main key elements in SCM, are SC operational efficiency, Optimization of SC cost, Customer satisfaction and Continuous improvement of SC.

The four key perspectives in Balanced Scorecard, are Internal Business Perspective, Financial Perspective, Customer Perspective and Learning and Growth perspective.

The four key elements of Supply Chain cay be measured through the four perspectives of Balanced Scorecard

Ex: The ability of SC Operational efficiency can be assessed via the measures that equate with Internal Business Perspective

Balanced Scorecard – SCM Goals

INTERNAL BUSINESS PROCESS

PERSPECTIVE

LEARNING AND GROWTH

PERSPECTIVE

CUSTOMER

PERSPECTIVE

FINANCIAL

PERSPECTIVE

FINANCIAL

EFFICIENCYSUPPLY CHAIN OPERATIONAL EFFICIENCY

CUSTOMER

SATISFACTION

BSS

MATRIX

To develop an efficient Customer Relationship Management

Increase Satisfaction

To increaseSUPPY CHAIN Responsiveness

Integrated Supply Chain (Organization/Information /

Technology integration)

To increase the Supply Chain

Flexibility

Increase the Supply Chain Delivery Reliability Performance

Optimise Supply Chain Cost

To be competitive in product price

To increase Supply Chain Asset Management

Efficiency

To increase the productivity

To develop an efficient and effective financial process

Increase revenue from current customers

THE VISION Supply Chain Strategy

Balanced Scorecard Parameters – SCM Goals

INTERNAL BUSINESS PROCESS

PERSPECTIVE

LEARNING AND GROWTH

PERSPECTIVE

CUSTOMER

PERSPECTIVE

FINANCIAL

PERSPECTIVE

FINANCIAL

EFFICIENCYSUPPLY CHAIN OPERATIONAL EFFICIENCY

CUSTOMER

SATISFACTION

BSS

MATRIX

Customer complaints in Percent

Delivery Performance

in Percent

Order Fulfillment Lead Times in

days

Integrated Supply Chain Organization in percentInformation in percent

(ex: ERP implementation and Supplier integration)

Supply Chain Response Time in

days

Fill Rates in percentPerfect Order Fulfillment in percent

Total Supply Chain Cost in Rs

Price competitiveness over Competitor

in percent

Cash-to-Cash Cycle Time in Days

% of Profit Margine

Transaction Process Time in days

% of revenue compare to last year

THE VISION Supply Chain Strategy

The Advantages of this Approach

• It emphasizes the inter-functional and inter-firm nature of supply chains and recognizes the need to ascertain the extent to which firms effectively work together and the extent to which functions are coordinated and integrated

• The framework will increase the chance that a “balanced” management approach in indeed practiced within firms and among the supply chain partners

• The example measures are suggestions that may stimulate management to create other measures appropriate to their unique circumstances.

• The use of this novel approach should help employees and managers focus attention on achieving goals that are beyond the typical measures of performances used within firms.