This study examines the way to employ BSC to manage organization operation performance from four perspectives, including customer perspective, financial perspective, innovation and learning perspective, and internal process perspective. The essay first introduces the formulation of the framework and its content, and then discusses how to use the BSC to facilitate operation performance evaluation. Then, several challenges are also put forward with possible solutions.
Keyword: BSC, implementation, performance evaluation, challenges
Table of Contents
Conventionally, government and non-profit agencies managed their organizational performance by evaluating their process performance, focusing factors such as the number of programs that agency undertook, or the fiscal year budget. On the contrary, private business usually looks at financial measures such as earnings per share, price per earnings, or return on equity market share. However, these two management strategies did not cover all indicators that reflect an organization's performance. As a result, to balance the need for evaluation of both internal process performance and that financial performance, Kaplan and Norton introduced a strategic management accounting technique in 1992(Kaplan and Norton, 1992), the Balanced Scorecard, which revolutionized the way how management come up with performance metrics.
David P. Norton and Robert S. Kaplan published their work The Balanced Scorecard-Measures That Drive Performancein the Harvard Business Review in 2002 (Inamdar et al., 2002), which was the very first paper mentioned the methodology of balanced scorecard. In this paper, they stated that managers should begin from the four aspects to evaluate the organization performance, including financial indicators, customer, internal business process, learning and growth, which contradicted the conventional practice of evaluating the performance of an organization only via financial performances. In 2000, the two authors argued in their new book that the balanced scorecard would significantly affect the profitability and competitiveness of a strategy-oriented organization, since the organization would be able to match its resources with its long-term strategic goal, striving to achieve its vision(Norreklit, 2000).
According to t Kaplan and Norton’s theory (Kaplan, 2004), performance measurements consist both process and results indicators. They used an airplane cockpit as an example to illustrated their idea. Pilots, when completing the complicated task of flying an airplane, have to get access to information about fuel, altitude, speed, and other indicators that describe current situation and predict potential changes. It would be fatal if they only make judgment based on one set of information. In an organization, mangers need to be able to view organization performance from different perspective and in several areas. As a result, the balanced scorecard provides a set of information that clearly outlines the performance within each sectors and the overall situation.
The BSC requires management gather information from four perspectives (Niven, 2013).
To achieve long-term success in financial performance, an organization must provide products with high quality to customer to win their satisfaction. Balanced Scorecard sets two levels of performance indicators from customer perspective. First, management must be prepared to meet the expectation of customers, including customer royalty, customer acquisition, customer satisfaction, etc. (Inamdar et al., 2000)Second, it is the segment of the first level target to select the specific evaluation and format specific performance evaluation scale. In this dimension, it mainly answers what customers expect from us.
The BSC requires analysis of the internal process during the value chain, and it categorizes related indicators into four types, including time-based evaluation, flexibility-oriented evaluation quality-based evaluation, and cost-indicated evaluation (Inamdar et al., 2002).
The goal of the balanced scorecard is to put more emphasis on the future and long-run achievement, and to avoid short-term behavior. Besides the traditional investing method of upgrading equipment and technology (Kaplan, 2004), it put increasing emphasis on investing its people and the whole operational processes through employee training and technology innovation. The measures include employee productivity and cycle sales.
The BSC includes financial indicator as a starting point to formulate the performance evaluation and management systems (Kaplan and Norton, 1992). The rationale behind is that an organization should have profits or funding to survive and grow its business, and performance should be targeted with financial indicators. In addition, since the ultimate performance of an organization is measured by its profitability, financial indicators should be takin into consideration.
The key step to BSC implementation is to develop the strategy map of an organization(Harden, 2016), which shows the links between objectives derived from each of the four perspectives in the BSC measurement System with cause-and-effect relationships(S. Kaplan, 2004). As Kaplan and Norton mentioned, the strategy map and the BSC are two components in the flow from the mission of the company to the outcomes and performances. It starts from articulating the business’s mission, values, and vision, which should be clearly stated rather than broadly or not specifically defined. Then the management needs to map out the strategy plan, which links the business’s vision to its results. Management often has difficulties in matching their clear mission statement with their daily decisions and operations, thus the BSC will provide a logical framework that critical objectives can be linked with and translated into meaningful and practical daily operations.
Next, after mapping its strategy with the BSC, the next step is to create measures and indicators that will reflect the organizations’ performance. The BSC put the same weight on bot lag and lead performance indicators. Lag indicators are measures that evaluate the results and historical performance, including market share and quarterly revenues (Niven, 2013). Lead indicators, on the other hand, include proposal written and target set, which has predictive nature and will allow the organization to strive to achieve the goal and make adjustment based on results.
From the financial perspective, in a study by Wu et al.(Liz Murby, 2005), they revealed the fact that the measurement that are often adopted by wealth management banks include ability to achieve profitability target, efficiency of management assets, and customer’s market share ratio. Recall Another example is in the book, to increase revenue, the television company HBO started to sell new types of television and provide current customers with broader choices of channels to enhance customer relationships (Niven, 2013). In order to measure the past financial performance of sales of new products, the company could measure its revenue from new sales. To evaluate its customer retention and royalty enhancement, it could evaluate the market share after the promotion. In addition to indicators related to growth and increase in revenue, other organization may have other preference when it comes choosing an indicator. For example, financial institutes, when developing its measurement strategy, it will target on revenue and cost, and also evaluate its risk management practice.
From the customer perspective, there are two objectives from the customers’ perspective, client differentiators and and entry price. Client differentiator includes providing original solution, having experienced consultant, and deepening the relationship. The entry price means the perceived value of the spending for products, the quality of service, and operational reliability. Wu et al (Liz Murby, 2005). Those indicators include VIP status, customer royalty, and customer retention. For example, McDonald’s provide customers with rapid and highly standard services. One of its operational goal is to provide convenience to its customers, so it might include convenience into its BSC. Another example is an ERP company, solution offered may be included in its BSC, since it realizes value by offering and creating valuable solutions to its customers.
From internal process perspective, and the indicators include inventory turnover, environmental emission and waste reduction, and R&D spending or warranty claims (Ashworth, 2001). There are several different sub-divisions within the internal process management, such as regulatory and social measures, customer management measures, and operations management measures.
From employee learning and growth perspective, measures include employee satisfaction, information capital reediness, and employee training. The related objectives are to attract and retain skilled employees and make them more skilled. In the case of a wealth management bank, it will have professional knowledge, training, and team size as part of the reward structure. A BSC will help empower employee and improve their productivity, and will help the company achieve better long-term good performances.
For the balanced scorecard to be fully effective, it has to have clear target. Target allows company to use quantitative measurement to evaluate its performance. Targets will fall into the following three categories, the long-term target, the mid-term target, and the short-term targets. The long-term target set the ultimate direction, and the mid-term target transforms the goal into realistic operations, and the short-term target focuses on incremental performances. In addition, initiatives taken to achieves those targets should be mapped to objects and be prioritized. For example, the objective of growth revenue can be matched with new pricing programs, and the objective of enhancing royalty can be matched with Frequent purchase programs or VIP certification programs (Journeault, 2016). The initiatives should be prioritized in order to make best source allocation arrangements.
In addition to align the targets with their corresponding measures and objective, it is important to ensure that employees understand and perform their duties in accordance with the mission and values of the organizations. High level BSC will be cascaded to that of low-level, such as division, department, or individual employee (Hoque, 2014). To make the BSC implemented effectively, due diligence has to be carried out so that during the cascading process from an organization BSC even project BSC, the merit of the scorecard will be carried out. As a result, employees and individuals are able to locate their personal contributions to the team and division achievement of goals, and eventually the achievement of the organizational targets. In addition to its employees, some researchers argue that organization would be benefited if they customize its BSC with local situations and environment. Effective communication of the agreed goals will contribute to the achievement of the corporate BSC (Lawrie, 2004). For example, if a company cooperates with local staff to design and implement the BSC with more compatibility, the BSC might be implemented with less obstacles and cost. In the case of Nova Inc., an utility company in Canada, it initiated its BSC by developing and implementing high-level BSC first, and it then community its strategy to its divisions, departments, and employees during the deregulation process in the industry. To make sure that every employee will contribute to the fulfilment and achievement of the strategy, the company cascaded the BSC to every level in the organization subsequently. In total, there are more that 100 BSC developed and implemented, ranging from the executives in headquarter to the salesperson in every shop.
To implement the BSC, an operational budget should be carried out in order to manage and guide the daily expenditures to run the business. In addition, a strategic budget should also be carried out so that long-term strategic initiatives will be protected from potential poor financial performance in the short-term. In return, the BSC will benefit the budgeting process. Cascading BSC actually define the objectives, the measures, targets, and initiatives of each level in an organization. BSC can be used as a guide that managers can use to allocate resources. The BSC can provide feedbacks as to organization performances, and involve every employee in the budgeting process. For example, the Supertel is a hotel franchiser which has more than 60 real estates, every division takes part in yearly budgeting program (Niven, 2013). It also involves housekeepers to predict the cost and requires them to make a budget, which resulted in high retention and high revenue. TELUS, a company located in Canada, also assigns its employment to certain budget task at an attempt to reduce cost, resulting in a 10 percent cut in the cost structure.
Besides specific targets, the BSC should also include the allocated funding that will fuel the process. Each initiative will incur cost and shout be supported by funding. There are multiples ways to allocate resources. Kaplan and Norton suggested that entities should use dynamic budgeting, the combination of strategy budgeting and operation budgeting, because the major determinants of operational budges are related to its service and products provided. In addition, other practice suggests the utilization of a mixed budgeting strategy. Unites should come up with their proposal for budgeting and then submit the proposal to the upper level management. Once all proposal regarding budget are collected, the management should make resource allocation decision.
Once the BSC is established, the process should continue with frequent maintenance and updating. When the BSC is developed and integrated into the organization, it should be updated with the evolvement of the company or an organization. It is vital to regularly review the performance measures in the BSC. Actions should be taken to maintain the validity of the strategy that form the basis of the BSC(Journeault, 2016). In order to test the functionality and effectivity of BSC, some methods are applied, including testing, and simulation. Statistic methods can be used to test the causal connections in the process of strategy mapping.
The BSC can be used in both for-profit and non-profit organizations. To maximize profit is not the goal of non-profit organization, but the ability to manage funding and cost still fall into the perspective of financial performances. In addition, it may be difficult for them to identify the associate customers. However, they can take other stakeholders as part of customers, c uh as government and service recipients. Research (Ashworth, 2001)found that the improvement of front-line performance in the UNational Health Service (NHS) is attributed to the collaboration between policy makers and front-line employees. The crucial factors that contribute to the success of the BSC are the degree of cooperation between different groups of stakeholders and the communication efficiency among them.
In a research by Dr Mustafa Jazayeri- Dezfuli (Manchester Metropolitan University) and Professor Robert Scapens (University of Manchester), BAE Systems were studied. Originally, it was less competitive compared with other peers in the same industry. As a result, it started to use BSC to transfer its mission and goal into operational target. The company follows the steps of establishing the BSC to improve its performance. First, it reviewed its competitive position, and it also analyzed current technology trend and financial outcomes. Then, it involved its 5 directors and chief executives to carry out a SWOT analysis by joint efforts. Next, it came up with a shared vision and core value of the company, and then communicate the vision and strategies to its stakeholders, including employees, and junior managers. The next step is to create short-term target and goals. By transforming long-term goals into short-term targets, the company set measurement for individual and departmental behaviors. Next, the company created value team and each team was assigned monitoring staff. The commitment of the leader also contributed to the final success of the program. Finally, the company linked its BSC with its objectives, and ultimately increased its stock price.
A Balanced Scorecard is used to clarify an organization’s strategy and vision, act as a linkage between objectives to targets and resource allocation. In addition, it can track the key indicators of the strategy of the organizations, and help an organization achieve changes or transformations. In addition, it allows organization to evaluate and compare performance among divisions in different locations or performances of different operation units. As a result, it facilitates the understanding of the organization vision and strategy. However, there are several challenges associated with the usage of the BSC. Although its has a large number of benefits and advantages, opponents may focus on the problems and challenges in the following aspects.
While the Balanced Scorecard is claimed to present strong causal relationship between strategies and the related indicators, research shows that it is not necessarily true. Nørreklit (Nørreklit , 2000) states that Kaplan and Norton had never mentioned the causal relationships in their articles In addition, Nørreklit claims that the Balanced Scorecard does not take time in to consideration and lack dynamics, thus fail the prerequisite of a causal relationship by Hume criterion. Furthermore, the cause-and-effect relations are subjectively built without considering time as a factor. In addition, it is also questionable regarding whether there is causal relationship between all the elements in any situation. For example, it is questionable whether the linkage between processes and customer satisfaction because opposite examples can also be observed. One possible solution is to evaluate and test the model from a evolving perspective.
The top-down approach in BSC will fail to function sometimes. Kanji argues that a top-down approach will not reflect the needs of employees who work in the organization. Instead, it only creates target-driven initiatives. As a result, employees cannot get their voice heard but only provide buy-in voting. The lack of motivation problems will reduce the effectivity of the improvement programs. A bottom-up method should also be considered when making decisions.
Another problem is that since departments have their own right to make the BSC, they may make decision that only benefit their own interest, rather than consider the group as a whole. Thus, a top-down structure will lead to local optimums. As a result, it might be a better choice to follow value chain to solve this problem (Laitinen ,1998) has provided solution as dynamic system for performance.
Neely (Adams, 2002)claims that BSC leaves some critical interest groups out of the structure, including suppliers, partners, and competitors. One suggestion is to add more flexibility to the framework so that new interest groups can be added later on. Simons et. al Simons, 2000)recommends that each BSC can be added with specific elements so that it will include people who get involved in this task.
The BSC provides a effective structure for organizations to manage its operation performance from four perspective, including customer perspective, financial perspective, innovation and learning perspective, and internal process perspective. Unlike traditional measure method, the BSC focus on both financial and non-financial measures and performances. In addition, it facilitates the process of decision making regarding asset allocation. To make use of the framework in performance management, an organization should articulate the business’s mission, then the management needs to map out the strategy plan, which links the business’s vision to its results. Then, the related targets and initiatives should be mapped with strategies. After being communicated to people involved, the BSC should also be maintained and and updated continuously.
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